Clearfield sees regional provider uptick amidst community broadband headwinds

Feb. 7, 2024
The company foresees a turnaround coming in the broadband market.

Clearfield may be known for its strong position in the community broadband market, but the vendor is seeing an uptick with regional providers. 

During its first quarter of fiscal 2024 earnings call, Cheri Beranek, CEO of Clearfield told investors that it has been ramping up larger regional service provider customer wins.

“What we're seeing is Clearfield has been strong for a decade in community broadband but is emerging as a presence in the large regional providers in that we took share during the pandemic period,” she said. “We're working hard to ensure the stickiness of that relationship, the partnering that we're doing to help them manage their inventory to help them reduce the cost of their deployment by taking out labor.”

She added that while larger regional providers could become a larger part of its customer base, the reality is that these providers work in cycles. “It will be an increasing part of our business, but it could be lumpy because you get an order from a large regional provider that can dwarf some of the other business and maybe put it out of perspective,” she said. “I wouldn't read into a single quarter, but it is good for all of us to see the level of activity underway and the pull-through we're starting to see.”

Community broadband headwinds

During the quarter, Clearfield faced headwinds in its community broadband customer base.

Beranek said the community broadband segment was impacted by various issues, including inventory and conservation of capital and resources to plan for BEAD.

“Community Broadband is holding back, evaluating what they're going to do, making sure they have the right funding and will be able to have their engineers in the right place for where they get their funding and where they don't,” she said. “For those of us who have been in this market for a long time know that government funding is fabulous but it also is frustrating because back in 2008, when we probably got the previous time that we got a chunk of money into this market, it put a lull in our business for probably close to 9 months, and so this is no different.”

She added, “we're confident it will come back. It is just a reflection of people evaluating their options.”

Turnaround coming

Analysts expect the broadband access equipment market will continue seeing revenue challenges during the year's first half.

According to a new Dell’Oro Group report, broadband access equipment revenues will decline by 1 percent from 2023, with the first half of 2024 seeing continued weakness followed by an improved spending environment in the year's second half. However, the research firm said that subsidization efforts, the shift from copper to fiber, and the rollout of cable-distributed access architectures will all propel the broadband equipment market starting in 2025.

“Although the inventory corrections seen in 2023 will continue through the first half of 2024, the second half of the year is expected to be the turning point towards renewed growth,” said Jeff Heynen, Vice President at Dell’Oro Group

Clearfield itself indicated that it is starting to see some signs of a turnaround as well. As providers move toward inventory digestion, Beranek said that the company foresees the purchasing situation will ramp up as more providers build fiber.

“So, it is starting to improve, and I think it's important to note that we did have a record high -- a record high in the number of homes passed last year,” she said. “And so, this disconnect between the number of homes connected and the number of the dollar signs being shown by the manufacturers is a mismatch at the moment.”

Anticipating BEAD

Like other vendors, Clearfield is hot on the trail to being an enabler for communities and providers pursuing broadband builds that will leverage Broadband Equity, Access, and Deployment (BEAD) Program funding.

The company is working to ensure new products and all other peripheral product offerings comply with Buy America, Build America known as BABA, as the BEAD awards will to translate to initial deployments.

However, Clearfield anticipates that many BEAD deployments won’t happen until late this year and into 2025. Other vendors like Calix which also recently reported its earnings, indicated there have been some delays in deployments as customers were evaluating the BEAD program.

“Calix’s [comments] are consistent with our world and probably consistent with what we've been saying for a couple of quarters now that as people put together their plans and their engineering directives and how it relates to what's coming with BEAD there needs to be a choice and so there has been less revenue -- less activity than one might expect,” Beranek said. “There are only so many engineering companies to go around, so they're engineering for potential BEAD awards and not necessarily for deployments this year.”

Beranek added that while communities evaluate BEAD, fiber roll outs are still accelerating. “The one thing that I want to make sure that we talk through this is that the number of homes passed in the next 5 years, even without BEAD, is going to be close to 35% higher than it was in the previous five years,” she said. “It's just really a timing of the quarters and how we can put this all together.”

Eying normalized cadence

Clearfield reported that total sales for the first quarter of fiscal 2024 dipped 60.2% to $34.2 million from $85.9 million in the same year-ago quarter.

As of December 31, Clearfield’s order backlog was $43.5 million, down $13.8 million, or 24.1%, compared to $57.3 million as of September 30, 2023, and a decrease of $92.8 million, or 68.1%, from December 31, 2022. The company said the sequential decrease was due to a continued lull in demand as customers digest previously purchased products.

The company reported that net sales for the first quarter in its large regional service providers market were $7.9 million, comprising 23% of its total net sales and declined by approximately 47% in the first quarter of this fiscal year versus the prior year first quarter. Net sales in its business were $5.2 million, comprising 15% of our net sales in the first quarter.

Net sales declined by approximately 75% in the first quarter of this fiscal year versus the prior year’s first quarter. Net sales in our National Carrier market for the first quarter decreased to $1.3 million, accounting for 4% of total net sales, and declined by approximately 48% in the first quarter of this fiscal year versus the prior year this first quarter.

Looking forward, Clearfield expects net sales for the second quarter of fiscal 2024 to be $29 million to $33 million and net loss per share to be $(0.49) to $(0.55). This loss per share range is based on the number of shares outstanding at the end of the first quarter and does not reflect share repurchases completed in the second quarter.

“While we expect the next few quarters to remain challenging due to the inventory overhang across the industry, we remain focused on positioning Clearfield to take share when ordering patterns return to a more normalized cadence,” Beranek said. “To that end, we are expanding and enhancing our product portfolio to reduce the overall cost of fiber deployment by making the process as efficient as possible.”

The vendor recently introduced its CraftSmart® Fiber Protection Vault, a platform it claims can deliver a 300% improvement in shipping and inventory space. 

“We recently announced the addition of an innovative vault to our current product portfolio, which is designed to reduce the cost of shipping and storage by approximately 67%,” Beranek said. “Feedback from our recently introduced CraftSmart FiberFirst Pedestal and the FieldSmart FiberFlex active cabinet, designed to be installed in rural areas has been exceptionally positive. Both products are now shipping and reflect another step towards our goal of providing our customers with choices that continue to streamline fiber deployments.”

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