Good day, welcome to the Clearfield Fiscal Q2 2023 Conference Call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then 1 on your telephone keypad. To withdraw your question, please press Star then 2. Please note this event is being recorded. I would now like to turn the conference over to Greg McNiff, investor relations for Clearfield. Please go ahead. Thank you. Joining me on the call today are Cheri Beranek, Clearfield's President and CEO, Dan Herzog, Clearfield CFO, and Kevin Morgan, Clearfield CMO. 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 in the forward-looking statements. It is 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, earnings presentation, and on 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 a description of these risks. With that, I would like to turn the call over to Clearfield President and CEO, Cheri Beranek. Cheri? Good afternoon, everyone, and thank you for joining us today to discuss Clearfield's results for the Q2 of fiscal 2023. We will also provide an update on our business and current market trends. Before I review our performance and current market dynamics, I want to emphasize that we remain more confident than ever that the long-term demand for fiber broadband remains exceptionally strong as the superiority of fiber as both a technology and an investment is well established. Accordingly, we are focused on positioning the company to capture market share once industry ordering patterns return to more normalized levels. I'll discuss these initiatives in more detail shortly. Clearfield has always differentiated itself on its crisp execution. As demand increased throughout the pandemic, Clearfield was able to respond quickly, driving revenue beyond 40% growth for the previous nine quarters. Moreover, our execution allowed us to move into larger accounts and take share as demand for hardware intensified. We intend to remain focused on execution as the industry works through the near-term dynamics and prepares for the return to growth led by significant government funding initiatives. Our Q2 of fiscal 2023 revenue and net income per share came in relatively in line with our forecast for the quarter. Total net sales for the second quarter were $72 million, which includes an $11 million contribution from Nestor Cables. However, following ourQ1 report, what we originally thought was a transition to a more normalized, seasonally driven ordering and deployment pattern by some of our customers has developed into a much more significant lull in demand as inventory is digested. Specifically, we have experienced order pushouts by several large regional service providers and some Multiple System Operators, MSOs, or cable TV providers, who had accumulated an excess inventory position during the pandemic period. In light of this inventory digestion, we expect revenue to be lower than we previously anticipated. Accordingly, we are updating our revenue guidance for fiscal year 2023. We now expect revenue for the full year to be in the range of $260 million-$275 million. Additionally, we are updating our 2023 net income per share guidance. We now expect net income per diluted share to be in the range of $1.80-$2.10. The majority of this downward revision to guidance is due to a pause in orders at the large regional service providers and to a lesser extent, the MSOs. Of the approximately $120 million in revenue reduction at the midpoint of guidance, a significant portion was due to pushouts and orders, while the remainder was due to an inventory overhang related to purchases during the pandemic. As we discussed in our previous earnings call, throughout the pandemic, our customers ordered products early in their deployment schedule to stay ahead of any supply chain challenges. This just in case approach, particularly at our large regional service- providers, led to growth in our backlog, which reached record levels by the end of fiscal year 2022. As our customers digest this inventory buildup, we are right-sizing capacity levels with this level of demand. In light of this inventory digestion, we expect revenue to be lower than we previously anticipated. In order to provide more visibility into this dynamic, starting this quarter, we will break out revenue contributions from our large regional service provider customers such as Lumen, Frontier, and Windstream. The historical financials for the new market segmentation can be found in the appendix on slide 22. I want to stress that we have not lost any customers in this segment, and we believe we will continue to take share in this segment when growth returns. We remain confident that long-term demand for high-speed broadband remains strong and that we are well positioned to benefit from the significant rural broadband build that is still in front of us. While we are right-sizing capacity levels to meet current demand, we are maintaining the infrastructure and processes for long-term growth and continue to design products to address our customers' biggest pain points and reduce the amount of skilled labor required to install. As many of you are aware, our primary end market is community broadband, which is predominantly comprised of tier two and tier three incumbent local exchange carriers, as well as a number of municipalities, utilities, co-ops, and wireless carriers. While there are pockets of excess inventory within this market segment, we believe it has less exposure to these headwinds. I now want to highlight how Clearfield is preparing to take share once we get through this period of in-inventory digestion. First, we continue to design our product line to be craft friendly in the field, reducing both the amount of necessary skilled- labor needed for the installation and the level of skill required to install our hardware. As illustrated on slide five, the most recent example of this strategy is our SeeChange product. SeeChange is designed to enable customers to complete their deployments faster and more efficiently, accelerating their time to revenue. As a reminder, labor accounts for approximately 70% of total deployment costs, so these savings can be significant. SeeChange has already received significant positive feedback from multiple carriers. Second, the scalable nature of our equipment allows customers to pursue a pay-as-you-grow strategy. Our Clearview Cassette has changed the rules of fiber- management. This integrated fiber management system is based on multiples of 12 fibers and can be utilized whenever and wherever it is required in the network. Other vendors' equipment is customized to specific parts of the network, an approach which requires more labor to install and resources to manage. This modular and scalable strategy has allowed us to extend our market leadership in underserved rural broadband to become the leading provider. Additionally, we have been able to move up market to larger customers looking to accelerate their deployment cycles and to reduce labor costs. We intend to keep delivering additional craft friendly products that shorten the deployment time. Combined with superior execution, this proven strategy will allow us to continue taking share. Please turn to slide six. To further enhance our positioning, we have worked to improve our product delivery lead time. During the pandemic, lead times reached a height of 20 weeks due to supply constraints. Lead times now are more in the range of six-eight weeks, and we are targeting long-term lead times of four-six weeks across all product lines, with the exception of active cabinets which still face supply constraints. This work to improve our lead time comes as our customer ordering cycles begin to return to pre-COVID patterns but at post-COVID volumes. For some additional insights on what we are seeing in the market and the significant long-term opportunity, I would like to welcome our Chief Marketing Officer, Kevin Morgan, to the call. Kevin? Thank you, Cheri. Great to be joining all of you this afternoon. The latest market research forecast from RVA, the leading market research authority in the field of fiber optic telecommunications market research, reflects the industry commitment to fiber expansion. As you can see from the chart, the tier one independent local exchange carriers, or ILEC, led the initial build out phase of the Fiber to the Home market during the first 20 years of deployment. However, in 2023, a shift is occurring in the market. According to the data, the other service providers in the market collectively will surpass the cumulative Fiber to the Homes marketed total of the tier one ILEC. Other service providers include the community broadband and MSO customer segments. The appetite for high-speed broadband communications has never been greater and shows no sign of letting up. This continues to drive fiber deployment deeper into every corner of society and across all market segments. As Sherry mentioned, we believe our work to maintain our world-class lead time and further progress our elite strategic plan enhances our position for the long-term demand environment. In the 2022 fiber provider survey published in December, the Fiber Broadband Association estimated a 10-year annual average run rate of 11.3 million fiber deployments. In 2022 alone, fiber providers passed 7.9 million additional homes, representing a new record for annual deployment. This momentum gives us a powerful foundation for 2023 and the years ahead. We're positioned within an investment cycle that has yet to reach its peak. We continue to view the gradual disbursement of ARPA and RDOF funds and the upcoming distribution of BEAD funding as meaningful but gradual industry tailwinds that further expand our market opportunity. Turning back to Clearfield's fiscal Q2 performance, I'd now like to pass the call over to our CFO, Dan Herzog, who will walk us through our financial results for the fiscal Q2 of 2023. Thank you, Kevin, and good afternoon, everyone. Please turn to slide nine to look at our fiscal Q2 2023 results in more detail. Consolidated net sales in the Q2 of fiscal 2023 were $72 million, a 34% increase from $53 million in the same year-ago period. This figure includes $61 million of organic net sales from Clearfield and an $11 million contribution from Nestor Cables, reflecting a 50% increase from Nestor Cables over the previous quarter. As many of you are aware, we acquired that business in July of last year. We are investing in capital equipment and faster processing capability to reduce costs and improve margins at Nestor. Furthermore, the discovery process on how to best provide higher margin connectivity solutions into the European market continues. The year-over-year increase in net sales was due to higher sales across our core end markets, particularly in our community broadband and MSO markets, along with the contribution from Nestor Cables in our international markets. Order backlog declined 21% to $108 million on March 31, 2023, down from $136 million on March 31, 2022, and $136 million on December 31, 2022. We expect backlog will reduce further and that it will be roughly equivalent to quarterly revenue. While we continue to disclose backlog based on the feedback we receive from our investors, we believe our lead time progress remains a more meaningful measure of our operational performance going forward. As Sherry noted, our lead times are currently six-eight weeks, with a goal of getting down to four-six weeks, excluding active cabinets. Turning to slide 10, I will now review net sales by our key markets. Sales to our primary market, community broadband, comprised 47% of our net sales in the second quarter of fiscal 2023. In Q2, we generated net sales of approximately $34 million in community broadband, up 26% from the same period last year. In addition, for the trailing 12 months ended on March 31, 2023, our community broadband market net ssales totaled approximately $152 million, which was up 72% from the comparable period last year. As Cheri indicated, we are breaking out revenue contribution from our large regional service provider customers, which was previously included in the community broadband and national carrier segments. We believe this new customer segmentation will allow investors to better understand the near term industry dynamics Cheri highlighted earlier. To provide clarity to this customer group, we have broken apart our community broadband customer market to disclose revenue from the traditional smaller providers and from ILEC with footprints of 500,000 subscribers and above, which we refer to as large regional service providers. While net sales in our large regional service providers market were up 19% over the trailing twelve-month period, net sales for the second quarter declined by approximately 17% year-over-year for this market. We anticipate the revenue decrease among this customer group will continue for a period of time. Please refer to the slide at the end of this presentation to view the historical revenue contribution for this new customer market. Our MSO business comprised 14% of our net sales in the Q2. Net sales grew 39% year-over-year and are up 127% for the trailing twelve-month period. Net sales in our national carrier market for the Q2 decreased by approximately 16% year-over-year. On a trailing twelve-month basis, net sales in our national carrier market were up 25% from the year ago period. Net sales in the international market increased 800% year-over-year in the Q2 compared to the same period last year. We are up 255% in net sales year-over-year on a trailing twelve-month basis due to the acquisition of Nestor Cables, who contributed $11 million toward this market. As detailed on slide 12, gross profit margin in the second quarter declined to 32.8% of net sales from 43.3% of net sales in the same year ago quarter. Our gross margin was impacted by unused capacity in our New Mexico facility due to the lower levels of demand, as well as Nestor's lower gross margins as its revenue contribution represented a higher percentage of overall revenue. Given the dynamics impacting the industry, including rising supply costs as well as our exposure to large regional service providers, we now expect gross margins to finish the fiscal year near 30% and expect to achieve mid-30s to 40% when volumes ramp up to our initial fiscal year 2023 revenue guidance levels. While Clearfield does not compete on price, we have been prudent in how we pass along rising costs to our customers in the interest of maintaining our long-term relationships. We will continue to be thoughtful in addressing these costs with our customers going forward. Please turn to slide 13. Operating expenses for the Q2 were $11.5 million, which were up slightly from $11.2 million in the same year-ago quarter. This increase is the result of the addition of operating expenses of the Nestor Cables business acquired in July 2022, offset by the reversal of performance-based compensation accruals during the fiscal second quarter. As a percentage of net sales, operating expenses for the Q2 were 16%, down from 21% in the same year-ago period, which reflects improved operating leverage. Turning to slide 14, net income in the Q2 increased 12% to $10.4 million from $9.2 million in the same year-ago period, and was down from $14.3 million in the Q1 of fiscal 2023. As a percentage of net sales, net income for the Q2 was 14%, down from 17% in the same year-ago period and down from 17% in the Q1 of fiscal 2023. As illustrated on slide 15, our balance sheet remains strong with $166 million of cash, short-term and long-term investments and $2 million of debt. We had $2.5 million in capital expenditures in the quarter, mainly to support our manufacturing operations. Our inventory balance increased from $90 million to $101 million in the Q2, driven by the industry dynamics we have discussed. While we expect inventory levels to increase slightly throughout the year, we do not expect them to do so at the same levels as we experienced in fiscal year 2022, resulting in improved free cash flow in the fiscal year ahead. As Cheri noted, we now expect revenue for the full year to be in the range of $260 million-$275 million. Additionally, we now expect net income per diluted share to be in the range of $1.80-$2.10 per share. With the capital raise we undertook last year, we plan to continue investing in our infrastructure and other necessary strategic areas. Additionally, our strong balance sheet ensures that we are well positioned to effectively compete for larger customer opportunities and the ability to pursue strategic opportunities to enhance our product portfolio. That concludes my prepared remarks for our Q2 of fiscal 2023. We appreciate the support of our investors as we continue to work to drive shareholder value. I will now turn the call back over to Cheri. Thanks for the financial update, Dan. Turning to slide 17, I would now like to provide an update on our multi-year strategic plan, LEAP, which is our roadmap for how we intend to capitalize on the significant opportunities ahead. Starting with L, which stands for leverage, we remain focused on leveraging our significant relationships in community broadband by listening to our customers and responding with solutions that address their pain points. As I mentioned earlier, we recently announced the launch of SeeChange, which reduces deployment time and labor costs. We expect to make similar announcements throughout the year. E stands for execution. To that end, we are currently rightsizing our capacity in our Mexico facility in order to navigate current market dynamics while ensuring we are ready to meet the market opportunity ahead. Likewise, we remain focused on reducing our lead times by strengthening our supply chain partnerships. Finally, we are pursuing cross-selling opportunities with Nestor's Fiber Cable, both domestically and at some point in the near future, Europe. The A in our LEAP plan is to accelerate infrastructure investment. We expect investments in our systems to continue to drive incremental growth and margin expansion going forward. We will also continue to expand Clearfield College to provide online and in-field training support as our industry navigates the ongoing shortage of skilled labor in the market. Finally, the P in LEAP stands for position innovation at the forefront of our value proposition. To that end, we intend to increase the cadence of our product releases while ensuring we provide the best value for our customers through our innovative product design. Several third-party analysts have estimated the total government funding for underserved and unserved markets to be approximately $100 billion over the next several years. Moreover, this funding is aimed at those markets in which we are a clear leader. As Kevin highlighted, this funding will drive a sizable shift in the coverage of fiber deployments such that the share of households passed will shift to the smaller and alternative carriers. Clearfield is favorably positioned to benefit from this shift and expects to recognize revenue from these funding initiatives beginning next year. In addition to the significant demand generated by the government funding outlay, we are preparing for several large opportunities over the coming years, including expansion into Europe, for which Nestor Cables provides a strong base. The integration of wireline and wireless architectures as 5G ramps up, and the evolution of the fiber network to the edge to manage low latency data intensive applications. In summary, while our second quarter financial results and guidance reflect the current state of the market, we are focused on building a strong foundation from which to address the long-term demand for high-speed broadband across our markets. While we are rightsizing capacity levels to meet current demand, we are maintaining the infrastructure and processes for long-term growth and continue to design products to address our customers' biggest pain points and to reduce the amount of skilled labor required to install. With that, we will open the call to your questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ryan Koontz with Needham. Please go ahead Hi. Thanks for the question and thanks for the added metrics on the regionals. It's clearly an area of concern here. I wonder if you can kind of walk through... I mean, we've seen the regionals, a lot of them, downsize their plans and, you know, revise CapEx lower this year. That's obviously a contributor and kind of doubling the problem of overbuying last year. Wonder if you could reflect on that and maybe some of the other segments, specifically community broadband and how you think about that market evolving over the next couple quarters, where I don't think we are aware of such an inventory issue, but is labor or labor cost a big of an issue in the community broadband side as well as the regionals? Thanks. Right. Yeah. Thanks, Ryan. Yeah, it's, as you've noted, this is very much an industry issue as it relates to the regional service providers in that the economic and macroeconomic issues across the world and inflation and the like are causing some of the regional service providers to, you know, readdress their CapEx as they've announced over the course of really the last month. A s you stated, that teamed with the fact that they did place a significant just in case inventory position last year that I think they even came to better understand as we came into the beginning of the build season. Because we started in our conversations with them in February and March and April, there was definitely a different tune to what they were doing. Long-term absolute commitment to broadband, and as many others in the industry have talked about, you know, today and over the last week is, you know, we see a strong return to broadband deployment, you know, in, you know, the latter half of the year. It's just unfortunate for Clearfield that our latter half of the year is not that far away since our year-end happens in September. You know, with community broadband in comparison to the regional service providers, you know, is a little less inventory intense. You know, there's some pockets out there, but mostly what we see there is a world in which there are so many more, you know, community broadband providers at a smaller scale that, you know, there's just a number of them that are starting to ramp up, that are starting their deployments. Our ability to have such a broad range of customers just really shows the strength of our business, you know, in community broadband. I think in all of the areas you are seeing issues associated with labor, we've been told that's getting better, but incrementally, not, you know, not overnight. The other thing that is emerging, less so on community broadband but absolutely within the regional providers, is challenges associated with permitting. Permitting is related not only to, you know, them being a single provider, but I'm hearing stories of multiple providers going into a market, and as a result, the cities and communities who are providing permits are just overrun with trying to be able to respond, you know, effectively. I think there's a, there's a changing world, a changing dynamic that's kinda, gonna have to work itself through. You know, but we're excited, and remain excited about our ability to execute within it. It's just unfortunately very bumpy. Understood. Just a quick follow-up if I could, around the ARPA contribution. Are you still seeing momentum there? Is there also a similar pause going on in the area of these ARPA awards that seem to be a nice steady stream of awards over the last few months? Right. We're seeing that for the summer, that we'll kind of see the revenues associated with that in community broadband. Small orders in our smaller providers, you know, a couple, you know, they're not gonna be passing, you know, 10,000 homes this year, but those awards are going to communities that are passing 3,000 homes here, you know, 2,000 homes there. but they all all add up. We're excited that we're working with our directly with some of those accounts and very much through distribution as well. Got it. All right, I'll pass it on to the queue. Thank you. Our next question comes from Jaeson Schmidt with Lake Street Capital Markets. Please go ahead. Hey, guys. This is Max on for Jaeson. just in terms of the guide, I wanna get your cadence for the next couple quarters. In other words, when should investors, when should we think or when should we see a trough in revenue? Yeah. We anticipate the next couple of quarters will be pretty consistent with each other. It'll drop from current conditions for third quarter, and then third and fourth quarter we think will be pretty consistent with each other. This is at this point the build season, the higher build season. As a result it's, we tend to see some nice momentum already, which we haven't unfortunately picked up in March and April. We're looking for that in May and June. Because of the lead times now shrinking drastically, that should work out just fine. Hope that answers your question. No, it does. Thank you. I just wanna clear something up. You've mentioned that GM, you expect, gross margin, you expect to be 30%. Is that for the next two quarters, or do you expect the entire fiscal year 2023 gross margin to end up at 30%? Yeah. That's a cumulative, so obviously third and fourth quarter will be less than that. Okay. Thank you. That's it for me, guys. Our next question comes from Tim Savageaux with Northland Capital Markets. Please go ahead. Hi, good afternoon. A couple of questions. As you look at your kind of reclass, again, I'm assuming you took Lumen out of national carrier and into, to regional. You know, if we look at that particular segment of revenue, I mean, should we consider that effectively going to, you know, de minimis levels, immaterial levels, the next couple of quarters as a primary driver of the revenue decline? Yeah. Third and fourth quarter, it will be very small. It's not just, it's some situations about inventory pushouts, and then it's the order pushouts, but then also our anticipation when we put together the initial guide, you know, for follow-on orders that have not yet materialized. That said, you know, looking forward, that's a very strong market opportunity for us, and our products are as well-respected, you know, in that market as they are in community broadband. You know, none of those carriers represented more than 10% of our business in a single quarter. When they're high single digits and there's, you know, multiple ones of them who have had some similar inventory carrying positions as well as some project deadlines associated with CapEx get pushed out, it starts to take a significant toll. Okay. Well, I guess maybe the reason I ask is that, you know, while community broadband... I'm trying to think. I mean, because you're not obviously a big second half of last year, the fiscal year. The impact on the smaller carriers seems, you know, much less significant, kind of, you know, maybe down slightly from current levels. Am I reading that the right way? You know, and I know Q saw a big drop. Sorry. Right. Let's just do that one, and we'll go to the next one. Yeah. community broadband is definitely, I mean, if we look at the course of community broadband as an aggregate and in second quarter in comparison to the last 12 months. Q2 is up high 20% in comparison to the 70 some% it was up over the course of the last year. that really represents there are some inventory positions, you know, within community broadband as well, some pockets of some of the larger community broadband carriers. What's different there as we look to third quarter, is there'll be new community broadband providers who are that we are working with that will come online. The question really will be how fast they will come online for their permitting and their different issues. The long term, I think we see the balance, you know, kind of returning to where we're at today, but there's gonna be some, that's the downturn over the course of the next, you know, 2nd quarters, as you highlighted, you know, is gonna be predominantly because of the large providers who are using the inventory positions they have for, to deploy for this summer. Okay. Got it. Then maybe just kind of a similar question on the cable side. You obviously saw a pretty significant drop off there in the 2nd quarter. Looking forward, you did reference, I guess I don't know to the extent to which your commentary on cable was about the quarter or forward looking and whether you expect further significant declines from that segment through the balance of the year. Yeah. Well, you know, we did mention that, you know, it was gonna be among the declines were within regional service providers as well as, but to a more limited basis within the MSOs. I really don't see that much difference between the segments about the differences in regard to rate. What's different is one carrier can represent multiple millions of the forecast in MSOs and in regional service provider, rather in community broadband, it's a much smaller number. Again, the intent within cable TV, I don't see it as being any different. They're very bullish on being able to protect their strong base of ownership in the residential broadband market. As some of the CapEx spend among the telcos decreases, the threat that they have been experiencing also declines. I'm what I see across the industry is, whereas last year it was a foot race for being able to get a land grab. Whoever was passing that home first was gonna get that business. What we see this year is really changing that position from being a land grab to today being more about success-based deployment and really concentrating on connecting the homes that they've passed already, in addition to additional homes moving forward. They've got to change their ROI models have to change. Their cost to pass a home was underestimated. Labor costs are much more than what many of these accounts thought they were going to be. That said, the interest rates now for this year are a totally different position than what their business plans were based on. It's really, pushed out, you know, the opportunity, rather than for it to be, you know, just immediate. I mean, if we look at the Fiber to the Home Council's numbers, you know, they said we hit a record of 7.9 million homes last year, which is fantastic. They also said that over the next 10 years, the average was gonna be over 11. I mean, it's all just pushed out moving forward, rather than for it to be in a shorter period of time. Okay, thanks very much. Last question from me. I mean, historically, kind of pre the big pandemic driven surge, you know, you had talked about kind of sustainable growth rates for Clearfield in kind of the double digit, 10%-15% range. As we kind of look forward and realizing, you know, visibility is not great right now, care to frame growth expectations heading into 2024 relative to those historic benchmarks? You know, while we're not giving 24 guidance, the, we firmly believe that Clearfield is in a position, as the shift moves from larger carriers to the smaller alternative carriers, that we can grow faster than market rates. That'll be our goal, and our positioning by which to do that. Thanks very much. Our next question comes from Scott Searle with Roth. Please go ahead. Hey, good afternoon. Thanks for taking my questions. Cheri, maybe, you know, just looking at the mix of business across the different customers. Just last year was really a coverage year of building out the footprint, but you also get paid for the connection and the success-based CapEx. I'm wondering if you could give us an idea about what that mix of business looks across the broader base in general, where you're seeing the growth and how the gross margins compare there, then I had a couple of follow-ups. Yeah. Well, our gross margins for homes passed as well as homes connected are actually quite similar. That, that's, that doesn't change the gross profit outlook. We as a company have a much higher penetration in homes passed with the with our cabinet line than we do with the number of homes connected, and that our share among homes connected is less than in our share of homes passed. One of our big initiatives this year is to establish ourselves now in maybe to a caveat. In community broadband, we have a much higher penetration of homes connected than we do in the large regional service providers. You know, in the regional service providers, we are very much about passing homes and have not yet become a portfolio provider for the full range of our solutions. It's one of the reasons that we saw a need for even simpler products than we currently had. I n addition to the terminals and drop cables that we had provided previously, this spring we launched, you know, a product line called SeeChange. SeeChange is an entirely plug and play, you know, no splice, you know, plug it in and move on solution. N ot only is it easier to install, but it is, you know, easier to engineer. T hat is a patent protected new proprietary product to Clearfield, that's just been on the market now for about 60 days. It'll be, as we look forward into 2024 and beyond, one of the tools by which that we'll have to increase that penetration rate, you know, into homes connected. Right. Very helpful. Maybe to follow up, I, you know, we talked a lot about excess inventory and kind of hitting the pause button at a number of the different categories in terms of regional providers and MSOs. Do you have an idea of what the existing inventory levels look like within those two groups? It seems like it's built into the expectations now of, you know, it's gonna persist into June and September timeframe. It also seems like you're seeing some indication that maybe in December there starts to be a pickup. You know, thoughts on inventory within those customers and- Right. These Q2 to kind of work through those inventory excess levels. We do have visibility into some of the accounts, directly into their own, you know, Excel charts and their own inventory levels. We do it to the, into the distributors, but not necessarily into every community broadband provider. We do talk with most community broadband customers at least quarterly, and all of the regional service providers probably weekly, if not daily, depending upon, you know, who we're talking to. I can't give you an absolute that it's, you know, it's three month months in regard to the inventory position, because I think part of it is whether or not these customers are gonna actually execute to the plans that they indicated. You know, last year, bluntly, you know, they didn't execute to their original plan, which is why they have this excess inventory. I think my best response to that is we're entirely bullish on the environment. We took a conservative approach to this guidance level because of the uncertainty and the uncertainty toward their plan versus their execution and their demonstrated history. We'll keep our investors, you know, as, you know, as advised as we can. It's why we broke out the additional market segments so that we can continue to be as transparent as possible. I think one of the fabulous parts about Clearfield is, you know, we built this company to make money from the beginning. While we and for nine consecutive quarters, we increased the, you know, the top line growth of the company by 40% while we were delivering, you know, high teens in net income. You know, there's a, you know, we, the expense to that or the return on that has been, you know, strongly for investors over the course of the last nine quarters. Now there's, you know, bluntly, yes, we have a capacity in excess of what current demand is. We've executed strongly to demand when demand was there. I think we know as the environment that the demand will return. Our product lines have been well-received, and now we have additional infrastructure by which to respond so we can grow, you know, to their original forecasted levels, you know, not this year, but certainly in the years to come. Great. Very helpful. Lastly, if I could, on the gross margin front, certainly you're going through some absorption issues over the next couple of quarters, but you referenced rationalizing some of the Mexican capacity. Wonder if you could talk about that. Then as well, inventory levels are elevated by design, but now as the world has started to normalize from a supply chain perspective, how is that playing into the gross margin headwinds? 'Cause you're not running the factories as hard as well, the absorption issues ... exacerbating that. How quickly do they come back then with the top line starting to recover at some point as we get into fiscal 2024? Thanks. You're right. We have capacity allocations that aren't being. Overhead allocations that have not been absorbed. We have, on some of the variable costs, you know, we have, you know, reduced our costs by having fewer workers in some of our factories. From an inventory standpoint, there is an increase associated with our inventory summit, organic Clearfield and also a significant increase at Nestor Cables. We couldn't be more proud of Nestor Cables increase over the 1st quarter of almost 50%. The demand opportunity in Europe is proving to be significant, and when we anticipate to see a strong Nestor Cables contribution in 3rd quarter. That's the good part. The unfortunate part of that is they're at a lower gross profit% than we are than organic Clearfield is. The mix between Clearfield and Nestor is gonna bring that number down. We are significantly investing in additional equipment and lines and capacity in Europe so that we can increase the gross profit of Nestor. Not necessarily on the cables to Clearfield connectivity levels, but as we introduce connectivity products, you know, into Europe, we'll see, you know, their our global numbers, gross profit numbers going up. You know, as we look into 2024, you know, we can't take the fixed cost out of the, our Mexican facilities and our Minneapolis facilities, but we're certainly managing the variable costs to the best levels that we can. We anticipate we would be at a gross margin level, you know, close to what we forecast of about 40% once we hit the revenue lines that we had in this year's guidance program. Thank you. Again, if you'd like to ask a question, please press Star then One. Our next question comes from Greg Mesniaeff with WestPark Capital. Please go ahead. Yes, thank you. When you look at the order intake softness, across your various, customer categories, I'm assuming that the vast majority of it relates to, products designed for the residential broadband market, not for the small to medium-sized business. Is that correct? Our product line, the Clearview Cassette, can be used for residential as well as for business class deployment. It's one of the advantages of our architecture, so that you use all of the same products regardless of where it's being deployed. Right. You don't know whether the lower, orders are related to, softer residential demand on the part of your customers or business. No, I couldn't tell you that. Okay. second part of the question is, as your customer base moves further upstream into the larger, carriers, what kind of, if any, competitive, landscape issues are you running into as far as competition? Well, certainly as we move up into the regional service providers, we're coming up to our larger competitors on a more, you know, aggressive basis. You know, last year, the last couple of years, you know, during the COVID environment, when our competitors did not have capacity to respond to these providers, it gave us the opportunity to, you know, compete for business. It was important for us during that period of time that we did not simply take orders. I wanted the opportunity for repeat business. We did a number of trials to facilitate and identify the labor savings and how we could be long-term customers, long-term suppliers into that environment. Now, larger service providers typically, you know, are gonna have lower gross profit than Community Broadband. That will be hidden in our numbers moving forward, because of the overhead absorption is, was going to be at a level that it'll hide the increased margin that we would normally see by a straight Community Broadband business. Thank you for that. One final. Any commentary or color on use of proceeds from your raise? You know, we were very fortunate to be in a position to raise money last winter. That, our balance sheet being very strong, and has not given us the opportunity to really look at a variety of factors. Certainly in a time of uncertainty like now, having a strong balance sheet gives us a lot of considerations. It allows us to compete for big business and bigger customers, and it also allows us the opportunity to strategically look at opportunities, to expand our product lines or to expand the channels by which we offer them. No definitive plans at this point, but we are looking and managing our balance sheet with a very disciplined orientation. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Cheri Beranek for any closing remarks. Yeah. Thank you very much. It's certainly been a challenging time, and it's, I take it very personally to disappoint investors in that your support and confidence in us is something that we take great pride in. I believe in this company, I believe in everything that we're doing. I look forward to continue to earning your respect and your trust moving forward. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.