$CLFD CEO Interview Cheri Beranek | StoryTrading

Well, thank you for the opportunity to come back on and tell you a little bit more about what's all been happening in the world of fiber management and fiber connectivity.

Good, thanks. Well, Clearfield was founded in 2008 with the mission and values to enable the lifestyle that better broadband provides, because we felt that everyone in the country deserved that opportunity to be able to live, work, and play from their home and business, as to the connectivity requirements that were put in place. But what we found 14 years ago was that the big guys were providing products to other big guys, like Verizon and AT&T, and hadn't identified the fact that deploying fiber optic communications in other markets, perhaps smaller markets, required different products. So in the last 14 years, we went from startup and bootstrapped ourselves from originally a stock price of 86 cents and a market cap of $10 million to today a stock price that I think is hovering around $104 and a market cap of $1.4 billion. And more excitedly, we have deployed millions of ports of connectivity across the country. What the product line does is protect fiber as it moves from the central office to the home or business, and we do that in a way that is unique in that it allows our service provider customers to align their capital equipment expenditures alongside their subscriber take rates. That modularity and scalability really makes a difference when cash flow is king, and more importantly, provides a mechanism for that service provider to be the first fiber in. Because we found during COVID that fiber was not a choice or a need; it was absolutely a complete requirement for our customers and for ourselves as a community. So we grew as a company about 15% compounded annually for about 12 years, and in the last two years, post-COVID or throughout COVID, about a 70% compounded annual growth rate over the last two years. In fact, finishing fiscal year '22 in September of this year at a 91% growth rate over last year, producing that in a way because our customers know that they need a labor-light solution. We reduce the amount of labor that's required, and we have found that to be a very sustainable competitive advantage. I like to be able to talk to investors to say our business is about allowing our customers to make money and to make money in a way that makes their customers happy. Our market is such that we're taking a lot of share because of our focus, and we see long-term a significant amount of opportunity. We released numbers at a forecast for fiscal year '23, continuing our growth at another 40 to 45%. And while we don't give guidance for profitability, we finished the year out at about 18.5% net income, and we're extremely proud of that type of solution, that type of opportunity to make a return on our investment. When we look forward to telling you about a lot more, but I think it's probably easier to do that in more of a dialogue with Chris, and then I can pontificate and tell the story of Clearfield, which is probably something that I love to do more than anything else in the world.

Well, you know, it's not about the price on a given certain day, and it's certainly about the long-term orientation that everybody wants to make money. Our trailing 30-day average was $110, which is where we were trading yesterday. Certainly it was a negative position in the marketplace the last couple of days. But we really looked at it with the advice of counsel that we wanted to improve the type of investor that we had within — improve is not the right word — enhance the types of investors that we were working with, and providing an opportunity for the institutional investors to be a bigger part of what we were doing, and really protecting the company and protecting our investors to have a product at the liquidity levels to ensure that we were a more stable product offering. And so we think that we came away at a really good place. We traded really well today, almost a million shares, and I think we'll have an opportunity to continue to increase our share price moving forward.

I think he doesn't know what he's talking about. One of the things we often found is that government or non-government individuals can get a bit of information and then extend it into assumptions that are not accurate. Starlink is a really good product. I have one on my RV. It's meant for me to be able to have niche solutions in different places. So when we are traveling into an environment where there is no other level of connectivity, it's a great option for us to continue to be working from anywhere if no one else is around. Because Starlink is a shared service, it's similar to a hybrid fiber coax environment because the more users that are on that Starlink connection, the lower the performance goes on an ongoing basis. So it is not a solution for a dense environment, and it's not a solution for an environment in which there's going to be a high level of users on an ongoing basis. In fact, in the broadband programs, there's a program called RDOF, and Starlink won initially. The RDOF program for unserved markets was to award $10 billion, and Starlink was awarded a significant check of that, a little over a billion dollars. But when they came to actually prove the performance threshold that they bid within the auction, they failed, and they were not allowed to receive that funding. So the proof is in the pudding, and I just have not seen them make any good pudding.

Yeah, I don't think it's an either/or. We have grown to an environment over the last two years, gone from less than $100 million in revenue to this year approaching $300 million. At that rate of growth, we were in a position that we couldn't continually internally fund the company as we had been previously. Up until 2022, this was an entirely bootstrap company; no public money had ever been raised. When we started in 2007, we were a kind of an offshoot of a public company that had raised $40 million in the com market but unfortunately never made any profit. So when we started, we had $4 million in cash, $36 million worth of NOLs, and an idea. Over those 14 years, we got ourselves in a position the old-fashioned way: we earned it, built a really strong balance sheet. But in the two years where we've grown so rapidly, we've consumed a lot of our cash. We made $50 million last year and did convert a lot of it into inventory to ensure that we can continue to grow and provide the resources that our customers require. When we had the opportunity to acquire Nestor earlier this year, that put us in a position where debt financing was appropriate because we had an opportunity and we needed to make that happen. But in our world, there's a standpoint that says let's make sure that we can go after an RFP, and the largest companies in the world are going to be comfortable that we're going to be able to execute them. While our product line and our company has been focused on community broadband and some smaller opportunities, we also know that we can scale to those larger companies and larger requirements. So we felt it was best for us to be in a position where we had a full tool chest. You could tell that I had 29 meetings in two days; my mouth is a little twisted today. But it gives us a really good foundation. We have been very cautious stewards of our money and will continue to be equally cautious and disciplined as to how we're going to use the money associated with it. But the biggest differentiation between Clearfield and our competitors, beyond our product line, is the culture of the company, which is fast and quick, and we can pivot when necessary. The raise is really going to help us do that.

No, there was no specific number from anything else. We were looking at our position, the rate of growth that we wanted, do we believe we can continue to grow with, and making sure that we had the checkbook, the credit card, and the balance sheet to be able to move forward.

Right. Our company is what I would call virtually integrated rather than vertically integrated. We did that when we started because as a small company we just didn't have the wherewithal to go out and spend the money and do all these different elements, and with it have all the overhead that comes from being able to do everything internally. So when we tripled the size of our footprint in Mexico last year and leveled the footprint in the US market, we really wanted to look long term as to how do we put ourselves in a position that we can continue to grow. It's not fun to move, although we're pretty good at it, but then also leverage our supply chain partners so that we were not the only ones adding overhead. It's difficult to put a number on what that footprint allows because it's product specific, and it also is a standpoint as to how much we're going to be able to bring on additional what I call contract cabinet centers. Our cabinet centers are not traditional contract manufacturing sites, but instead they are our suppliers that are dedicated to our work, and we have Clearfield quality employees on site to ensure that they meet our specs. So we don't have to necessarily just go after square footage in order to be able to grow the business. I am very comfortable with our forecast for fiscal year '23 with the footprint we have, and for more than one year beyond. And then we can add space as necessary, or potentially proactively for the right opportunity. One of the things that we demonstrated last year was we gave our original forecast in the fall of 2021. We were building those facilities and we had targeted March for them to come online, and then we had to be able to hire hundreds of people and then train them to be effective. So when we looked at the numbers for the year, we discounted quite a bit of the opportunity as to whether or not we truly were going to be able to execute. And I can tell you, it suppressed our wildest expectations. The ability to execute has been phenomenal at every level, and my team has been laser focused on being able to make this work. As we move forward, we are building the facility in Mexico in quadrants for fiber termination. We're on our third quadrant, so that allows us to control overhead as well as scale as our business scales. We're going to bring an additional enhancing our capacity for optical cable manufacturing by bringing a new line into the Mexican facility, and there's room for three more. So we're in a pretty good place to continue to grow. The Nestor environment is a little tighter. They were in an environment that didn't have an organizational infrastructure or ownership structure that really encouraged growth; they were more about a return on an equity position from the original lending group. We're really excited about giving them some open arms, not an open checkbook, but to look at how do we best grow the organization. That's an amazing team. We're looking at some additional CapEx there for microduct manufacturing. We also have a plant and a team in Estonia that provides some low-cost labor options. So there's a lot of good things available to us, very multifaceted rather than single focused.

Well, the first stage is to enhance capacity, and so we're going to bring a new line into Mexico. The goal there, you're right, was to be able to not have the logistical nightmare of shipping product from Finland to the US and then terminating it for final requirement. The integration of that new line into Mexico will allow us to lean out the process and terminate cable assemblies right in step with that manufacturing line. Our frame of reference, that's all about FieldShield. FieldShield was designed by Clearfield but then manufactured by Nestor. Now bringing the manufacturing capability in Mexico will allow us to bring new innovation to what we're doing and extending different kinds of materials and fiber counts into our world, but not at the expense of what we're doing in Finland. We think that we'll be able to use some of that additional capacity in Finland for growth there. So it will be a labor or a cost savings, but I would not encourage you to look at this as being a gross profit improvement in the short term. What we're really looking to do is to position the company to ensure that we have the wherewithal to meet price points as we move forward.

Absolutely. We are typically known as a cabinet company and more outside plant in regard to passing homes. Our revenue opportunities per home passed is around $50, but our opportunity for homes connected averages up to $250 for every home. Today the take rate is about 44%, I think, as the industry has talked about. So there's a significant opportunity in front of us to connect the homes that we have passed with our partnership with our service provider customers. One of our strongest initiatives this year is really creating portfolio customers that use our product on an end-to-end basis so they can recognize the labor savings that are associated with it. We've done studies with our service provider customers. Last year, in fact, there was a tier two company that wasn't able to get the product from one of our competitors, and they wanted us to fill in on capacity. I said, 'I have so much business, honestly I don't want your business unless it's sticky, unless you're going to stay with me, because I want to earn it. I'm not just going to ask about your business.' So they did a labor study and found that they could pass twice as many homes using our product than the incumbent that they were using before, which really put us in a position of a passing of the home leader. Subsequently, we did studies about our connection solutions, and we found through our service provider studies that were done on site with their engineers that it took 38% less labor to use our products than a competing solution that was not plug and play. So that combined is really giving us this big new opportunity moving forward, and why we wanted to assure FieldShield was close to our manufacturing facilities and we could really run with it.

I think that will actually align really closely with where I think the government funding is and where the overall market is going to really take off. Taking a step back on some of those government funding initiatives, I've talked a little bit about the RDOF dollars and how they made some mistakes on how that was awarded. Under the BEAD program, they're doing a better job, I think. It's taking unfortunately a while. The BEAD program is $100 billion, about half of it going into CapEx, about half of it going into subsidies so that the consumer can improve their take rates. Take rates are enhanced through those programs. Clearfield is in a really great position to take advantage because we believe those unserved and underserved communities that are in the census blocks that were released last week are exactly in our sweet spot in the community broadband markets that we serve. The maps released last week, they've got six months to go through the review to identify that they're approved, and then the states will start to allocate where that money will be deployed. So late next summer we'll start to see some of that money, and then it'll be '24, '25, '26 as part of that five-year program that this market is really going to be strong. That's why we have to be so focused on labor.

Our organic is difficult to define these days because community broadband is changing. When we started as a company, community broadband was when a service provider is surveying the community in which they live and making the decision to deploy in the communities in which they live. Community broadband used to be a tier three telephone company only, companies like SureWest Communications or Nuvera or Vermont Telephone. Now community broadband is a series of utilities and municipalities and rural electric co-ops that are saying, 'If no one else is going to serve the needs of my community, I have the wherewithal because I have right of way, I have a customer service team, I have a billing methodology, so I'll take the initiative either on my own or through a public-private partnership.' So I think those BEAD dollars will be part of all of community broadband, and I think Clearfield will be, by our sales structure which is distributed and remote to those facilities, teamed with a very strong technical support group which I call my smart guys, that will continue to work there and grow with it and be a reference point. When you're on telephone deploys in Minnesota, the guys who run their own telephone are talking to the guys who run Paul Bunyan Telephone 50 miles away, and they're not competing with each other; they're looking at the fastest way to deploy. Oftentimes the referrals are what get us the strongest business in this space. As a result, today we have about 1,200 customers. About half of our business goes through distribution, about a thousand of those customers, then 200 customers which represent the other 50% of our business go direct. But all of those customers are serviced by our technical team; it's just the financial relationship that the distributor would own.

There hasn't been an independent study, so it's a guess. But Ryan, coincidentally, he felt that we were about a 50% share. That number can go in a lot of different directions, but I think what is more telling is that the Fiber Broadband Association has indicated that the market is growing at about 13% for the number of homes passed and connected, and Clearfield grew 91% last year. So we're taking share somewhere. That means we're going to continue, I think. Why we're growing and why we will continue to grow.

The customer, our service provider customers, would be the ones that would submit applications for government funding. So we don't get the government funding directly, but our service providers could receive it or could apply for it.

It's only an estimate because so much of it goes through distribution. But on our direct business, we think it's about 5%. It's really low yet; it's very early.

Well, we used to deliver product in 12 days right before the pandemic. The backlog is actually distributed pretty fairly across the entire customer base. But there are two different kinds of backlog: there is what I would call FIFO backlog and schedule backlog. The FIFO backlog, as it sounds, is a first-in, first-out approach. That used to be the majority of our business. But in the quarter ending in June, I said that about 75% of our business would ship in the next six months, and then the quarter ending in September it was down to two-thirds. So more and more of our customers are looking in that scheduled environment and really helping us help them so that they can have a long-term plan about where they're going. They're not necessarily large customers, but they are perhaps more sophisticated or more experienced in their deployment. These are companies that have typically done fiber before and are doing a better job of aligning their labor requirements with the capital equipment expenditures.

I'm very proud of our hiring teams both in the US as well as in the Mexican plant. We are close to 800 people now in our Mexican plant, which is more than double where we were a year ago, and we're continuing to look at that facility and how to continue to expand another 50% over the course of the next year. So I think we're doing a pretty good job of knowing that it's not just about money; it's about how you treat people, it's about providing resources that are appreciated. We have breakfast every morning, we have lunch every morning in Mexico. We have 27 different bus routes that we go and get people from their homes or from their daycare centers to ensure that no one has more than an hour a day commute. Those are the kind of things. We even have, when someone starts in Mexico, they get a friend at work so that with 800 people in the building, you want to make sure that no one's left behind. Those are the little things that create a Clearfield culture. But more importantly, that's not our stumbling block. Our stumbling block is labor in the field. The telecommunications industry is really struggling with this. We have lost tens of thousands of people out of the telecom market in the last 10 years. I was at a trade show a few years before COVID, and one of the lead CTOs of one of the big service provider companies was saying the average engineer in our industry is a 58-year-old man who's never touched fiber. We have to change that. There are a lot of aggressive training programs that all of us are undertaking in order to help put that in place. I'm extremely proud of Clearfield College, which is both an online user-led, online instructor-led, and most importantly, in-the-field experience training so that we can sit right alongside our customers and make sure they have a good first customer experience.

Absolutely. And it's not — careful from a standpoint of being too — our first strategy, first element of our strategy moving forward, which I call LEAP, the L is to leverage our role of community broadband. So we don't have to service the needs of someone who has 40 million customers in order to significantly grow this company, although I wouldn't say no to the business if it was strategic and it didn't dominate our market, because we want to make sure we're not dependent upon a single customer or a single market. But absolutely, in a market where labor is so short, and it's not just the telecom market, I think anyone that I speak to will be able to tell me horror stories on how they can find workers at McDonald's or at the hospital. So being able to improve upon those situations certainly resonates strongly with my customers. Long-term, I think it'll be very good for Clearfield. Short-term, it will introduce some hiccups.

A long time from now.

Yeah, I mean, they're so focused on 5G for the phone, right, and not the 5G associated with the small cell deployment and the real opportunity that comes from 5G. That said, every home and business we pass is effectively the initiation of 5G and being able to use those fibers for backhaul and fronthaul, and put ourselves in a position to leverage every piece of fiber that's out there. The wireless carriers consistently talk about leveraging the fiber that's put in place for both wireline and wireless installation and wireless performance. So I don't think I'm concerned about it being too far away. In fact, there's only so much CapEx each of these guys are going to spend in a given year. But because of Clearfield's fiber-to-anywhere texture, the same product that we use for wireline and for cable TV can be used in a wireless environment, the Clearview cassette. So every piece of experience that we're gaining for fiber to the home and business is going to be applicable for 5G as well.

We sell both direct as well as through distribution, depending upon what that individual company wants. We're certainly careful if it's a startup so they have the funding, but they're typically different distributors. An electrical utility is used to working with a different distributor than a communications provider. So that means we've been expanding our distribution channel and providing additional programming for those distributors to be able to turn up. There are 800 electrical utilities in this country, and 200 of them have reported that they're going to deploy fiber. So they're absolutely our sweet spot, and we have concentrated programs within our regional sales teams to go after them.

All of our customers are welcome to get extensive training from us. I wouldn't use it as hand-holding; I would say that our smart guys, most of them are former employees or former customers, or they are personnel out of the military who have deployed fiber in some of the harshest environments in the globe. So being able to have that right hand on call and to work alongside has been instrumental, and I think it's created a network of opportunity for us.

It's probably a little bit still early in the process, but no, not at this point. We have seen customers getting over their head on that, but not losing funding.

The Fiber One Consortium is initiated by SOS, which is our distributor partner in Canada, and it aligns a number of providers into a single source. So companies like Prismium who would provide the fiber, and Clearfield providing the fiber management, to be working together to solve these problems and to provide a unified integrated solution. All of our distribution at this point — Clearfield doesn't have direct personnel or a Canadian employee, but instead manages the Canadian market from the US. We've seen that all of our distributors are very close to their customers. With the exception that so much of Canada is serviced by Bell Canada, which would be considered a tier one with a barrier to entry as it's really kind of protected by the incumbents, we're best positioned for the rural markets of Canada. We have absolutely seen strong growth in the Canadian market, and I think because of the harshness of the environment and the way our products were designed for harsh environment deployment, we have definitely an opportunity for that new funding. Nothing specific or different there in regard to the funding versus the US program funding; it's pretty similar in regard to timing, so it's probably like '24 or '25 events.

If the opportunity was significant, we would move. We would put capacity close to the customer. Captioning not available.

There's some of the same players, but there certainly are strengths in different places. You see companies like Huber+Suhner, Hexatronic is a bigger play in that market, so you have to adapt to the competition wherever you might be.

When we added $50 million in inventory this year, that's a good thing. It puts us in a position of really having what we need when we need it. Remembering that if there's a hundred things on a BOM and I only have 99 of them, I can't recognize the revenue. So we're going to continue to make sure we have the right inventory in the right place, and we're going to work with our supplier community to do more value-add into sub-assemblies. So rather than just shipping us piece parts, we're changing the nature of some of our suppliers so they can be more integrators, more value-added. It'll put more labor into it, allowing us to continue to scale our business without additional overhead because we're going to leverage those kinds of solution providers. Sheet metal operators who didn't have a lights-out operation and didn't have the capacity to do some of the initial integration work that we'd like them to do so that we could scale. That means putting inventory in position, sometimes on site with some of those suppliers, so that is a cash requirement to grow this business.

Exactly. And so we see the market not going back to the days of 10 to 12 day lead times because that isn't necessary. We're in a place now where they couldn't get the labor that fast. But we have outbooked our shipments for the last two years. This last year we grew 91% and we outbooked revenue by $100 million. That is not sustainable. We need to be able to be closer to a one-to-one relationship. So we're going to start to reduce our backlog, which allows us to improve our lead time by the capacity that we put in place, and then try to get to a lead time that's closer to maybe eight to ten weeks, which allows about one times quarterly revenue for the backlog amount. That creates a cadence that is more sustainable and continues to give us the position to take an order in the season in which it is going to be deployed, rather than having people get in line a year in advance.

Yeah, okay. Because it's a standpoint in which we need to right-size what we're doing. We've been running like a bat out of hell for two years, and we have to be able to — I think the general marketplace, even AT&T a month ago, screwed up our market a little bit by not warning anyone that they were going to take a quarter to reevaluate their capital position. What that's doing is helping the whole industry take a breath and say, 'Okay, how do we better align deployment so that labor and materials are coming at the same time?' I said on my year-end numbers on the field report in November that this next quarter we're going to ship more product than we booked for the first time in two years, and that's a really good thing.

No, we won't do anything that would increase costs. We want to work with suppliers that are going to be at our price or lower. There are different ways to do that, depending upon using both. We do a lot of termination in Asia with partners, but we do more sheet metal work, plastic extrusion work in Mexico and other places. As an example, the cassette before the pandemic we had a single mold and we did it in the US. Today we have four molds in three different countries. Spreading that out allows us to have a more average price that allows us to ensure that we have primary and secondary sources, we don't run out of supply. All that collectively creates a better engine for us.

That would be their past practice.

The Fiber Broadband Association is an organization of all of our industry. There are 93 members of the Fiber Broadband Association, premier members, that work collectively to influence our market, to influence our government in the right direction. They have a very strong lobbying entity within that to work with the senators and to help them through that process. We think the work that's been done, especially the administration has been very clear that they prefer fiber, that they want this spend to be future-proof, to not be a bill that we've done in the past where we throw money away because we didn't have high enough standards. Fixed wireless and satellite are an improvement to anyone who's stuck with a 25/3 service, so we certainly encourage for-profit businesses to be able to go out and offer those solutions. But they're not the future-proof solution that the government programs were designed to do, and that's really been a strong message that has been enforced by the FCC today. So you're always going to have individuals who are going to go off on a tangent, but in general, I've been very pleased with where we're at from a government support program right now.

Well, thank you for the opportunity to continue to be able to talk about Clearfield, and perhaps we'll talk again next spring.