Clearfield, Inc. (CLFD) Earnings Call Transcript & Summary

Hello. My name is Ron Roth. I'm the Chairman of the Board of Clearfield. On behalf of the company, its management and employees, I welcome you to our shareholders' meeting today. I hope that all of you are safe and healthy. The last year has been one of the challenge as our society has faced a pandemic that has sicken millions and killed hundreds of thousands. For those of you who have lost loved ones, you have my personal condolences. This year's annual meeting conducted in this virtual environment is unlike any Clearfield has done in the past. We will attempt to maintain our commitment of providing content-rich environment and direct access to our Board members and management team. In attendance today, but not present on the screen are my fellow directors. Our outside directors are Chip Hayssen, Pat Goepel, Roger Harding, Donald Hayward. Our CEO, President and also Director, Cheri Beranek, will be available for questions later in our meeting. In years past, our annual meetings have provided a lively exchange of information in an in-person format. Questions have been welcome, and we prided ourselves in the making of this meeting a meaningful opportunity to communicate with our shareholders. While we can't meet in person, we can still aim to make this meeting a meaningful and productive exchange of information. Questions are encouraged. Upon registering for this meeting as a shareholder, you were provided the opportunity to present questions using the chat function that you will see on your screen. Please note, you must have used the control number found on your proxy voting card to gain access to the meeting as a shareholder. As an alternative, we are making a telephone number available by which you can text any questions to our attention. That number is (612) 429-1950. The format for our meeting today is that, following my introductory comments, there will be a 10-minute video presentation. Our goal of this short video is to provide some additional insight into the value proposition that Clearfield provides in this exciting time in broadband extension. Following the video, Dan Herzog, Clearfield's CFO, will conduct the formal business meeting. Following the business meeting, Clearfield's CEO, Cheri Beranek, and her management team will be available for questions. Once again, I encourage you to ask questions, if you have any. The opportunity to ask questions is via the chat function on your screen. And once again, the text number is (612) 429-1950. With that, I hope you'll enjoy this look inside of Clearfield, as prepared by our management and staff. Thank you. [Presentation]

Hello. I apologize for that. My name is Dan Herzog. I'm the CFO of Clearfield. And on behalf of the company, I hope you enjoyed the video you just watched and learned a little bit more about the company. Right now, I will begin the formal portion of our 2021 Annual Shareholders' Meeting today. We are going to take questions about the formal portion of the 2021 Annual Meeting at this time, and we will take general business questions and other questions at the end of the formal portion of the meeting. You can ask a question about the matters being voted on at the 2021 Annual Meeting by typing into the box at the bottom of the screen. Before we move on, I want to note that the meeting is being recorded and a webcast replay will be available on the same meeting website following today's meeting. I would now like to call this 2021 Annual Meeting of Shareholders to order and proceed with the formal portion of the meeting. Following the formal portion of this meeting, we will turn the presentation over to Cheri Beranek, our CEO, for her remarks and then begin taking any questions you have. At this time, we ask that you submit any questions on matters relating to the proposals at this 2021 Annual Meeting. You can do this by typing in the box at the bottom of the screen. This meeting was called by a notice and proxy statement first mailed on or about January 12, 2021, to all shareholders of record on December 29, 2020. We have received proxies representing more than a majority of the shares of common stock entitled to vote at this annual meeting. Therefore, this meeting has been duly called and a quorum is present. I will be acting as inspector of election. The polls are now open, and you can vote at any time. Voting at the meeting will be online, via the links you see on the screen in the voting section. Anyone who desires to vote should do so now using these links on the screen. Please note, this is the only way to vote your shares now, via the voting link and instructions you see. If you already submitted a proxy or voted via the Internet and do not wish to change your vote, no further action is needed at this time. There are 3 matters for consideration at today's annual meeting. The first item of business is to elect 6 directors to serve until the next Annual Meeting of the Shareholders or until their respective successors have been elected and qualified. The nominees are: Cheri Beranek, Ron Roth, Roger Harding, Don Hayward, Chip Hayssen and Pat Goepel. The second item of business is to approve on a nonbinding advisory basis the compensation paid to our named executive officers. The third item of business is to ratify the appointment of Baker Tilly Virchow Krause, LLP as the independent registered public accounting firm for Clearfield for the fiscal year ending September 30, 2021. Information regarding the director nominees and the other proposals is set forth in the proxy statement. If you wish to vote, you need to do so by using the available links in the voting section on your screen. Now answer any questions that have been submitted at this time for the 2021 annual meeting and the 3 items of business for consideration by shareholders. There being no further questions that I see, at this point, I now declare the polls closed for each matter voted upon at this meeting. The preliminary report of the inspector of election indicates that each nominee has received the affirmative vote of the holders of plurality of voting power of the shares represented at the meeting and entitled to vote for the election of directors. Accordingly, each of the 6 nominees identified in the proxy statement is elected as a director of the company to serve until the next annual meeting or until their respective successors have been elected and qualified. In addition, the shareholders have approved on an advisory basis by the affirmative vote of the holders of the majority of the voting power of the shares represented at the meeting and entitled to vote on that matter, Proposal 2, relating to the compensation paid to our named executive officers. My preliminary report also indicates that the shareholders have approved by the affirmative vote of the holders of the majority of the voting power of the shares presented at the meeting and entitled to vote on that matter, Proposal #3, the ratification of the appointment of Baker Tilly as the company's independent auditors. The final report of the inspector of election will reflect any additional shares voted online during this meeting. There being no further business, the formal business meeting is now adjourned. At this point, I will turn it over to Cheri Beranek for a short introduction. After which, a question-and-answer session will follow. As a reminder, on registering for this meeting as a shareholder, you are provided the opportunity to present questions using the chat function that you will see on your screen. Please note, you must have used the control number found on your proxy voting card to gain access to the meeting as a shareholder. As an alternative, if you joined this meeting as a guest, but would like to ask a question, we are making a telephone number available by which you can text any questions to our attention. That number is 612-429-1950. And it should be on the agenda on your screen. Please include your name and institution if you are affiliated with one as you submit any questions. We'll be taking questions until about 3:00 p.m. today. And if we run out of time to answer your question or we do not answer it, we will follow-up with you or if you provide your e-mail address or telephone number in the chat or by text. Before Cheri gets started, I wanted to bring to your attention that our remarks today may involve forward-looking statements regarding the company's future plans, objectives, beliefs and expectations. Forward-looking statements are not guarantees of future actions, outcomes, results or performance. There are significant risks that our actual business will differ materially from the future plans, objectives and expectations described in our remarks or the reasons set out in the Risk Factors section of our most recent Form 10-K. And with that, I will turn it over to Cheri Beranek, the company's CEO. Cheri?

Thank you, Dan. Welcome to this unusual, but I hope very productive Clearfield shareholder annual meeting. Dan is joining us from our corporate headquarters. Ron Roth is also joining us, our chair, from his home in Florida. And I'm joining you here from my home in Minnesota. It has been a very tumultuous year and almost a year since we've been working remotely. So I thought, first, I would give you an update on how we have managed COVID during this time. Our initial response to COVID was ensuring the safety of our employees. Nonmanufacturing employees have been working from home for these last 11 months. Manufacturing employees have continued to work in our production plants as essential personnel. We have implemented extensive safety measures, starting with classic draping and then moving to plexiglass protected workstations, and facemasks are, of course, required. We also have nursing staff, 1 staff on-site and daily monitoring protocols. Extensive cleaning in our facilities are standard. There have been isolated cases of COVID on-site, but we are proud to report that there have been no transmissions of COVID from one employee to the other and no outbreaks within any of our facilities. We also ensure that our supply chain was intact, and that we've enhanced our inventory in each of our positions. We've also taken steps to ensure and strengthen our supply contracts. Finally, we instituted the communication and transparency needed to not only survive, but I believe thrive in these very, let's say, expanding marketplace. I'd like to thank all of our employees for their rapid ability and extra effort to adapt to COVID, their diligence to operate and follow the protocols, and their ability to work collaboratively over these last 11 months and to achieve the response to demanding -- the demands of our customers, and to achieve, I think, some amazing financial results. The world's changed. The broadband is not a luxury but instead a necessity for remote working and business learning. And it has been a lifeline for personal relationships. High-speed fiber-fed broadband is the key to a strong economy and to cultural equality. Yet Clearfield has not changed. We were founded to connect the unconnected. We have focused from the beginning on developing an architecture that would reduce the costs of deployment and to bring that scalable architecture to rural markets that were being underserved by the incumbents. Slightly more than a decade ago, we developed our first outside plant cabinet with fiber pioneers like Paul Bunyan Telephone and Cincinnati Bell. We were proud then and now to be developing our products as field engineered rather than lab designed. Today, we offer the most scalable platform of our products to small and large providers alike. We believe we are uniquely positioned to capitalize on the swirling demands among the rural markets as well as the suburban. We believe our future is bright. We are dedicated to building a better broadband, meeting the needs of all of our stakeholders, our employees, our customers, our suppliers and our shareholders. Clearfield Annual Meeting of Shareholders has always been a dynamic exchange of questions, and I hope useful answers. The questions you have submitted over chat function and text are being directed to Dan. If we don't get to your question, and if you've included your name and address, we'll be sure to respond to you directly. We want to have this to be the most as useful and as most exchange-oriented as we've had in the past, so we really encourage you to ask any questions over chat or text.

And with that, Dan, what are you seeing? What are people interested in and looking for from the area of questions?

Right now, we have just one, so maybe they're slow in coming in. But the first question, I can't be sure who it's from, but can we discuss international sales opportunities, specifically in Canada and the U.K.? Both markets have very large fiber opportunities.

Yes. Well, we've actively been working in Canada. We have both manufacturers' reps and distributors on site in the Canadian marketplace. Canada is one of our strongest growing markets, and we believe we're really strong in the community broadband efforts there. Canada has been adding the government funding in that space. And we have feet on the ground through our distributors and our manufacturers' reps by which to manage that. All of our existing products that we sell in the U.S. market are positioned and well established for Canada as well. The U.K., which is deploying through typically a group called [ Fiber City ] and other opportunities is outside of our current market initiatives. I'm sure you are following some of the things associated with Calix and some of the work that they're doing there for that deployment. Johnny Hill, our Chief Operating Officer, and I have visited the U.K. for potential opportunities. But we've identified that our product line would not be appropriate to the European market and will require us to provide some extensive new products redesign and wouldn't return -- provide the right return on that investment. Instead, we're focused on the U.S. market and the North American opportunities here. Like you've identified, Canada has some strong government funding and the U.S. market has some amazing government funding in the last year and moving forward. Over the last year, we've seen programs like the CARES Act, which have provided fundings for broadband initiatives. Moving forward, there's this program called RDOF or the Rural Digital Utility Fund -- Opportunity Fund, excuse me. And under RDOF, up to $20 billion is going to be provided into service providers in our community broadband effort. A good share, about 40% of that money was allocated to under -- unserved markets. And that was awarded now in the last quarter. Of that money that is being presented, up to 85% to 90% of the targeted communities, targeted homes are going to be provided with gigabit services. And many of those customers are existing Clearfield shareholders. So we're actively working towards that RDOF initiatives. In the future, there's additional government funding efforts that we're going to be working under and are excited about the growth opportunity there. Outside of that, some of the Caribbean and Mexican market, since you asked about international, are slower. We don't see some of the government funding initiatives underway. And so that has really resulted in no opportunity to get those markets out of their COVID slowdown. But we remain committed to those markets. We have feet on the street in those markets as well. And when their economy has rebound, we're going to be in a good position to work with them. Anything else, Dan?

Nothing in the [indiscernible] right now. Excuse me. Yes. I'm sorry. There is a follow-up to that, and that is, is the start of the monetary impact of RDOF still expected in second half of calendar year 2021?

It is. We do intend to see some initial opportunities coming in the second half of this year. Remember, that is a 10-year program. And so it will start slow and move up from there. But we are seeing people currently evaluating it, seeing how they're going to be underway. And I think we'll start to see it a little bit in the tail end of our fiscal year, but it's much more of a fiscal '22 opportunity for us moving forward. One of the things I talked about historically or at previous shareholder events for -- excuse me, our quarterly field reports is that our opportunity per home passed and connected is about $200 per home. Based upon the targeted markets for the RDOF initiative, that's about $50 million of total available market opportunity to Clearfield on an annual basis. So today, we think we have about a 20%, 22% market share. So actively looking to achieve and target some of those dollars, I think we actually might be able to increase our market share, that was forward-looking statements based upon some of the things that we're working towards. Of course, not a projection of future revenue or forecast. One of the things that has been unique about Clearfield's shareholder meeting in the past is the opportunity to dialogue between myself and our Board's Chair, Ron Roth. So I wanted to take this moment to kind of open up the dialogue between Ron and myself. I think he is standing by in Florida. Ron, can you say good afternoon?

Good afternoon, Cheri. Can you hear me okay?

Yes, we can. Thank you very much. Good to see you.

Well, it's a little different than our last meetings and running in around the room, trying to solicit questions. So I got a real tough question here for you to start with. How did Clearfield get its name?

Well, Clearfield actually, goes back to Dan's point, we were figuring out what we wanted to name the organization. Those of you who've been around with us for a while know that our legacy operation was a company called APA. And when we had the opportunity to break away and form a new organization, it was a chance to really think about what it we want to be. In the very beginning, we thought there were some -- [indiscernible] tossed around. One of the ideas was called Blue Prairie, thinking we could capitalize on the water -- Clearfield -- waters of Minnesota. And like the Silicon Prairie from the West Coast, we could be a Blue Prairie. Ron, that has shut down. But Clearfield actually means that, clear is the vision that we want to be able to provide broadband connectivity and to connect the unconnected. Field was to identify that we were grounded and the practicality of being able to make that work. The logo for Clearfield actually has 12 segments. And so when you look at it the next time, you can see it behind Dan's shoulder. When Dan addresses the next question, you'll see that there are 12 different segments, just like a fiber. And the pedal surrounding it are to be able to protect that fiber, which is Clearfield's really brand promise, to protect that fiber and provide the utmost of performance. You got a harder one for me, Ron?

I got a real -- yes, I got a harder one for you. When we first started, we were primarily in the Midwest. And then we grew from there. Maybe you can give a kind of an overview as far as our reach throughout the country, areas that we're strong or unique. You mentioned Canada and you mentioned the other areas outside the country. But I'd -- give people an idea of what areas that we're operating in now on and where our sales are occurring.

Yes. Well, we do operate in all 50 states in the U.S. From a legacy standpoint, we were strongest in the Midwest. But today, we operate actually under 14 different territories across the U.S. market, with field personnel in each of those 14 territories. One of the highest growth markets for us is really the Deep South. Mississippi, Alabama, Louisiana are just exploding the opportunities associated with broadband. We've always been a strong source in Middle America. You'll see a lot of fiber cabinets being built and being deployed in Missouri and Nebraska and Iowa. We have some emerging opportunities around some of the bigger markets associated with Boston and New England. And have always looked strong in Alaska. Alaska has been one of our proving grounds because of the hardened ruggedness of deploying in Alaska and have been a chosen provider from Alaska Communications for a number of years. We'll be -- we also support our field operations with additional -- people that we call smart guys. Smart guys are also field -- in the field. They're distributed across the country. These are fiber pioneers, people who have been deploying fibers for their original career. And now we recruited those pioneers to work for us so they can work alongside all of the different possibilities. So that people who are deploying now in the future don't have to make some of the same mistakes that these guys did. They can learn from experience. So we have, on any given day, there are -- we have 250 employees in Clearfield. I would say, in any given day, 80 of them are actually talking to customers. So we're very associated with being able to make sure that our first core value of a -- as a company is to listen. And we are really working to listen to each of those companies on a daily basis. In addition to our U.S. manufacturing, we do have manufacturing operations. They are dedicated to Clearfield just across the border in Tijuana. We have an additional 250 employees in the Mexican market. And also do a level of agent sourcing and agent design work that is in collaboration with our team. So we really reach across the globe, but our continued focus on the North American market and being able to capitalize upon it. Dan, is there anything that's come across from the shareholders?

I do. I do have a few. And you've covered some of it, but I still want to read it just so they are aware that we're getting them, and I'm going to read them. So you may just augment what we said. But one of the first one comes from Steve Kramer. Congratulations to the entire Clearfield team. I've been a Clearfield shareholder for more than a decade, and this is the most exciting time to be one. If you can please provide some granularity around the RDOF opportunity and how it might impact Clearfield revenues in 2022 and beyond. For example, might have add $30 million to $40 million to the previously planned 2022 revenue plan and substantial growth after that.

Yes. Well, RDOF is really exciting because RDOF is really about community broadband, and it's getting fiber into the hands of everyone across the country. The -- and it speeds up the delivery. In the past, one of the things that we were able to prove in the marketplace, as far back as 2008, during the economic recovery times that happened there, there was dollars that were being provided to rural markets. And those dollars proved that fiber wasn't -- that the value proposition worked and that the return on investment was true. It was just -- it was very -- but it also proved that was capital intensive. So today, as we look at the RDOF initiative, we're seeing an opportunity to bring some things forward. So certainly, the COVID situation has not only validated the need for fiber, but it's brought up and accelerated some of the rate of deployment. What RDOF does is provide a whole another level of funding stream so that -- especially on this first award, the first award is for unserved markets. And these are environments that would have just not been able to provide fiber to without government initiatives. So we believe that, as I said a little bit earlier, the annual revenue opportunity of 4 -- under RDOF is about $50 million for our level of product. We're certainly going to go try to get our share and then some. So I don't know that it's $30 million or $40 million, Steve, but it's certainly an uptick for what we're going out to make happen. But I think it's also important to note that our market is growing not only because of RDOF and government funding, but because we have validated that fiber is the most economical way by which to operate the telecom network. There's been an announcement, and I can -- I don't remember the research firm, but I can provide it if anybody is interested. That has put together a finding as to who is going to be deploying fiber over the course of the next 10 years. And there's been announcements from Frontier, Windstream, CenturyLink, [indiscernible], who -- their rate of fiber to the home deployment actually will dwarf -- I've been trying to say that word all day today, dwarf the amount of fiber that is going to be deployed to AT&T and Verizon networks. So -- and those -- these are being self-funded because some of those organizations are now out of bankruptcy, reestablishing themselves. And research has indicated in the past that as long as you can get a take rate above 30%, that is a profitable network by which to operate under fiber. In addition, what we found is that fiber is the most cost effective means they wish to operate a network. So that once you put fiber into your network, their call rate, your return calls, your service calls all go down substantially. So RDOF is great, but fiber in general is going to be a really rich market for us to work under. As long as I had the opportunity, I wanted to be able to call out that we just don't work in fiber to the home. Our platform is fiber to anywhere. That means we're involved in the telco regions, but also the cable markets. You've seen in recent field reports that our cable TV solutions and our cable TV revenues have been up dramatically as much as 40%. So that is really associated with a lot of the regional cable TV companies identifying that fiber and fiber to a home can augment what a cable TV is operating within. And we're also then working with other types of cable operations to get their cable deeper into their networks. So they need hub [ collapses ] in different parts of our architecture. So whether it's a telco market or a cable market, they're both attractive solutions for us. And then as we go into the wireless markets and some of the 5G initiatives, 5G has been a lot of hype for a couple of years. There's actually an amazing amount of fiber that's being laid. It's just not yet at a point where Clearfield gets the opportunity to participate in that deployment. Our opportunity is really the meet me point. We've talked about that in the past year. The transition box, that meet -- that allows you to move from wireline to wireless. And it will be involved in some of the small cell deployment that is really coming forward in the next coming years. And so a lot of those small cells are going to be distributed throughout the community broadband marketplace, which gives us the opportunity to benefit from not only fiber to the home community broadband, but also the backhaul that will be driven by 5G in those communities.

That sounds great. I do have a few more. Shifting a little bit here from, I believe, [ Mr. Hank Mandock ]. Regarding our international, can you give us a status of Latin America?

Yes. Latin America is a difficult market. It is still suffering strongly from the COVID world. Their COVID was as strong, right, as difficult in the Latin American market as it was in the U.S. market. In some countries, even worse. And they don't have some of the vaccine issues and [ the light ] is yet to be seen there. In addition, they don't have the economic stimulus dollars that have been driven in the U.S. market, broadband funding or not. And so the Latin American market has stalled for us. It was down for us a little bit last year, driven by COVID. I think it will be a solid kind of run rate business for us, but it won't be the driver of our growth initiatives at least in the next year to 18 months.

Thanks. And I have a couple of questions that I kind of run together. So I'm going to combine a few here. So over the past 12 months, about 2/3 of revenue came from Tier 2 and Tier 3 carriers. Are you expecting the split between Tier 1 and Tier 2 and Tier 3 to -- going forward? And what areas of growth are you most excited about? And beyond that, somebody also asked, there have been comments about COVID has slowed down Tier 1 penetration due to lack of product marketing and training and relationship building. With vaccines rolling out and cases declining, is this opportunity starting to reaccelerate? So I think it's a discussion on Tier 1, if you will, and then split between...