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Fiber Optimists

After 22 consecutive years of losing money, the company now known as Clearfield is profitably supplying connectivity products to smaller telecoms.

Fiber Optimists

Gong. Gong. Ding-ding-ding-ding-ding!

The “gongs” sound from the big “$100,000” bell; the “dings,” from the smaller, “$10,000” bell. The two ship’s bells are mounted on the wall at Clearfield, Inc., and when someone grabs the cords and rings them, everyone in the office can hear the news: The company has just rung up another sale, this time for $250,000.

With the tolling of each bell, Clearfield makes a further inroad into the nation’s estimated $3 billion market for optical fiber used by small and midsize telecommunications companies. “I’ve got 97 percent of the U.S. fiber market still open to me,” says Cheri Beranek Podzimek, the company’s president and CEO. Clearfield, she adds, is “very early in a very high-growth market.”

Clearfield (Nasdaq: CLFD) is a $25 million company that designs and manufactures hardware for optical-fiber management, as well as fiber and copper-cable assemblies. Headquartered in Plymouth, it provides equipment for managing, maintaining, and delivering broadband service for Internet, voice, and TV.

Though Clearfield’s customers are mostly rural, Beranek prefers to use the term “independent” to describe them. These telcom providers, she says, are less stressed than the large ones. What’s more, the economic stimulus bill signed in February includes about $7.2 billion for underserved communities, which Beranek believes could give rural telecoms a significant boost.

For its latest fiscal year (which ended September 30), the company reported a $1 million profit, turning around a decades-long legacy of losing money. To be clear, Clearfield itself didn’t actually lose money; its parent, APA Enterprises, did. But last year, APA Enterprises shed all its operations except the one that became Clearfield. Now the former subsidiary is making money—and some noise.

 

Fiber to the Country

 

The telecommunications fiber management market has grown over the past decade as telecom service providers across the nation light up more and more optical fiber in their networks—extending it from their central offices (where they pick up Internet, satellite, and voice signals) out to distribution points in the field, and increasingly all the way to commercial buildings, multi-dwelling units (condos and apartment buildings) and houses. In telecom lingo, this is called taking “fiber to the X,” or FTTX, where X can be a distribution point (or node), commercial structure, or home.

Before the rise of fiber optic cable, copper was the signal-carrying material of choice; it was cheaper to buy and install than fiber, and it worked just fine for the simpler voice and data demands of the late 20th century. It’s a different story now. Copper just can’t handle the bandwidth required for today’s technology. Even in a troubled economy, the consumer need for speed remains high. So phone companies, cable companies, and other broadband providers—large and small—are updating and extending their networks with longer-lasting, more powerful fiber.

“Fiber management used to be the last thing anyone ever thought about,” says Clearfield COO Johnny Hill. “Ten years ago, we thought no one would ever need more than 72 fibers. We thought 72 would last 100 years. Now we’re putting in 864 fibers—all because of consumer thirst for bandwidth.”

Urban consumers aren’t the only ones demanding speed. According to Beranek, there are currently 200 million access lines for voice and data in the United States. Approximately 90 percent of them are controlled by Verizon, AT&T, and Qwest. Clearfield’s big competitors—Tyco, Corning, and Eden Prairie–based ADC—take care of the big three’s fiber management needs. What’s left is controlled by about 1,000 independent telecom providers, which on average serve 10,000 to 20,000 access lines. (AT&T has more than 60 million.)

“Our product line is designed for the independents and their unique needs,” Hill says. “We don’t design for the big boys, even though they would do very well with our products, if we chose to go after them, which we don’t. We like working with the right people—the people who appreciate what we do for them.”

The rural market—perhaps better described as the market where big telcos and their big suppliers don’t dominate—is “very stable,” says Robert Rosenberg, president of Insight Research, a New Jersey firm that specializes in telecommunications industry analysis. “It doesn’t have the growth, nor does it have the perturbations, of a big urban market, where new competitors will come in and shake things up, and pricing will change drastically.” (ADC, for one, knows how challenging supplying the large telecom providers can be. ADC blamed “slower customer spending” for the $443 million first-quarter loss it reported in March.)

“The thing that I’m most impressed by is [Clearfield] actually knows] what the marketplace needs, even before the marketplace has begun to ask for it,” says Don Hayward, president of Jordan-based metal-stamping company Engel Diversified Industries and a Clearfield board member. “They show up, introduce new things, and their customers say ‘Well, yeah, that’s what we need.’”

Beranek observes that small, independent telecom companies require more customized fiber distribution products. The “big boys,” she notes, make products for the “highly replicated topography” of metropolitan networks. But these products don’t work as well for the more variegated needs of a more rural environment.

What Clearfield’s customers want is manageability and simplicity. The swinging bulkheads in a big distribution box, for instance, require engineers to move hundreds of fibers just to access one. “One thing I preach here every day is, ‘Let’s not design a pen when a pencil will work,’” Hill says.

 

Like Legos

 

Clearfield’s flagship product is the Clearview Cassette, which allows telcos to access just 12 fibers at a time, thus avoiding the risk of damaging others. “You need to be able to get your hands in there and work on a single fiber—to clean it or repair it,” Hill says. “And you need to be able to do that without jeopardizing all of the other live traffic in there. One single fiber can handle 56,000 phone calls at once. If I were to break one buffer tube, that’s up to 3,000 customers whose cable TV service went down.”

The patent-pending Clearview Cassette can be configured hundreds of ways to consolidate, protect, and distribute incoming and outgoing fiber circuits in an orderly, accessible fashion. Multicolored buffer tubes swirl neatly around the inside of a snap-apart, disk-shaped, transparent-plastic device. Each buffer tube contains a dozen 250-micron-wide fibers; each fiber has an 8-micron-wide glass core, invisible to the naked eye, over which the signals fly.

The Clearview Cassette also allows deployment of just 12 fibers at a time. With traditional fiber management products—big multi-port boxes—companies might be buying more hardware than they need.

“Let’s say I’m building a fiber-to-the-home network,” Hill says. “I’ve got a 288-home neighborhood, but I’ve only got 24 customers who are taking service now. Through everybody else’s solution, I’ve got to put in 288 ports and pay for that up front. With Clearfield’s solution, I can take care of the 24 customers I have, and as marketing brings in more subscribers, I can add them. So I’m always getting an immediate return on my capital investment, which I wouldn’t get using a traditional model.”

In Clearfield’s fiscal 2008, sales of the cassette reached 42,000. “When we created the mold for the cassette, we figured it could generate anywhere from 20,000 to 30,000 parts and last from three to five years,” Hill says. “We got our ROI on that mold during the first six months.”

Brian Schrand, senior specialist in network engineering and construction at Cincinnati Bell, one of Clearfield’s largest customers, compares the Clearview Cassette to a Lego set. “You can build off it—and it’s pretty much future-proof,” Schrand adds.

Cincinnati Bell isn’t a typical Clearfield customer. Most are small, rural phone companies like Paul Bunyan Cooperative in Bemidji and Grand Rapids, SureWest Communications in California, Foothills Rural Telephone in Kentucky, and Matanuska Telephone in Alaska. Cincinnati Bell is the nation’s ninth-largest telcom company, with more than 800,000 access lines. But the Clearview Cassette has provided a boost for midsize telcos facing powerful competition from cable companies.

Cincinnati Bell recently began a fiber-to-the-home initiative through which it hopes to win customers in multi-dwelling units (MDUs). These potential customers are mostly young people using cell phones instead of landlines and getting high-speed connections from their cable companies. Says Schrand: “We are going to try and touch 60 percent of our operating area in the next three to five years.”

Cincinnati Bell uses multiple vendors for fiber management products, but hires Clearfield for the largest share. Last fall, Clearfield was selected for the MDU initiative. “We have found that the large, 800-pound gorilla companies—and I can’t mention names—have other clients with written contracts that can take up to half of their production at any given time,” Schrand says. “When that happens, our lead times for products can jump out to an astronomical 18 weeks. But in Clearfield’s market, we’re the 800-pound gorilla. They’re large enough to give us the capacity we need, but small enough to custom-make products specific to our needs.”

For a while, though, it wasn’t clear that there’d actually be a Clearfield to meet those needs.

 

A Company of Survivors

 

Clearfield’s origins stretch back to a Bloomington company called Americable. Earlier this decade, Beranek was Americable’s president; Hill was in sales.

“We had some early-generation, central-office fiber management products at Americable, which were the cornerstone of some great products,” she recalls. But with post-tech-bust problems in the telecom market, which were exacerbated by 9/11, Americable’s owners wanted out.

One of Americable’s competitors, Computer Systems Products, had been recently acquired by APA Enterprises, a Twin Cities research and development firm focused on ultraviolet-light detectors and precision optical lenses. Computer Systems Products competed in the local market for fiber and copper connectivity products, but it didn’t provide fiber management products. Beranek saw the potential for a successful merger, and she and others approached APA Enterprises to see if it agreed.

It did. In June 2003, APA purchased Americable—a mere three months after purchasing Computer Systems Products. APA offered Beranek the role of president and the job of merging the two rival companies into the brand-new subsidiary called APA Cables and Networks (APACN).

Within 30 days, Beranek and her team had moved Americable’s entire manufacturing operation in Bloomington to the new APACN headquarters in Plymouth. “We shipped our last product out of Bloomington at 2 p.m. on a Friday, and we were building product here at 8 a.m. on Monday,” she recalls. “Our customers never saw a difference in service.”

But that appearance of unbroken calm was somewhat deceptive. APACN’s new facilities weren’t quite ready on that Monday. Unable to get a T1 line at first, Beranek worked a deal with one of their customers, located six blocks away, which had excess capacity on one of its lines. APACN rigged up a tower on its roof, and worked wirelessly. “We became a company of survivors,” Beranek says.

The physical and technological challenges paled beside the task of merging two formerly fierce competitors. “The two companies had two different cultures, two different systems of operation, two different distribution channels, two different marketing schemes,” says board member Hayward, who in 2003 was a consultant for Minnesota Technology (now Enterprise Minnesota), a Minneapolis–based consulting firm to small and midsize manufacturers that was hired to conduct organizational evaluations during the merger. “Cheri had to combine them into the same staff and get them headed in the same direction, all under the umbrella of a holding company that treated them like the red-headed stepchild.”

Beranek began with bringing together the two sales forces as one team. Gone were individual quotas; the sales force of 12 shared a team goal, and they would swim—or sink—as a unified whole.

“We had two companies who had competed against each other for 20 years—and had been profitable doing it for 19 of those 20 years,” she says. “The evil competitors just had to work it out.” She adds, with a smile, “I didn’t want us to be a family culture, because there’s a lot of bickering in families. I wanted Cables and Networks to be a community.”

APACN worked at what it was best at: delivering custom products, services, and technologies to rural phone companies. Unfortunately, what worked for one customer didn’t work for another, and APACN soon had a burgeoning collection of products with hundreds of part numbers. Ideas that would coalesce into the Clearview Cassette began turning in Hill’s head as early as 2003. “But I was a sales manager,” he recalls, “and the VP of engineering said the market wasn’t ready for it.”

Despite its challenges, APACN chugged along, developing its market, focusing on hands-on service and custom work—and turning over every dollar it made to its ailing parent, APA Enterprises.

APA Enterprises was founded in 1979 as APA Optics. Donald Roth, former chairman and CEO of Waste Systems Corporation and an early investor in APA Enterprises, says the company’s research and development work was often funded through government contracts. “We developed a number of patents, but we were unable to convert the projects into commercial products,” he notes.

Finally, in early 2007, the APA board had had enough of waiting till next year. “The development products just weren’t happening, we couldn’t sustain any further losses, and we saw [APACN’s] success in developing real customers,” says Roth, who’s now Clearfield’s chairman.

APA founder Anil Jain resigned as CEO in June, and Beranek took the helm. In a sense, APACN became the entire company; APA Enterprises’ divisions were shed. Hill had started work in earnest on the Clearview Cassette in January 2007, and it hit the market nine months later. On January 1, 2008, APA Enterprises became Clearfield, Inc.

“‘Clear’ says we have clear direction about who we are and who we serve; ‘field’ says we are always grounded in the reality of the situation,” Beranek says.

 

A New Bell

 

The reality of the current economic situation, of course, is recession.

“Times are tough out there, but I think the market we’re addressing is absolutely—no doubt in my mind—a growth market,” says Bob Poorman, Clearfield’s new vice president of sales. Poorman joined the company in October, charged with growing its international business. In 2008, Clearfield’s international business—in Scandinavia and Canada—accounted for only about $400,000 of its $25 million in revenue.

Poorman has spent most of his career in the international marketplace, managing sales teams for high-tech companies. He first worked with Beranek at Minnetonka-based computer-network device maker Digi International in the early ’90s. When Beranek called Poorman last year, she had an offer he couldn’t refuse.

“As far as the Clearfield concept goes, I think it’s rather simple,” Poorman says. “It’s one of the things that drew me to the company—and what I think draws customers to the company, too.”

The current economy and stagnant housing market certainly pose challenges. And while the independent telco market may be a more stable one than that dominated by the big players and their suppliers, that doesn’t mean there aren’t tremors and plate shifts. Beranek says that many of the smaller telecom providers are facing increasing competition from cable providers as well as a new type of competitive local exchange carrier (CLEC). Unlike the CLECs that arose after the passage of the Telecommunications Act of 1996 (many of which have since disappeared), Beranek describes these new CLECs as small, local carriers seeking to expand beyond their traditional markets to cover other areas—and thus competing with the incumbent carriers in those areas.

Hayward cautions that while the telecom business is relatively less volatile than many, the general lack of consumer confidence in the U.S. could hurt Clearfield’s business. Longer term, he adds, there’s the fact that Clearfield’s history of demonstrated success has been short: “If there’s an interruption to that, it’s going to be very easy for the investor base to look at their success as an anomaly rather than the beginning of a trend.”

Still, Hayward is bullish. “I know 50 to 100 small to midsize companies, public and private, and Clearfield is leading the pack in stability,” he says, adding, “When I think back to the two failed companies, lumped together in less than advantageous circumstances, it really is a phoenix-rising-from-the-ashes story.”

Meanwhile, Hill is working on the next-generation Clearview Cassette—and thinking about a new bell for Clearfield’s headquarters. “A big one,” he says. “$500,000.”

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