Q3 2019 Earnings Call
[laughter] good morning, ladies and gentlemen, and welcome to clinical third quarter 29 team results conference call. At this time all participants are in no listen only mode.
Peter We will conduct a question answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your touched on telephone.
I would now like to turn the conference over to your host Mr., Kevin Powers, Vice President Investor Relations Sir.
Good morning, Thank you for joining us today to discuss Commscopes third quarter 2019 results.
With me on the call or Eddie Edwards, President and CEO .
Pease Executive Vice President and CFO .
You can find the slides that accompany this review on our Investor Relations website.
Please note that somewhat comments today will contain forward looking statements based on our current view of their business and actual future results may differ materially.
We see our most recent entity filings, which identify the principal risks and uncertainties that could affect future performance.
Before turning the Colbert Eddie just a few places kitten housekeeping items to review.
Today, we will discuss certain adjusted for non-GAAP financial measures, which is right in more detail in this morning's earnings materials.
Reconciliations of non-GAAP financial measures didn't bother. So she disclosures are contained in our earnings materials and posted on our website.
References during today's discussion will be to our adjusted results also note that third quarter 2018 results include historical Airbus results, reflecting certain classification changes to align to Commscopes presentation.
Paul quarterly growth rates described during throughout today's presentation or on a year over year basis, unless unless otherwise noted.
I'll now turn the call over to our President and CEO , Eddie Edwards, Eddie Thanks, Kevin and good morning, everyone. Today, we reported third quarter sales that were in line with their outlook and adjusted EBITDA and earnings per share. There was a high end of our outlook.
Results were consistent with expectations with the exception some networking cloud product sales for were expected to occur in the fourth quarter and mobility sales weakness due to of course and spending related to the pending large carrier merger.
Overall, our results reflect our ability to manage near term headwinds, while maximizing profitability in a challenging environment.
During the quarter, we made progress across several areas as we continue to execute on our strategic plan to deliver shareholder value.
Financial standpoint, while sales were down year over year on a pro forma basis, we successfully stabilized adjusted EBITDA margins in 15.5% generated over $500 million as adjusted free cash flow.
The strong cash flow performance and they go long term debt repayment of 200 million during the quarter and an incremental 200 million in the fourth quarter to date.
As Alex will touch on later, we continue to expect strong positive cash flows through fourth quarter.
Commscope remains a strong business and these results illustrate our ability to act that was joking and meet our short term and long term financial obligations despite broader industry challenges.
Examples of proactive efforts to next month or profitability is Freightliner business include we are evaluating all opportunities to accelerate your related cost synergies.
As a result of our efforts to date, we're on track to delivery at least $75 million in cost synergies in the first year post close and exceed our annual run rate savings of 150 million ahead of the third anniversary of the close of the arrows transaction.
In addition to deal related synergies, we've taken decisive action to execute on our previously announced plans to deliver $30 million incremental cost action in the second half of 2019.
We've implemented manufacturing footprint optimization changes and driven efficiency gains through product, we initiated reengineering initiatives as we continue to work to enhance efficiency reduce cost and dry integration solution in the short and long term.
We are coordinating that integrating all indoor Ltd work together and utilizing traditional switcher expertise.
This will enable us to service and they said, but important sipri adhesive free aggregation market among other programs.
As these broader industry headwinds abate commscope will be strategically positioned to capitalize and returned to growth as we have experienced in the past.
We continue to believe into long term potential of the business and are committed to delivering shareholder value.
Alternatives specific business performance.
In connectivity solutions indoor fiber sales remain pressured in the quarter with continued shift from company owned data centers to the cloud. However, we continue to identify opportunities to ensure that we continuously improved performance of commscope.
Example, because to be intense focus on data privacy and security, we're seeing in financial services clients employee in more of a hybrid approach that being deployed in the company owned data centers and into the cloud.
We have a strong history of success in company owned data centers, where we believe that investment by the financial services sector is an attractive opportunity for commscope.
In addition, Hyperscale data center sales remain robust and are more than doubled in the quarter in that market expected to grow at low double digit cagar over the next five years.
Our strong performance is driven by two factors growth in the overall market and strategically growing our position in the high fiber count connectivity products segments. One of the primary concerns of Hyperscale customers is scaling up quickly on a global basis to meet cups customer demand Commscope is demonstrated superior R&D.
Okay and operational capabilities to provide complex high density solutions at global scale, keeping pace with Hyperscale demands.
While indoor copper enterprise sales continued to decline in line with the industry. We are focused on maintaining constricting than our market position and positioning our products for new applications.
To ensure our continued leadership we are investing in innovation that provides the best performance in the industry to help our customers deal with the connectivity challenges of today and tomorrow.
These include solutions to solve for connectivity and increased power needs from devices, such as Wi Fi access point, the internet of things and indoor small cells.
As a result, we have seen or in building say your sales through the enterprise channel growth substantial year over year as our enterprise sellers and channel partners collaborate several comps good products and services.
We remain well positioned with the breadth of our industry, leading portfolio to address these growing needs and overtime, we expect our rate of decline from side.
Network favoring the connectivity remained soft as expected in the quarter, primarily due to headwinds from tier one north American cable operators and carriers, but we see opportunities for growth in other areas of the market.
Tier two tier three markets in the U.S. remained strong as they build out their networks to address regional markets underserved by other larger players. In addition from the international perspective, we see fiber builds continuing across several markets recently, we won fiber to home deployments in the Philippines, Germany, Puerto Rico, and the Middle East.
All told we expect to see a modest ramped in fiber cabling and connectivity from the cable operators and 2020.
In mobility solutions, we continue to help operators designed their sale side architecture for Fiveg.
Is that in our base station antenna business, we continue to help our operators continue.
Our customer operators to efficiently deploy more and more spectrum within the even tighter space constraints of the top holes buildings and towers, while also continuing to improve network performance.
The average for diversity of our antennas. We are shipping this year is up nearly 50% versus two years ago.
This is an investment cycle that we expect to continue over the next decade, and we're well positioned to capitalize on this opportunity.
And our metro cell business, which feature small cells. We now have fully integrated smartpost deployed in multiple major us markets, including Boston Dallas in Los Angeles.
These solutions are designed to solve challenging side acquisition problems for carriers backed lending contracts connectivity installations with urban Street furniture.
Solutions are deployed and over 10000 integrated metro sales across the country.
Hi minutes or a rapidly growing and we as we received zoning and architectural approvals by growing list of municipalities.
To that end, we've made investments to more than double our manufacturing capacity provided full breadth of solutions to meet the requirements of nearly every urban planner.
Importantly, these integrated Smartpost solutions pull through additional product sales include fiber connectivity RF infrastructure and power.
We're incredibly excited about this business as a growth engine for commscope in the near and long term.
And our distributed antenna systems and indoor small cell business, we're making good progress across multiple fronts.
Our next generation digital debt solution called era is in RF over fiber distribution system that evolves to commit trouble vast architecture by adding centralized our C ran capabilities.
Importantly era makes in building wireless solutions easier to install the system has a smaller footprint saving space, it's easier to manage and less expensive to operate and other systems, all while giving operators neutral host and enterprises the room, they need to grow as Fiveg technologies and applications come to market.
Say that we've been awarded the cellular coverage for the 2020 and 2021 Super Bowl stadiums further validating our fully digital era das platform as the industry, leading solution to pack maximum amount of spectrum and bandwidth from multiple operators into high density public venues.
Next our C ran small cell offering called one sale recently won formal approval from the major North American tier one carrier.
The formal approval following multiple trials across different venues and we've already signed the contract for Turkey deployments with a significant pipeline to various buildings and venues.
So as our innovated innovative in building small cell solution. This course multi bands and multi operators.
Let's sell is built on Fiveg architecture and dramatically reduces the cost of ownership for in building cellular coverage.
With fiveg relying on indoor coverage to be successful one sale unlocks an entirely new and very large pools addressable market for us in small buildings and venues at a rice solution to deliver cellular services. In addition, one sale is built on an IP friendly architecture, which allows the solution to be deployed and operated by.
Not to ecosystem, which further unlocked scaling opportunities.
All told we expect one sale sales to increase significantly in 2020 and continued to grow is the need for reliable and cost effective indoor cellular coverage increases for Fiveg. This product will also add operating capabilities for the first net footprint.
Moving to seek the we successfully introduced new video products in the third quarter, including the set top box, we're off to east that combines far fewer microphones speakers with traditional set top capabilities.
This combination creates a new class a smart media device that enables integration of digital home services with video.
During the quarter, we also launched Fourk set tops as several European operators.
Moving to broadband we're excited that our fixed wireless broadband gateways in the final stages of lab approvals at two American wireless service providers. We remain heavily engaged in next generation gateway to development for both on and DOCSIS solutions with deployments expected in 2020.
We're also continuing to support the gigabit broadband service rollout Vodafone in Germany, and we're seeing strong additional demand from the service in the newly acquired Unitymedia regions.
Moreover, we launched the Mercury the to DOCSIS Gateway supporting Liberty Globals to give the CD service.
From a cost standpoint tariffs on certain set tops that would be this for a went into effect in September with additional tests going into effect in December .
We felt the impact of this this forecast in the third quarter, which we expect to continue in the fourth quarter. However, we expected the impact will be materially mitigated by the first quarter of 2020.
Finally, we saw sequential increases CP gross margin in EBITDA due to cost containment and material cost improvements.
This extends games gross margin in EBITDA achieved in the second quarter, and we expect to see further improvements in the fourth quarter.
We continue to drive product positive changes in the organization to improve efficiency and they are deeply focused on cost management.
Turning to network and cloud, it's expected sales improved sequentially in the third quarter from an improvement in cable spending and some earlier than expected orders.
While the business remains softer than expected. This year, we achieved several notable minds milestones in the quarter.
As the market leader and install news advanced technologies, and fiber and copper connectivity Commscope continues to be a natural choice for upgrade modules as operators look to upgrade to a distributed axis architecture to that end, we recently launched our new optics aggregator and optics termination products at a tier one north American cable operator.
Yes.
These Nino based products are significant as they will become a key component in this operators distributed axis architecture upgrade.
The first products were installed in the field last week with volume shipments coming this quarter.
In addition, we've been asked to engage jointly in a large tier one amss, so and the large chip manufacturer for their next generation remote phy device.
Scope was awarded this project because of our industry, leading capabilities in reckless subscale, which are in assessing the for projects of this significance to be successful.
Moving on to the core of virtual CMBS platform. We are currently in trials with several operators and we'll be ready for commercial launch by the end of year.
We're making great progress progress and we're very comfortable that our timelines and position.
According to third party projections the market for virtual platforms is expected to be relatively small through 2020 with the majority of the DOCSIS infrastructure spending continuing to go through current traditional platforms. All told we don't expect our commercial timeline to be impactful on long term market positioning the.
Thank you to deploy our current generation see kept products.
Finally, we continue to add new remote phy device modules to our portfolio.
In the first half of 2020, we plan to launch our our new remote Mac five module, which will be plugin compatible with our new platforms. This will give us the ability to support either a de core plus remote phy architecture or a fully distributed remote Mac fine.
Now turning to Ruckus, Ruckus had an active quarter, making progress across all product lines.
Following the launch of the our 750 the industry's first Wi Fi six certified access point, we introduced several additional products, including the our 657 50, which will not only improved network throughput for up to three gigabits with new compatible clients, but also when prove the capacity for existing AC clients by up to 30%.
Yes.
This is proving to be incredibly valuable for our customers with how this fee requirements like schools, who continue to be a very important segment of this business.
In line with our plans, we continue to upgrade our switch portfolio the ramp of our high end.
70, 850, camper switches progressing faster than we expected.
We believe that with a need or 10 gigabit per second capable switches to see why five six access points, we will see significant growth with these products.
For CVR EPS during the quarter, we continued to build support for private networks with trial systems and combined engineering efforts with our once sale product line, which will enable us to address solutions for both licensed and unlicensed spectrum.
Our CBR spss.
Kicked in high gear with FCC announcement of entering initial commercial deployment.
One of the first publicly announced deployments of CBR EPS was in New York Times, New York Times Square and included Ruckus technology, and just yesterday Ruckus CBR as technology was demonstrated as part of the Microsoft as your capabilities for private LTE networks during Microsoft Ignite.
For cloud analytics, we released beta release for all of you cloud and analytics platform, which will tie both our licensed and unlicensed wired and wireless products together on a single pane of glass and help our customers manage and optimize their networks. This platform will launch in the first quarter of 2020.
From a market standpoint, we've made great progress in adding our wireless products that federal certification for lease next year, we positioned the internet of things white by six and analytics toward the hospitality markets and we continued to focusing our offerings at all levels of the education market.
Wrapping up our third quarter achievements, we continued to make progress on our Eris integration plans. They 100 items have been completed and we finalized or new purpose vision and values for the combined organization to being petted with an aligned culture.
We're also implemented a three into one website integration that would create a more consistent communication platform and experience to all stakeholders as well as exposed our collective customer base to our entire portfolio.
We generated over 400 cross selling leads during the quarter leveraging the breadth of product portfolio and have that has the potential to deliver significant revenue synergies over the next few years.
And I mentioned earlier, we remain we remain on track to deliver at least $75 million cost synergies in the first full year post close of which 50 million will be realized in calendar year not team.
From an organizational design standpoint, we restructured our CEO reporting relationships to flatten the organization and drive accountability.
I am pleased where early results, but we have the opportunity to make further refinements to better position the organization.
Now before I turn the call over to Alex element to reiterate how excited I have about the unique opportunity that we have the shape the future of network connectivity.
We've made a number of changes this year that are repositioning the company to achieve accelerated returns I'm confident we will deliver on the strategic and financial promise of the Eris acquisition.
We have notable progress from Eris already and continue to believe the successful integration will position the company for long term success.
With our portfolio of industry, leading products strong customer relationships, a talented team and long term potential to lead the transformation of communications could activity remains as strong as ever.
Now I'd like to turn the call over to Alex for our financial discussion Alex.
Like that and good morning, everybody today I'll begin with a review of our third quarter financial results and discuss our guidance for the fourth quarter as well as providing our preliminary view for 2020, we'll then open the lineup for questions, let's get started.
In the third quarter net sales increased to 2.38 billion.
Really driven by the benefit from the Air acquisition, which contributed 1.34 billion.
Sales in the third quarter include a $14 million reduction of revenue related to deferred revenue purchase accounting adjustments.
Pro forma net sales declined 15%, which includes a 1% impact of unfavorable foreign exchange third quarter sales were down across all geographic regions. As we continue to be challenged by cable operators spending geopolitical tensions and a temporary pause in spending due to a pending telco merger.
Consolidated orders for the quarter were $2.35 billion, providing a book to bill ratio of 0.99.
For the third quarter, adjusted EBITDA increased 55.5% to $369.8 million or 15.5% of sales pro forma adjusted EBITDA declined 13.5% to $369.8 million, yet we were able to modestly expand margins.
Adjusted EBITDA results were primarily driven by lower volumes, particularly in networking cloud CMT at software licenses, we partially offset this top line weakness with favorable commodity and raw material pricing as well as lower operating expense as a result to be aggressive actions, we've taken to preserve profitability as we manage a difficult operating.
Environment.
Our cost synergy and cost savings actions for the year continue to track well ahead of plan.
And the commitments we made earlier in the year. We also expect to exceed annual run rate savings of $150 million ahead of the third anniversary at the close of trap that transaction.
Finishing up the pn output net interest expense was $160.7 million, excluding the amortization amortization of debt issuance cost and I'd at $7.4 million interest expense was $153.3 million.
The adjusted effective tax rate in quarter was 28.1% versus our expected range of 29% to 30%.
The favorability in the third quarter was the result of lower than expected us tax costs on foreign earnings.
Adjusted net income in the quarter with $127 million or 55 cents per diluted share as compared to adjusted net income of $115 million or 59 cents per diluted share last year.
As a reminder.
Included in our third quarter 2019 diluted share count as the assumed conversion of the call out convertible preferred stock, resulting from the billion dollar investment to help fund vs acquisition.
Now moving to our segment results I'll begin on slide seven and discuss results for the connectivity and mobility solutions.
Connectivity solutions segment sales for the second quarter decreased 13% year over year to $635 million, excluding the impact of unfavorable foreign exchange sales declined 12%.
In North America sales decreased about 14% with weakness in the remaining geographic regions.
As expected results were negatively impacted by softness in the network cable and connectivity business driven by the continued trend of lower cables capital spending in certain north American cable operators and capital spending reductions on major projects by North American carriers. In addition, enterprise sales declined in both.
Copper and fiber markets, primarily in Europe , and China with declines of 12% and 31% respectively.
Turning to profitability.
Adjusted EBITDA was down about 25% year over year to $121 million with adjusted EBITDA margins at 19.1%.
But the impact of lower sales volumes, we are able to offset some of this pressure through continuous cost savings and efficiency programs.
Moving onto mobility solutions segment sales for the third quarter decreased 3% to $406 million, primarily impacted by a pause in spending related to a pending north American carrier merger. This order delay impacted the third quarter mobility sales by nearly 5%.
Excluding the impact of unfavorable foreign exchange sales decreased by 2%.
From a geographic perspective results benefited from growth in North America, and a map, which was offset by declines in kalla and apacs.
While macro tower RF sales and product sales declined primarily due to the carry a merger uncertainty our macro tower accessories and metro cell business increased about 30%. This growth was followed by our Dcs business with project wins in EMEA and North America operators are accelerating spend today.
Densify their fourg LTE network and preparation for Fiveg and we expect this momentum to continue.
In the quarter.
Mobility, adjusted EBITDA increase over 8% to $83 million or 21% of sales I 220 basis point improvement over this point last year partner, demonstrating the ability of the team to manage cost and protect margins in the business.
Results were driven by a combination of favorable product mix manufacturing footprint optimization and other cost reduction initiatives to improve profitability.
Now turning to slide eight for the era segment performance.
CE second quarter net sales were $826 million, a decrease of 12% from the pro forma year prior.
While revenue declined year over year, adjusted EBITDA increased 55% to $60 million.
EBITDA margins of 7.2% of sales represent at 310 basis point improvement versus last year and the team has worked relentlessly to manage raw material cost remove controllable overhead through headcount optimization efforts and stabilized pricing.
Lower CP revenues were again, largely the result of weakness in our broadband business as we continue to be pressured by reduced cable operator spending and weaker demand from a tier one carrier.
Overtime.
We continue to believe that broadband device volumes will return to more typical levels and provide an opportunity for growth as the monetization of DOCSIS three dot one investments occur.
Video shipments for the quarter declined 1%.
Year over year, but improved more than 6% sequentially as slept operators continue with the technology refresh cycles. Despite these factors we expect the combination of ongoing mitigation that activity and the continued growth in north American over the top tends to be likely headwinds moving forward.
For the networking cloud segment third quarter net sales were $377 million, a decrease of 29% year over year.
Adjusted EBITDA was $95 million a decrease of 31%.
Adjusted EBITDA margins declined to 25.2% of sales.
Our networking cloud segment sales were were lower driven by a combination of factors, including customer driven M&A strong capacity additions added in late 2018 and to a lesser extent a temporary pause in spending as the industry aligns around the path towards virtualization.
We continue to see strong growth and brought in bandwidth demand and we do our networking cloud business as well positioned to serve a wide range of architectures when the impact of these transitory factors the base.
To that end, we're starting to see an uptick in CMBS license purchases from a major tier one north American cable operator, as they begin to exhaust capacity from last year.
The good indication for.
Continued purchases of current CMBS products for the foreseeable future.
Moving onto the Ruckus third quarter results third quarter net sales were $137 million a decrease of 23% from the pro forma the year about.
Adjusted EBITDA was $10.8 million, a decrease of 19% despite lower sales volumes and what has historically been a high fixed cost business.
EBITDA margins of 7.9% improved 43 basis points from the pro forma year prior as we execute our cost savings and efficiency plans throughout the business. We remain confident in the long term potential of Ruckus and expect trends such as the introduction of life by six.
And cloud based architecture to provide a tailwind for the business.
While ruckus sales remained weaker than expected, we're encouraged by the improvement of over 30%.
Compared to the first quarter, we see an additional E rate demand ahead recent wins in the OEM channel the introduction of Wi Fi fix that sampling of the cloud based architecture and several recent customer wins all as evidence for the strong longer term growth prospects of the business.
Furthermore.
We remain excited about the long term, both Saxon rockets as part of our new capability and offer in licensed and unlicensed spectrum solutions to the market.
We believe this combined solution is extremely relevant in Fiveg and has the potential to solve many of the most demanding in building in venue wireless challenges the future.
It will also serve as a critical element to unlock the full potential private networks, which represent a substantial growth engine as fiveg unfolds.
Returning to the consolidated results for Commscopes ill address our cash flow on slide nine.
Okay.
For the trailing 12 months, we generated $393 million the cash flow from operations and $590 million, an adjusted free cash flow during the third quarter cash from operations was $522 million and adjusted free cash flow was $535 million. These amounts exclude cash paid for the transaction integration and reached.
Alex and costs.
Cash flow in the third quarter significantly improved from the prior quarter with a meaningful improvement in the cash conversion cycle. For example, our days inventory outstanding improved to 65 days through a cross functional inventory optimization program through the successful implementation of this program, we delayed final configurations drove optimistic fast track.
Protection of low volume high value inventory and improved tracking and management of inventory, which resulted in a more flexible product line and lower utilization of cash.
Importantly, we continue to expect to generate positive free cash flow in the fourth quarter. This reaffirms our previous expectation of a meaningful improvement in the second half the year. So now let's discuss our capital structure on slide 10.
Before the quarter with net leverage at 6.1 times pro forma adjusted EBITDA.
Which includes pre acquisition adjusted EBITDA per aircraft for the trailing 12 months as well as a $120 million of anticipated cost synergies and an additional $20 million of other cost savings initiatives.
Because of the significant cash flow generation during the third quarter, we redeemed $200 million of aggregate principal to our five of our 5% senior secured notes due in 2021. Shortly following the ended the third quarter, we redeemed an additional $200 million at the 2021 notes, which occurred on October 20.
As previously mentioned.
With the expectation of meaningful cash generation in the back half of the year, we expect further debt repayments to occur in the fourth quarter.
Despite the temporary headwinds we experienced in the and the current operating environment. We continue to deploy the traditional konsko playbook tactfully adjusting the operating models of each segment to maximize efficiency and cash flow generation. The most recent redemptions at our 220 21 notes emphasize our ability to execute in a challenging environment.
And our commitment to deleveraging with the utmost urgency.
Longer term, we remain committed to returning to a net leverage ratio of approximately four times and eventually to two to three times.
Now moving into our fourth quarter guidance on slide 11.
For the quarter, we expect revenue of 2.2 billion to 2.24 billion.
non-GAAP adjusted EBITDA of between 275 million to 335 million and non-GAAP adjusted earnings per share between 27 and 37 cents.
Additional assumptions include and adjusted effective tax rate between 27, and 28% and a weighted average diluted share count of approximately 232 million shares.
Turning to slide 12 regarding our fourth quarter outlook by segment.
In our connectivity segment, we expect sales to follow our normal seasonal pattern declining sequentially for the fourth quarter, we expect the softness to be driven by weaker network cable and connectivity as well as declined in the enterprise copper and fiber.
And our mobility solutions segment, we expect sales to follow our normal pattern and sequentially declined in the fourth quarter. However, in addition to the seasonal trend we accounting for the temporary spending uncertainty associated with a large north American carrier merger that will materially impact mobility results.
This pause in spending impacted mobility sales by about 5% in the third quarter, and we expect that impact to increase in the fourth quarter.
Which is largely timing related.
And our CE segment, we see strong demand for gateways and IP set top at key North American cable operators.
But we are currently experiencing supply constraints that will prevent us from achieving the full upside potential.
In addition, we're seeing impacts from lower capital spending at other operators due to declining pay TV subscribers, a shift from capital spending to content acquisition and the ship to lower.
The IP TV set tops.
Next we now expect fourth quarter revenues to be modestly down sequentially from the third quarter.
Their network and cloud as result of some expected fourth quarter customer orders that we booked in the third quarter. We now expect fourth quarter sales to be relatively flat for the third quarter.
And our rocket segment, we expect net sales in the fourth quarter to modestly declined in the third quarter. While we are well we remain confident in the long term growth trajectory. This business, we're focused on optimizing the cost structure to align to current sales trends to preserve profitability.
Before I open the follow up for questions I'll provide a few early thoughts on our business outlook for 2020.
Given what we're hearing from around the industry and from our customer conversations cable operator spending is anticipated to be largely unchanged from 2019, but the mix of spend is extremely important burcon. So we see an opportunity for a modest uptick in network infrastructure spend next year, while CP East then we'll continue to be concerned.
Rain.
We expect.
CE sales declined slightly in the double digits in 2020, we have and are taking significant action to address our cost model and we expect continued EBITDA margin improvement.
From a carrier standpoint, we currently expect wireline spend to decline next year, but importantly for Commscope, our businesses more dependent on wireless spending.
Early we'd expect the continued network transitioned to fiveg to drive dried steady wireless spending next year I.
Additionally, what we're experiencing short term headwinds due to a pause in spending related to the pending merger of two large carriers over the long term, we expect this the benefit comps.
We are well positioned to an end to provide an industry leading set of solutions to enable their potential cell site architecture.
From a geopolitical standpoint.
Beginning with tax we've mitigated the majority of the impact, but we still have a few items remaining to address namely filters and some of our distributed antenna products. In addition by the end of the fourth quarter nearly all CPT video set top box set top box production is expected to be out of China.
Moreover, we expect the U.S., China say attentions to continue to impact Chinese spending levels on our enterprise fiber and copper products.
In consideration of these factors, while still very preliminary and based on what we know today, we would expect our sales to decline modestly in 2020, primarily driven by a decline in CP.
Again, while early we believe there's an opportunity for our remaining segment to be stable to growing in 2020.
From a cash flow standpoint, our primary focus will continue to be debt paydown.
While we are providing from cash flow or debt pay down guidance at this point, our second half results should be a good indicator of what we think we can deliver in 2020.
Thanks again for your time this morning, and operator, if you. Please open the call up for questions.
Yes, Sir ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your Touchstone telephone. If your question is been answered or you wish to be move yourself from the can you. Please first get down key.
Your first question comes from the line of Jaffe give all of Nomura Instinet. Your line is now open.
Thank you very much for taking the question I guess my first question begins with the.
The shift in revenue out of the fourth quarter and pull into the third quarter.
Could you gentlemen, give us a sense of how sizable that shift might have been and what that tells us about the outlook for 2020.
Our I'll take the first part of that.
Alex can quantify.
It's a significant nothing from standpoint of carrier business were large provider to to all the carriers here in North America. So so we had a shift in Q3 and we're going to have a shift in Q4, we would expect in in 2020 that that will come back.
Depending upon timing of the merger or depending upon that.
As they anticipate when the bills may restart. So so I think Alex mentioned that was 5% or so in Q3 in Q4 will be a number bigger than that.
So the other is.
The.
The vmoso related spend and network and cloud these carrier spend.
Depending upon needing to add licenses to to their systems and vets, let's not necessarily in our control. So they spent more in Q3 than we had anticipated we plan for weeks ago to be a Q4.
Revenue generator, but that will.
Just happened early so it's not a so lots of business or anything relative to the market. It's just timing as to how the large operators.
There's been cycles.
I think with with the.
The wireless carrier, we've talked about their pauses in shifts in starts with good when these mergers happened and so we probably will see others as we go through the next year.
So Jeff let me, let me take the second half your question around implications. There 2020 that the short answer is there really aren't any implications for 2020 that the merger related.
Delays that.
That Eddie mentioned that business that that will get as soon as the uncertainty at the merger is behind us and we know that from conversations with the customer so we're anticipating that.
Basically being an additional opportunity in 2021 that deal finally gets approved.
It's not atypical at all for that purchases that these license agreement to to migrate from one quarter to the next because it's at nearly instantaneous purchase that the fundamental thing is the underlying bandwidth demand, which is continuing to grow 30% to 50% and so as capacity gets.
And in the network will see operators at add licenses, which will return that that.
Network and cloud business to its more historical levels. So we're really just in the process of working through.
This capacity in the network not the overall guidance for 2020 really with the exception at CP, you're looking at stable surmodics growth across all of the segments.
Mobility would be that probably the leader in that trend and then some recovery some modest recovery and networking cloud and.
Cable on site connectivity, probably being more on the flattish side, although all the significant wins, we've made recently in Hyperscale should provide some some tailwind, which which I referred to and then really the big that big topline headwind will be will be that decline in CE, which we've been managing through.
Although we do anticipate maintaining EBITDA across that so overall, even then.
Kind of slightly declining to flattish topline environment, you should see an improvement in overall EBITDA performance, so hopefully that helps.
Okay, and I guess should we translate that EBITDA performance slight improvements into free cash flow slight improvement.
Or is there are there some fluctuations on the balance sheet, we should be aware of or how do we think about that for next year.
Yes, it's safe to assume that that would translate to free cash flow that driving the only offset for that would be capital spending, but we don't anticipate large amounts of capital spending next year.
Good morning, and unlike what we normally do.
Excellent. Thank you both very much thank you Jeff.
Thank you next question comes from the line of George Notter of Jefferies. Your line is open.
Hi, Thanks, a lot guys I wanted to ask about the networking cloud Division then yes, that's a business that historically has been.
Much more predictable in terms of the revenue run rates $5 million to $600 million a quarter. If you look back it.
The last few years within aerospace and yet the step down is still really significant then I guess I'm kind of wondering what you think the kind of normalized revenue run rate for that business might look like in.
Yes, I understand there's a lot of moving parts here in the industry with.
Obviously, the large customer there dialing back capital spend you've also got a lot of technology continue and I think around but is there some kind of normal levels of sales and EBITDA run rate. You think you could ultimately get out of that business, Yes, let me.
Let me take a crack at it and then and then Andy can elaborate so I think really you should think about.
Probably three drivers of what we're seeing in networking cloud right now so the first is that.
Kind of large investments in capacity that happened over the course of 2018 in that.
Capacity is is late and so there's probably it.
Year 18 month as bandwidth demand continues to grow 30% to 50% to consume that capacity that was introduced in 2018 before.
You need to continue to invest in a meaningful life. That's the first try that the second driver.
Is that.
Uncertainty around this virtualization and distributed access architecture and a bit of a reason spending as folks want to understand how that how that evolution is likely to unfold and as Eddie mentioned this is going to be up a multiyear journey.
And is it through that were a month or two behind in starting that journey at yet, but it's equally true that we're building off a base of 20 years of experience in the industry, leading position in both Cmcs in and an access technologies and we believe we havent extremely competitive products.
He talked about and not in his remarks, and then the last piece.
Really has to do with.
An fdx architectural decision and really one of the major large operators.
That typically leads the industry in these choices choosing to go one direction versus.
The rest of the operators kind of waiting and seeing and that led to sort of a broad based pause in spending.
You'll you'll know that a lot of backlog is likely behind us as it's just become clear that.
This architecture becomes very very expensive for a number of the operators and so they decided to pursue a different different option. So.
What is all that need really it means that we see.
We don't see us a structural shift in the network and cloud business away from that historical performance of networking cloud, what we see as that but temporary soft patch that will likely persist through the balance of 2020 and perhaps into into 2021, but theres. No reason to believe led this business can't get back to us it.
Historical its historical quarterly revenue and earnings potential as as we work through these challenges Eddie what we'll do I think he covered as well I think the the important thing like to reiterate is that there's been much said about the us not being into Virtualized network company.
What I tried to say is that we have a deployable product right now we believe that that will be in the market.
In Q1.
We don't believe that market is going to be strong. We we have a relationship with with all the customers but.
One of them has special relationship with one of our competitors. So we'll be able to that but we will have in the marketplace competitive product.
To provide pool offering to to all the customers.
Thank you.
Thank you next question comes from the line of Simon Leopold of Raymond James Your line is open great. Thank you I wanted to just get a quick.
Think important clarification from from you on the on the 2020 commentary.
I want to make sure that the baseline for 2019 is pro forma for Arris being with you for the entire year as opposed to.
The fact that you had acquired in the spring just given that note. Yes. Thanks for that that's an important clarification, yet it's a pro forma as if we don't the company for the full year, great I think that everybody can breed now.
So I appreciate that wanted one to see if we could talk a little bit about maybe a shorter term perspective on for Q cash flow from ops in Delevering.
Because it looks like at the very strong cash generating three Q was with a little bit.
Coming from working capital. So just wondering whether there's sort of timing issues. There how we should think about the fourth quarter.
Cash from operations, Yes, it's a good question. So you'll remember cash flow generation in Q2 was actually a little bit light. So there's a combination of things happening in Q3.
The first is all the proactive steps, we're taking on inventory management that I mentioned in my script and.
And that is enduring and there's still work to be done on just getting inventory out of the channel and using that as a source of.
So the cash there was also down some very strong customer collections activity, which was.
Related to some of the softness we saw on Q2, so that would certainly be at more of that more of a timing issue.
I would just we didn't guide cash flow for Q4, I would expect it to be.
Fairly significantly weaker than Q3, given the strength we've done in Q3, a lot of that will depend on.
The collection the customer collection cycle. It it's not unusual to see the customer collection cycle.
Bridge from from the end of the year to the beginning of the year and that can have.
Significant fluctuation, but we do we do anticipate as I mentioned.
Continuing to pay down debt and and we will focus all the all the cash flow to continue to pay down those those 2020 ones and de risk the balance sheet.
Thanks, and then just one last one in a quick clarification, which I think.
I interpreted from your comments on the networking cloud segment results for three Q. It sounded like the two sources of strength here, we're really licensing sales for capacity and to see cap and then transmission business being being quite strong just want make sure I heard that correctly.
And the first point, absolutely correct and Im not sure exactly what.
When you say that transmission business, what what are you, referring to well basically the things that arent services and arent see cap.
Yes that said, yes.
Overall, I would say on the networking cloud Keith Simon we are seeing that business from up.
This we are seeing capacity being being added to the system. So I think theres some.
Some positive things and then it really positive thing just to reiterate as Eddie mentioned, we rolled out our our Virtualized solution, we've got remote phy nodes being deployed in the field.
We're making a lot of progress on that next generation of technology.
Great. Thank you.
Thanks.
Thank you. My next question comes from the line of Samik Chatterjee of JP Morgan Your line is open.
Hi, Good morning, Thanks for taking my question, if I could just start on the mobility solutions group to high positive comments about the outlook for that growth next year, just looking to see if you can dive in a bit into the pipeline from macro cells and the one set of product and how should we be thinking more the timing of cool from pure.
And if you can give us a sense of how big do you think these this puts us together can be for commscope and put sort of yours.
What what I said is that that businesses. We have 10000 sites that have some type of.
Of coverage.
What we've seen ablate is really a full stacked.
Fully.
Compatible cell site is just in the telephone Pole Street light.
Businesses.
Rebuilding itself about every other month right now so we have.
Very high expectations I think the three cities that I mentioned.
Where we have coverage are.
Good examples of what we can do in different difficult environments, we have the ability to to sell the full capability, we understand RF, we understand power and backhaul and.
That's that's something that we strive to to continue to outperform so we think.
We think it can be multiples of what the the current macro sites are because with fiveg coming you're going to need.
Besides the big concern you going to need that for a for latency issues as well as coverage and we think that were just at the beginning of what is going to be so.
We havent quantified it in relation to to the to the macro it will be.
Less per site, but now, but many times more.
In coverage. So we were very excited about it and.
We've gotten some really accolades from some of the cities where these things have been deployed also because of the statics the ability of better coverage and the visibility of the so these goals. So sanuk, let me just hit on on not on the the.
Kind of sequential growth. So when we talked about the mobility segment as Eddie mentioned these where the growth is going to come from our these metro cell and and one cell inbuilt listen so thats more back half back half weighted we typically would see Q1 as being one of the weaker core.
Others.
The year, but but in addition to that the growth in the segment will come from that the back half as these things start to ramp. So I think it's realistic to anticipate or a reasonably soft Q1, which which would not be atypical.
Okay. I think somebody can just quick follow up with you on the long term operating cost Marta.
Planning.
Towards some improvement in the top line trends so certain segments next deal, but if some of them will not materially lays like how should we think about the long film cost model you're running at the board 1.7, I think at this point and you have synergies on saving so fell to 100 million is that like the right level of cost model.
Going forward.
Yes, so so as Eddie mentioned I believe in his remarks.
Work aggressively going after cost and not not just.
Not just synergies but.
But also broader cost actions so the business that.
Probably up.
We're focused on most is within the CP business, where you do have a declining topline environment and our commitment is to maintain profitability.
First and foremost and if that means that we.
Our deliberately exiting certain programs that aren't profitable then then thats a trade off we're willing to make so that the businesses and the process of building.
A combination of a revenue optimization plan as well as the cost takeout plan to maintain profitability despite that that top line environment.
And the other businesses, we're continuing to to evaluate the cost structures and as I mentioned, even in that modestly declining to flat top line environment for 2020, we should anticipate.
Relatively healthy EBITDA performance.
Thank you.
Thank you. Your next question comes from the line of Steven Fox with Cross Research. Your line is open.
Thanks. Good morning. My first question was on the connectivity business not quite sure I understand all the negative leverage that was produced in the quarter. So I understand sales volumes being down drove some of the margin decline, but can you explain what else contribute contributed to the 25% year over year decline in EBITDA.
On on connectivity really it's largely volume related so.
So this is a relatively high fixed cost business since we own the manufacturing assets and so if we're not if we're not.
Keeping the assets full then you have you havent absorption issue, so thats really what what the issue is there.
I would.
22, which is which is extremely positive sign is that growth that Eddie mentioned in the hyper scale. So what we said is that copper is going to be it in a business that through structural decline.
Over time, we believed that the growth in fiber will offset that decline in return connectivity to growth and so the fact that we're now we doubled the size of that business in the quarter on a year over year basis and are now extremely active and for the five hyperscalers really shows that the moment.
In that building, which we feel very good about.
Okay. Thank you for that and then in terms of the sprint merger I mean, the expectations are that after the transaction is completed there's an immediate recovery in spending on your products or like historically, there's still a pause post deal we counting on any business because every there for 2020 whats your comments or.
Should we sort of exclude that for now thanks.
I think Steve the.
The company has made about a combined merger being a reason for delay in the antenna spend in the third and fourth quarter we.
Thank you Alex further said that Weve, that's not loss, that's just delay and we think that that will be caught up and so you know fees burgers are all different.
Some take a pause I think a lot of work's been done and disciplined beforehand. So I think it's just a matter of getting approval or near approval before the spin will start back in earnest. So I think there's opportunity for.
Catch up volume year, we'll have to see that's that's something that's not been communicated to us yet, but it's something that we're close to and.
Well positioned with with the both sides of the merger.
Okay I appreciate that color. Thank you.
Thank you next question comes from the line up Matt Marsh show up from Morgan Stanley . Your line is open.
Great. Thanks, I, just wanted to get a sense of whether some of these mid band spectrum getting completed and.
Prevent some of the spending that you would expect on macro cells or if you would expect it to be an accelerator afterwards.
And then maybe just diving into the rock a segment and when you would expect to kind of see some upward movement from the wife Isix upgrade thanks.
You know the mentor the.
A macro environment.
Unless they change frequencies the antennas we sell today are the same once we so yesterday and so.
So said we're selling.
Much more complex incentives today than we then we did years ago 32 port.
Antennas today, and so I'm looking at even larger and we're doing in a smaller form factor. So we save our customers.
Money from the from the rental standpoint, so so we see we see that continuing at a reasonable pace I think we do see.
Uptick and what are our.
Dislocation is going to to be either I think we see an uptick in one sale as.
As.
A TNT wants to do work with.
First fit to make sure that they ever more efficient networks offering a lot of positives are going to be there is as we as we see from all the all the different ranges of products are sizes within the mobility segment. So we're very bullish I think.
Next year will be weighted more toward best side than the than wireline side.
Got it and then just on Ruckus and my six.
Okay. So we were the first in the market and we were excited about the take rates that we're starting to see.
We're getting a lot of.
A really good momentum between the both sides of the company is weve.
Combined the sales forces so we have the.
The full ranked capability of the partner.
Part of our enterprise of our historical enterprise business. So that's that's taking off and we're getting a lot of cross selling are now I said 400 are so much of that is in the enterprise ruckus side of the business.
The ability of us to go and have a wired wireless and wireline or licensed and unlicensed capability is unique in the marketplace and a lot of our partners and.
And installers and all that so you'll see the benefit of that so it's a lot of lot of those questions or some of the first things that the people obviously with the customer base talk about and so we think thats going to be as Alex said, we think that has a lot of potential next year you're in the years after.
Great. Thanks.
Thank you last question comes from the line of genes from that of Citi. Your line is open.
Thank you very much and I have two questions, we're a little bit related so I'll ask them at the same time.
And that regards the December quarter guidance.
Three months ago, you mentioned that it would be up and now it's going to be down so what really changed so fast in three months that caught you by surprise.
And then my second question, we maybe that was it looks like the December quarter earnings or the profitability of the company quarter over quarter really takes a pretty big abnormally big step down so whats from Q3 Q4, what's really pressuring the margins earnings.
How much is fully attributed to tariffs or mix or ASP pressure. It just seems like the earnings is pressure more than just simply the sales. Thank you Bill I'll talk about maybe the revenue the biggest factor in the and the difference between what we would said last maybe even two weeks ago is.
Is the merger impact of in the wireless mobility side of the business that went from a possible acceleration to stoppage or at least a slowdown until next year.
That would that would be the biggest part of the topline and that would certainly those volumes in that product line would be impactful to the bottom line as well.
But that also is impacted because of the utilization of our factories.
Let's make sure that in one of these other comments. So we do make all the antennas that we sell so.
If we don't have the demand we don't we don't make boom and the plant is underutilized someone the Singapore, where he and I. If I understood. The question. Your line is a little model, but I think you're talking about the margin compression.
From Q3 to Q4 sequentially and so.
Assuming that was what your question wise, it's really driven by a handful of things the first.
And biggest driver would be would be a mix shift so that license sales revenue that we've been talking about.
Carries with it substantially higher mix then.
Then the manufactured products and so to the extent that with more of that in Q3 than in Q4, you would see a big mix shift the second.
The sales decline and that Ccs business, which we pointed Tim.
And and also in mobility and so as that he just mentioned the deleveraging effect of.
Those that topline decline.
That is causing some margin compression, but for mobility in particular I just want to reiterate what Eddie's set. This is this is purely timing related this is related to the merger and we anticipate that business coming coming back we have the product ready to go as soon as the customer is ready to buy.
Yes, very very helpful employees. Thank you.
Okay.
Okay.
Thanks, everyone for your your interest in Commscope. We appreciate your you're continuing to attention and we look forward to talking to you next quarter. Thanks a lot.
Ladies and gentlemen. This concludes today's conference. Thank you for participating and have a wonderful day you may all disconnect.