Clearfield (CLFD) Q3 2026 earnings call transcript

Thank you. Joining me on today's call are Sherry Baranek, Clearfield's President and CEO, and Dan Herzog, Clearfield's CFO. As a reminder, Clearfield publishes a quarterly shareholder letter which provides an overview of the company's financial results, operational highlights, and future outlook. You can find both the shareholder letter and the earnings release on Clearfield's Investor Relations website. After brief prepared remarks, we will open the floor for a question and answer session.

Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward-looking statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. It is important to also note 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, shareholder letter, and on this conference call.

The risk factor 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 a description of these risks.

With that, I will turn the call over to Sherry. Sherry?

Good afternoon, everyone, and thank you for joining us to discuss Clearfield's results for the third quarter of fiscal 2026. I'll begin with an overview of the quarter and our strategic priorities, and then I'll turn the call over to Dan to review the financial details and outlook. Third quarter net sales were $43.9 million, gross margin was 31.8%, and net income for diluted share from continuing operations was $0.22.

Our results reflect continued progress, executing on our strategic priorities while reinforcing the strengths that have defined Clearfield. We are increasingly focused on positioning the company for its next phase of growth as a strategic digital infrastructure connectivity provider within the data center marketplace. That progress was highlighted shortly after the close of third quarter when we received our first significant order to support a hyperscale data center project, accelerating our expansion into the data center connectivity market. The initial purchase order totals approximately $22 million, which we expect to begin shipments in early fiscal 2027.

Equally important was how this opportunity developed. We became involved early in the design process, working collaboratively to develop a connectivity solution tailored to the end user's deployment requirements. That collaboration led to an expansion of our Innova platform with the addition of a new panel developed in conjunction with the customer, which we intend to standardize and introduce to the broader data center market later this calendar year. This approach reflects the same design principles that have differentiated Clearfield for years in broadband deployments. As demand for high-density fiber infrastructure continues to grow, we believe our expertise in delivering modular, labor-efficient connectivity solutions positions us well to actively engage in this expanding market. While it is too early to predict the size or timing of future opportunities, this initial engagement demonstrates that our strategy is resonating with customers and broadening our addressable market.

We believe it represents an important step toward creating long-term shareholder value. Turning to the broadband market, the slow pace of the Bede program continues to influence customer planning decisions across the broadband industry. While states have made meaningful progress developing deployment plans, continued delays in federal approvals and funding disbursements are affecting both Bede-funded and other commercial projects. These headwinds combined with higher deployment labor and material costs as well as the constraint of limited fiber availability have resulted in a slower deployment environment and extended project timelines across much of the industry The impact of the slower broadband deployment environment is reflected in our bookings for the quarter ended June 30, 2026. Despite these near-term dynamics, we continue to believe the long-term opportunity for fiber deployment remains intact.

While the timing of broadband deployments remains uncertain, we continue to invest in technologies that solve our customers' challenges. As broadband, wireless, data center, and edge computing networks continue to expand, customers increasingly look for ways to make deployments faster, simpler, and more efficient. One example of our new technology offerings is our recently announced Fault Managed Power Portfolio, which enables customers to deliver both fiber connectivity and power to difficult-to-reach locations through a single, coordinated solution.

By bringing fiber and power together, customers can reduce deployment complexity and create a more flexible foundation for future network growth. We believe this offering expands the role Clearfield can play in supporting our customers as their network needs continue to evolve.

With that, I'll turn the call over to Dan to review our financials and outlook in more detail.

Thank you, Sherry, and good afternoon, everyone. As a reminder, in November, we completed the sale of our Nestor Cables business. As a result, all financial results presented for fiscal year 2025 and all prior periods reflect the Clearfield segment as continuing operations only, with Nesta results reported under discontinued operations in our statement of earnings and statement of cash flows, and reported as assets and liabilities held for sale in our balance sheet. Third quarter net sales were $43.9 million, an increase of 13% from $38.8 million in the third quarter of fiscal 2025.

The increase was driven by higher revenue across the majority of our customer markets. Revenue also increased 28% sequentially, reflecting the seasonal nature of our business. Gross profit margin for the third quarter of fiscal 2026 was 31.8% compared to 35.3% in the third quarter fiscal 2025 and 32.5% in the second quarter of fiscal 2026. Our gross margin reflected several one-time items during the quarter that, on a net basis, reduced gross margin by approximately 1.8 percentage points. Operating expenses from continuing operations for the third quarter of fiscal 2026 decreased 6% to $11.4 million, or 25.9% of net sales, compared to $12.1 million, or 31.3% of net sales, in the third quarter of fiscal 2025. Operating expenses also decreased 14%, or $1.8 million, from $13.2 million in the second quarter of fiscal 2026.

Net income in the third quarter of fiscal 2026 was $3 million, or $0.22 per diluted share, compared to net income of $2.3 million, or $0.16 per diluted share, in the third quarter of fiscal 2025. This compares to a net loss of $500,000 or 4 cents per diluted share in the second quarter of fiscal 2026.

We ended the quarter with approximately $155 million in cash, short-term and long-term investments, and no debt. During the quarter, we repurchased approximately 31,000 shares for $897,000 as part of our share buyback program. For the fourth quarter of fiscal 2026, we anticipate net sales from continuing operations in the range of $38 million to $42 million, total operating expenses to remain relatively consistent with our second quarter, and net income per diluted share in the range of break-even to $0.07. As Sherry mentioned, industry demand constraints are forcing us to reduce our guidance for the full fiscal year 2026.

We expect net sales from continuing operations to be in the range of $151 million to $155 million, and net income per share to a range of $0.14 to $0.21.

And with that, we will open the call to your questions.

Hi, Ryan. The community broadband marketplace, I think, is principally being affected by two different issues. One is Bede, you know, and the uncertainty associated with it. And as a result, it's affecting not only the Bede dollars, but other dollars that are, you know, where do they put their capital? And so because they're waiting for B, they can't put their capital into other commercial environments in case B would come into play. So it's kind of a double-edged sword in that world. But equally a result is really the lack of fiber in the U. S. I mean, we started the year really strong. We saw really strong, excuse me, quoting activity early in the year. We had a really strong backlog as we came into the bookings over the winter months.

And then we saw everything kind of take a, oh, we got our bookings and our quotings from the environment, but the lack of being able to get fiber from U. S. -based manufacturing where most of the customers are waiting because they don't want to have multiple, excuse me, want to make sure they've got what's available in their inventory for either direction they might go. And so while there is fiber activity happening in the market, it's predominantly with the national carriers. That's who's getting the business or getting the fiber in the U. S. But you saw that, you know, even that, Corning earlier this week, or last week, I guess it was, you know, announced that their total carrier business was up only 1%.

So you see the lack of fiber is actually not just in the carriers. It's because of the data centers or I've got all the fiber. So it's a frustrating approach in which the demand is there, but the market availability to get the fiber to make it happen just isn't there yet. And so as a result, the early indicators that we saw in the spring didn't materialize in the summer. Right.

Exactly. I mean, they're the same type of customer that, you know, they're not issuing a $100 million or a billion dollar purchase order to Corning. They're, you know, they're looking for $50,000, and so they're not a strategic account for the big fiber provider, and as a result, you know, they're getting second fiddle. They're getting allocations, and those allocations are significantly less than what they started with. So we're seeing these projects either being delayed until next year or significantly reduced in size and scope.

It's Community Broadcast.

It absolutely was our largest customer in community broadband, a longstanding relationship with the customer. And we continue to do business with the customer for other products. But a management change within the customer resulted in the standpoint that they focused much more on not building out the network, But instead, increasing the amount of subscribers on the network that they had. And so as a result, the type of product that they were buying from us significantly changed. Unfortunately, as they looked at their design parameters, they indicated to us that they would not be needing cabinets for a number of quarters up to years moving forward. And accounting regulations require us to be able to make that reversal.

You know we continue to work with our legal team to evaluate what our options are in this scenario Gotcha But But I think it important to note that It a fairly custom product It was a custom product designed for them We worked for 15 years with the customers so there as you saw in the inventory reserve It did result in about a $2.6 million write-off after we've put into inventory what is standard, but there is a write-off associated with product that is custom or unique to that individual customer.

This is a customer's business model that changed after 15 years of deployment in one direction, because we've worked with this customer since the beginning of Clearfield.

No, no, no. It is an order in hand in that we wouldn't provide speculation of that type. So order in hand for $22 million. It is the first part of the first stage of the first building on a campus for this hyperscale environment. So we're really excited to be able to be part of this build and potentially chosen for an ongoing part of the build as they continue to issue RFPs for the build out of where they're going.

As I signaled last quarter when we talked about the really welcome reception we were receiving in the hyperscale market, I think this order now comes in to validate that strategy. So because of the significance of it, we wouldn't normally discuss simply an order or an individual customer, but I think the significance of this pivot and our place in the marketplace is something that we wanted to share with our shareholder community.

Oh, no, this is in the middle of the data center, so we were given an opportunity to, you know, we've been part of the central office in the telecom market, you know, for 15 years as well, and so our ability to, you know, what was exciting about this, I think, and many different, there's many different things exciting about it, but, you know, we had a large group of people visit our Clearfield headquarters associated with this opportunity, And, you know, one of the things that people don't talk about is, you know, the broadband marketplace has a lot of expertise, and that expertise is being pulled into the data center market. And so many, many people in that room had worked with Clearfield before, recognized the scalability and labor savings of our product line, the quality, reliability, you know, of the products and the people that they work with, that we work with, you know, our organization, and, you know, the customer service.

and responsiveness that they can expect from us. So I think this is a wonderful example of how we can get started and just the opportunities within the data center to come.

Good afternoon, everyone. You know, there are a lot of balls in the air right now for us, and while we are disappointed to not meet the guidance for the year within the broadband market, I want to reassure everyone on the call that Clearfield continues to work strongly with our customer base, continues to have a very strong presence within the base of broadband, And I am confident that we are maintaining our share of business within the market. I wanted to also reassure you that this is really an exciting time for us. While we can't predict the future of where we're going in the data center market, we are extremely grateful and appreciative of the response that we received thus far.

And I look forward to speaking with you again in November about our progress in three months. For now, have a great summer, and we'll talk to you soon.