Q2 2020 CommScope Holding Company Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome did a cold scope second quarter 2020 conference call.
This time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
Well that's a question during this session you will need to press star one on your telephone.
You require further assistance please press star zero.
It is now my pleasure during the cold over if your speaker today Mr., Kevin powers, Vice President of Investor Relations. Sir. Please go ahead.
Good morning, and thank you for joining us today and welcome to our second quarter earnings call I'm, Kevin Powers, Vice President Investor Relations.
Joining me today are Eddie Edwards, President and CEO.
And Alex Pease Executive Vice President and CFO.
Could find the slides that accompany this call on our Investor Relations website.
Please note that some of our comments today will contain forward looking statements based at our current view of our business an actual future results may differ materially.
But you see or add to see filings, which identify the principal risks and uncertainties that could affect future performance.
Before I turn the call over to Eddie just a few housekeeping items to review.
Today, we will discuss certain adjusted for non-GAAP financial measures, which you described in more detail this morning's earnings materials.
Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website.
All references during today's discussion will be to our adjusted results on a combined company basis and of note.
Our second quarter of 2019 results include historical air with results for the three days before the acquisition date April 4th 2019.
Reflect certain classification changes to align to Commscopes presentation.
All quarterly growth rates described during today's presentation or on a sequential basis, comparing our results for the first quarter 2020, unless otherwise noted.
I'll now turn the call load or to our president and CEO, Eddie Edwards Eddie Thanks.
Thanks, Kevin and good morning, everyone before we've again I'll take a moment to sadly acknowledge the recent passing of our Chief commercial officer, Jeff flight.
Although uses a konsko team just related immediate impact begins his expertise and talent to our sales and marketing teams positioning there for success during an extremely challenging period.
We send our deepest condolences to just family and supportive in this difficult time.
Yep was part of the Commscope family and we're thankful for the short time, we had with him.
In the coming days, we will evaluate our path forward and provide more information that the appropriate time.
Moving to our business discussion this morning, and I'd like to begin thinking the entire commscope team for their incredible resilience over the past several months.
Our operation staff to engineers innovating in our labs, where our sales teams, creating new ways to support customers and to our back office support our people continue to execute our on our core mission, that's creating lasting connections.
Our purpose is divided by our values.
For more than 40 years, we have built a deep rooted culture. The celebrates the unique contributions of all commscope employees.
Our diversity as a company is what makes a strong collaborative and successful.
In June we launched our Commscope diversity and inclusion business network to further tap into the strength of our diverse workforce and their experiences.
This employ designed and lid network created for for discussion debate and provides opportunities for commscope employees to network learn and lead.
That's our employees demonstrate our values diversity in culture, we are working together to support our customers as they embrace what's next.
Business models have changed you opportunity to several listen and the need for fast reliable ubiquitous connectivity has become the very backbone of Commerce education education health and safety.
The workplace and hold dynamics are shifting globally, and commscope is well positioned to tap into these opportunities through the networks for the future that we create.
Let's now turn to our performance in the quarter on slide three.
Net sales increased 3% EBITDA improved 21% sequentially and we delivered earnings per share of 32 cents.
Free cash flow of 217 million was extremely strong through excellent management over the balance sheet.
Our better than expected performance is a testament to the perseverance of the Commscope team and the innovative spirit that drives us.
The team quickly adapted delivering reliable network connectivity to power emergency response, telemedicine distance learning and much needed human interaction.
We have demonstrated once again and the strength of our business model cast generation power RV economic engine and the ability to weather significant cyclical disruptions only to emerge stronger through the cycle.
I will move to page four.
[noise] broadband segment sales were flat year over year and grew nearly 10% sequentially as service providers are increasing investments to maintain network capacity.
We expect this momentum to accelerate through the second half of the year.
As the primary source of enterprise exposure venue and campus sales continued to be impacted because in 19.
They did improve sequentially, which is very encouraging there are expected to improve in the second half of the year.
Importantly visibility into our end markets is improving and we see strong pockets of opportunity in certain core verticals, such as healthcare government and education.
Disciplined expense accrual is a hallmark of what we do as a team and grow by significant profitability upside in the second quarter.
As we continued to build a more efficient cost structure. The organization has adapted to our challenging environment moving aggressively the Meg make permanent cost improvements in positioning the company through emerged stronger through the cycle.
This is in our DNA and that's how we've navigated through past cycles, and always met or exceeded our financial obligations.
We continue to invest into core growth elements of the business, including in building wireless Fiveg broadband networks as a future while exploring it's for a new technologies like open Rand and why Fysixteen.
While the coded patent imec required us to quickly react and decisively we've done so prudently and we'll continue to invest into strategic long term growth drivers for the business.
Finally, we generated strong operating cash flow and adjusted free cash flow of more than $200 million.
We remain on target to deliver more than $400 million this year.
Moving to slide five.
Let's review our performance across the business areas.
Beginning with venue in campus as we expected we have seen some general construction delays do decide that access restrictions the project cancellations today have been limited.
Consistent with our expectation the impacts are varying by vertical.
For example, and hospitality current hotel constructions are being completed however, we're observing limited new construction starts.
In education, we are seeing an increased funding in projects are progressing the schools take advantage of the elongated several break.
The importance of connectivity solutions is greater than ever where aiotv has become a means to deliver a safer learning environment for students.
Enabling touched fish navigation on campus and social business.
Cool from K through 12, and at the University level are undergoing a rapid pivot the remote learning very reliable connectivity is essential.
We have stepped up with rapid deployment walk past solutions that next students in public places such as school in library parking lots and even in mobile solutions that mammals school buses.
For example, we were recently selected by the New Zealand Ministry of Education for the largest ever watched by six deployment that will include up to 38000, Wi Fi six access points and 12000 multi gigabit switches.
Turning to indoor fiber, while the traditional enterprise data market was soft as expected Hyperscale sales remained strong in.
In the quarter cloud, but based video communication and entertainment uses surged as people responded globally to the pandemic.
Our competitive positioning continues to improve as we showcase our global footprint.
Manufacturing prowess in the consumer facing innovation proving ourselves to be highly reliable supplier in the most challenging circumstances.
Finally, our das business continued to grow both year over year end sequentially. They have a numerous stadium projects, including the ATM T. Stadium home of the Dallas Cowboys.
While there aren't fans in the stadiums consumers are using this idle time I mean customers are using this idle time is an opportunity to upgrade their networks to the next generation of technology that we provide creating better fan experiences and more five to use cases for the future.
Moving to broadband networks, we are building momentum in this business led by cable operator investments to maintain network capacity upstream bandwidth has grown nearly 50% from pre cobot 19 levels due to working from home virtual learning and telemedicine and the broadband network performance has never been more Ms.
And critical.
Our backlog has grown significantly as operators invest in expanding capacity of their outside plant.
And we're leading the way, enabling these investments in both traditional HFC network upgrades as well as upon the a and other virtualized cloud based architectures.
Our D.A. solutions are now being deployed worldwide with multiple service providers in a variety of the Das network architectures.
These deployments are expected to expand its operators focus on increasing plant capabilities through a combination of traditional and next generation architectures.
Looking ahead to 2021, the U.S. regional the U.S. Rural digital opportunity fund or our das is expected to be another positive driver for the company and demand for our past the fiber cable and harden connectivity products is approaching record levels.
Does this in we have directed investments to increase production capacity in support this growth in our tier two tier three north American markets as well as in Europe.
Moving to slide six, let's turn to home networks and outdoor wireless.
And how networks, our home video or how media solutions. Our video CP remained soft in the period as expected.
This pressure is likely to increase in the third quarter due to ongoing OTI trends.
As customers work from excess inventory that was built in response to anticipated coded 19 supply disruptions.
That said, we do expect a modest recovery in the fourth quarter.
We continue to drive cost out of this business, while investing in innovation and are seeing early successes with our IP streaming platforms, along with increasing interest in products that integrate voice input and speakers.
Turning to broadband modems and gateways. This business has been more stable given the importance of in home connectivity in today's remote working and learning environments.
Sales increased sequentially and only modestly declined year over year.
We expect increasing strength in this business in the back half of the year and into 2021 with the introduction of critical new product one at a large north American operator.
Finishing with outdoor wireless sales were soft across every region outside of Europe, a variety of reasons.
In Europe Fiveg investment continues in Varco. The 19 is call some countries slightly delay their final spectrum auction and allocations overall operators continue where their fiveg readiness and we're now seeing crews back in the field for installations.
In addition, recent geopolitical tensions have created opportunities for us to gain share in several in important markets and we see this opportunity continuing as we head into 2021.
Offsetting that positive trends in Europe sales and our remaining international markets were soft due to currency volatility as well as commodity price pressure in markets that depend upon certain cup commodities for a meaningful portion of their economy.
Sales in particularly pressured in middle East in Africa, Central and Latin America and in Asia Pacific.
In North America trends were solve primarily due to the winding down of investments in large programs such as person yet the preservation of capital to invest in the upcoming C band auction and the front end loading them much of the 2020 capital spending.
In addition, coded 19 impacted metro cell deployments as permitting was delayed temporarily.
We view much of these trends is transitory effects of either Kogan 19, or the natural falls in spending before new spectrum is interviews and fiveg spending ramps in earnest.
It's important to note that we have not seen any loss of market share and we remain one of the most important suppliers to our north American customers.
We create the world's most sophisticated and high performing antennas and are uniquely position. This new spectrum is deployed mobile data usage surges in fiveg related tower spin in accelerates.
In addition, T mobile has resumed spending on the macro tower in the second quarter and our full year assumptions remain relatively unchanged barring any unforeseen timing impact.
We're excited to partner with them in the years ahead as they upgrade towers to deploy their newly acquired 2.5 gigahertz spectrum and optimize their combined network post acquisition.
Before turning a let's move to slide seven but before turning it over to Alex I'd like to detail our response, because the 19.
Operationally Costcos manufacturing facility, so safely resumed normal operations.
We're maintaining strong production levels, while ensuring a profit appropriate safety procedures for our employees.
On behalf of the entire leadership team I extend my gratitude to our global network of contract manufacturers and suppliers, who had been a key strength for commscope and our ability to deliver for our customers.
Our broad portfolio solutions provided network operators with options to improve their mobile and broadband services in the near term and prepare their their networks for the future.
While the pace and degree of change in our lives scenes unpredictable the role of communication networks is clear.
Never has the importance of Commscope and our technology been more evident.
At Commscope were also adapting and doing things differently. We truly believe this crisis has made us a stronger team you have taken the long term focus mindset prudently managing costs, while continuing to invest in growth for the future.
We are meeting our commitments and are excited about the path ahead.
Now I'll turn it over to Alex to discuss the financial results for the quarter Alex.
Great. Thanks, Sam Thanks, Eddie and good morning, everyone.
I'll begin with a review of our second quarter 2020 financial results and the impact of the decisive actions taken to build a more efficient cost model for our business. I'll, then highlight our cash flow capital structure and liquidity position finally, I'll close out with some perspectives on how we see the balance of the year playing out.
As a reminder, due to the impact to covert 19 on our year over year results. All changes reference during my discussion will be on a sequential basis unless otherwise noted you can find year over year comparisons in disclosures in our earnings presentation press release in 10-Q.
Turning to slide nine in our second quarter consolidated results.
In the quarter sales were $2.1 billion, an improvement of 3%.
We estimate the sales were negatively impacted by about $50 million due to the supply constraints related to covert 19.
Orders for the quarter were $2.2 billion, yielding a strong book to bill ratio of one dot Ofour led by broadband networks.
Gross margins were consistent 32.1 person and operating expenses decreased to $432.1 million or 20.5% of sales.
Adjusted EBITDA of $280 million grew about 21%, primarily due to higher broadband network sales improved homework home networks profitability and the cost actions, we took to stabilize the business.
In addition, our profitability was negatively impacted by approximately $30 million and costs related to calls at 19 supply disruptions and other incremental costs.
Finishing up CNL book net interest expense was $141.4 million and excluding the amortization of debt issuance costs and all idea $6.7 million net interest expense was $134.7 million.
Finally earnings per share improved from 12 cents to 32 cents.
Moving on to slide 10.
I'll spend a few moments reviewing the actions we've taken to aggressively manage costs as told in 19 began to impact business.
As Eddie mentioned earlier tightly managing expenses in a cyclical industry is in our DNA.
As you'll see here on the left panel at the slide as a pandemic began to unfold, we prudently manage costs and we have consistently lowered our 2020 operating expense expectations as I referenced on our last call. These actions include head count optimization discretionary spend reduction a comprehensive R&D portfolio review and investment Reprioritization.
Yeah.
Looking at the right panel at the slide you'll see that each quarter, we over delivered on our expense plan and we expect that trend to continue in the second half of the year.
I'll note that the second quarter benefited from a few onetime expense benefits that we don't expect to repeat such as the timing of marketing related expenses and some lower professional fees and we expect to exit the year to run rates slightly less than $450 million, which is about $50 million below our original plan. When we began the year.
We believe that the majority of actions we've taken to contain cost our permanent in nature and position us with an even more efficient and lean operating model as the cycle improves.
That said there are certain cost categories, such as travel and a portion of the marketing spending that we do anticipate rebounding as business conditions normalize, although certainly not to the FICO that 19 levels.
Turning to slide 11, let's review our segment performance.
In the second quarter venue on campus sales improved 2% to $479 million, primarily driven by higher sales in China Asia Pac in North America, partially offset by declines in Europe in India.
The improvement was most pronounced in our das ruckus and indoor fiber and partially offset by declines in indoor copper as we expected.
Adjusted EBITDA of $38 million remained essentially flat the improvements in operating expense and higher sales were offset by the impacts of unfavorable mix absorption and our strategic decisions to maintain critical R&D investments to drive future growth.
Outdoor wireless network sales declined 6% to $328 million from regional perspective.
The sales decline was primarily driven by North America, and the Middle East Africa, partially offset by improvements in Europe and calendar.
Sales soften both on the macro tower and in the Metro layer.
Adjusted EBITDA decreased 16% to $76 million. Despite the improvements in operating expense. This was more than offset by lower sales volumes and unfavorable geographic mix given the weakness in North America.
Moving to slide 12.
Broadband network sales grew 10% to $672 million. The improvement was most notable in North American Asiapac, partially offset by central and Latin America in Europe.
Sales improved in both network cabling and connectivity and networking cloud due due to cable operator capacity investments.
Adjusted EBITDA increased 40% to $130 million.
A significant improvement was primarily from higher sales volume and strong expense control.
Shifting to home networks.
Sales grew 4% to $624 million primarily from improved.
America in Europe.
From a product line perspective, the sales improvement was primarily due to growth in broadband carrier and retail gateways in modems and some expedited video shipments.
In the quarter due to the anticipation of supply disruption related to cold in 19, Lex video service providers chose to accelerate video set top box shipments ahead of normal video activation requirements.
As Eddie mentioned earlier this creates a headwind in the third quarter, but we expect inventory positions to normalize as we move into the fourth quarter.
Finally, adjusted EBITDA of $35 million significantly improved from the first quarter, primarily from higher volumes favorable mix and lower operating costs.
Turning to cash flow on slide 13.
In the second quarter, we generated cash flow from operations of $209 million, an adjusted free cash flow of $217 million, both significantly above our expectations.
We continued to drive substantial working capital improvements with notable reductions to our days sales outstanding an extension of our days payable outstanding improving our cash conversion cycle by eight days quarter over quarter.
We can we expect continued momentum from working capital enhancements.
And expect to deliver positive free cash flow generation through the balance of 2020.
Turning to slide 14, let's begin with our recent refinancing.
As we continue to prudently manage our balance sheet and out of an abundance of caution we took an opportunistic approach to extend our maturities at historically attractive rates with high yield markets open in receptive and after a turbulent couple of months, we issued $700 million of 2028 notes at seven M&A.
They carry the same attractive covenant light structure as our existing maturities.
We used the proceeds to repay the remaining $50 million of our 2021 notes and to retire $650 million of our notes due in 2024.
Importantly, following the refinancing our next nearest maturity do isn't until 2024.
We believe taking this step was an insurance policy against future uncertainty, especially given the dynamics nature of the current operating environment.
Our cash and liquidity positions remained strong throughout the quarter as of June Thirtyth, we held $823 million in cash and cash equivalents and at $522 million of ABL availability for total liquidity of over $1.3 billion.
As a reminder, during the quarter, we drew $250 million on our ABL revolver as it from cautionary action.
Absolutely as liquidity and visibility have improved on July eight we fully repaid the full balance using cash on hand.
Furthermore, we held more cash and the balance sheet during the second quarter in anticipation of any liquidity strains we might experience in the wake up a pandemic as that risk is mitigated in our business has stabilized we plan to resume debt repayment, beginning with $100 million into third quarter.
We will evaluate additional opportunities before year end, depending on business performance and the macroeconomic environment as they pandemic unfolds.
While net leverage at the end of the quarter remain elevated at 7.1 times, we remain laser focused on achieving our long term leverage target of two to three times as the business recovers and the Fiveg investment cycles against take hold.
Turning to slide 15 for a few of us additional thoughts on our near term outlook.
Following the same format as our last call I'll provide brief overview of the near term outlook within our segments.
And broadband networks the market remains healthy as cable operators are accelerating investments to maintain network capacity.
We're in the market with a fully virtualized distributed access architecture solution and actively working on PON cloud advanced analytics and other cutting edge solutions that will be increasingly relevant in 2021 and beyond.
Within outdoor wireless networks T. Mobile is ramping Europe is strengthening and we expect north American carriers to be active in the upcoming C band auctions in December we are seeing some delay in metro cell deployments as a result of call that 19, but are confident that this is a transitory effect of the pandemic and our metro cell business will be a strong contributor to growth as opera.
Radars continue to need to densify their networks beyond the macro tower.
Internationally outside of Europe, we expect commodity prices and currency volatility to create headwinds in certain markets, particularly central and Latin America as well as the middle Eastern Africa.
And then you on campus.
Datsun Hyperscale trends remain strong and we're encouraged by the overall stability of the business through the pandemic.
And the growth outlook into the future.
We have the industry, leading indoor wireless solutions with our one cell and next generation era Das platform and our investing to integrate these LT options with our Ruckus Wi Fi technology to create a private network solution that is second to none.
While our core enterprise business, particularly inside copper has softened since the beginning of the Lockdowns. We continued to enjoy the benefits of having the industry, leading brand and market share and we're hopeful that the worst is behind us.
Within home networks broadband remained stable and will ultimately become a growth engine for the segment.
Video continues to be a challenge for the reasons, we've discussed, but we are managing cost aggressively and expect to rebound in the fourth quarter as in inventory levels again to normalize.
Given these factors in the momentum we felt we expect third quarter sales and adjusted EBITDA to modestly improved compared to the second quarter.
Furthermore, we expect accelerating momentum from the third to fourth quarter.
Turning to slide 16, I'll highlight a few more detailed assumptions across our segments.
Broadband networks, we expect to high teens third quarter sequential improvement led by outside plant.
For the fourth quarter, we expect moderate sequential growth.
For venue and campus, we expect mid single digit sequential sales improvement led by indoor five fiber and Ruckus. Additionally, we expect fourth quarter sales to be consistent with the third quarter and this assumes we don't experience a material slowdown in the core enterprise spending, resulting from new and unforeseen cold and related impacts.
We expect a low teens sequential decline in outdoor wireless sales driven by front half weighted tier one north American carrier Capex plans and continued emerging market weakness. However, we do expect a moderate sequential improvement in the fourth quarter.
For home networks in the third quarter.
We expect a mid teens sequential sales decline. This is driven by high customer video inventories driving weakness in the quarter. However, we do expect steady growth in broadband gateways, given the launch of new platforms.
As the headwinds from video inventory levels, a day and new platform launches tolerate we do expect strong sequential home networks growth in the fourth quarter.
Additionally, a full few eat up a few full year assumptions to consider from a modeling perspective.
We expect an adjusted effective tax rate of approximately 27% dilutive share count in the range of 239 to 240 million shares outstanding Capex of approximately $100 million.
Interest payments of about $525 million cash taxes.
Around $105 million.
Restructuring integration and transaction cash payments between 110 [laughter] in dollars and most importantly of all adjusted free cash flow of greater than $400 million as as well as a commitment to pay down at least $100 million of debt in the third quarter.
With that I'd like to turn the call back Eddie for some closing thoughts.
Thanks, Alex.
While the environment remains challenging we are focused on what we can control and I believe we're well positioned for future growth and success.
As we conclude our call and open it up for Q and I'd like to leave you with a few key takeaways.
We continue to build a more efficient cost structure focused on reshaping and transforming our business.
We generated strong cash flow into quarter, and we expect this to enable debt pay down in the second half with 2020.
Our broadband segment or is the solution to keeping people connected to the time when global that works for our strained.
We are maintaining our strong culture and keeping our employees safe continues to be a priority.
Our global reach enabled us to be resilient and flexible with our global supply chain to quickly address regional market challenges.
Visibility is improving and our business is stabilizing.
And we are committing to de risking our capital structure and we remain optimistic.
With that we will now take your questions rain.
As a reminder.
Question, you will need to press star one on your telephone.
We try your question, perhaps the Kentucky.
Please stand by and while we compounding senior officer.
Your first question comes from Sammy bought me from Credit Suisse landfill.
Hi, Thank you very much first question is for Alex regarding debt PNM and you guys did offer your free cash flow guidance of $400 million are greater than $40 million for the year, but should we think about your you know that you know the amount of money that you plan on paying down in 2020, sorry debt payment to look right.
Instantly comparable between 19 or can you give us more guidance on kind of like the game plan on how we should be thinking about that.
Yes. So you know the commitment we made on the call was to pay down a $100 million in the third quarter. We obviously I have some amortization as well on that on the.
On the term loan that will pay down on on schedule beyond that we haven't we havent committed to anything obviously the environment that we're operating in his job.
Incredibly fluid and dynamic and so we're trying to balance Mac maximizing liquidity and being conservative on on the balance sheet.
No our commitments to continue to work on a de leveraging path towards two to three so I can't really commit to anything beyond the hundred a $100 million that I committed to call.
Got it. Thank you for that and then my second question is related to outdoor wireless networks kind of like I'm trying to figure out two different things here first thing is we obviously here about telco is building out in Densifying Fourg LTE and we continue to hear about Fiveg buildouts now starting to accelerate.
And then given looking at your guidance right I know that theres been a little bit of slowed down some of the telcos, but for the most part there is still continues to be some buildouts right, but your guidance at least the results you delivered for the year in the implied for the back half of year, there's not really imply that there's something kind of big happening here right. So maybe you could give us.
A bit more detail around each telco and you're spending plans any kind of revised contracts in kind of pricing terms. The renegotiating our that pricing terms is what slowing things down is just deploying a cadence is that when it is like maybe is giving us some more detail on what's going on specifically outdoor wireless from a telco spending perspective.
Okay sure and we know we talked about Europe being strong and continuing then we talked about the geopolitical happenings that give us some opportunities that probably is not in 2020, but we will have conversations with customers about.
As they change over their equipment and what that means to us going forward you know the a the other international markets are still challenged we think with with what's going on with Coca 19, and general economic challenges that they face with commodities and foreign exchange and things like that and [noise].
North American market, So we talked about a C band auctions.
We think that that's the intended this been talked about but some of our customers as to Oh allocating the up for getting ready for the seabed auctions in the billions of dollars that will be required for that so we think that that will impact capital spending is all part of capital in one way or or the other.
We also talked about T mobile specifically.
We we are getting orders, we do believe that based upon what we thought they would do for the year. They are own on park Park targets do that we know that some people have talked about slowness or with a with them.
We sell at different paces than than some of the people that have talked about that our product is put into inventory and utilized as they needed and so we feel comfortable based upon our conversations that we're having with them as to as to what those volumes will be a relative to what our planning process here.
Got it. Thank you and then maybe just any kind of commentary around maybe Verizon 18 T or other pricing.
Contracts that you guys have normally talked about in prior years has there been any renegotiations or repricing of certain contracts and products.
Oh, you know the 70 there there are always talked about and you know I think that we've shown that we adapt to those conversations and and so there's there's nothing the extreme that is outside the norm today, you know, but we have we do engage with those conversations with.
Our customers from time to time.
Got it okay. Thank you very much.
Your next question comes from Jack evolve from Wolfe Research Your line is hopefully.
[noise]. Thank you very much gentlemen.
Mike My first question I'd like to begin with little bit of color. If you could on <unk> visibility improvements or business trends that are stabilizing.
You talked about that across maybe against many of the business lines.
At the same time I think allergy you mentioned was still a dynamic or fluid situation can you help us.
I understand what is giving you the.
So the better visibility despite the ongoing covidien.
Pandemic impacts due to the business.
Particular and I.
Fourth quarter is often a sequentially lower.
Quarter in many of your businesses. So if you could talk about that a little bit to I'd be grateful.
When you went into a you'd begin with that question, Alex if there's anything.
Matt.
Yeah, Jeff, but I think I think what gives us comfort to our belief is of what we're seeing in our order book, a and and Ah you know, where we saw softness in some of our.
Verticals. So during the second quarter I think we're starting to see some firming up a firming up there.
In a in enterprise or Hyperscale as a strong business for us and that continues to be strong. So we see that continuing through the year I think that a you know.
What what has been typical in the past I don't I'm not sure that counts this year.
This is a this is a whole different environment that we're facing and and so we're gonna have to adapt there's still a great need for communication or because of where people are working and how they're working we've seen we've seen a considerable strength into in the broadband business with the orders and.
Thats going so we have we feel good about about that I think those are some of the highlights of what I would mention.
Alex if you have any other further comment yeah, maybe just a couple other details. So so we have seen some some pretty notable successes in the enterprise space, particularly on large projects and one of the things it's been encouraging.
Ah throughout the pandemic as we've seen very little cancellation of large projects once they're committed to so you know Eddie mentioned in his remarks, we are seeing some softness and.
On the hospitality space for reasons that I think would be obvious to everybody, but those are being offset by some some pretty pretty important wins on the on the venue side of the business. We also see you know accelerating trends on the I'm Hyperscale side of business work, where we then.
Very successful so I think we feel good about the way the enterprise businesses is hanging in there.
Okay, and then secondly, I would you mind, giving us an update on how.
Progress how your progress is developing with millimeter wave and tens [noise].
[music].
Oh, Jeff we work with a partner a in that we've been a opened about our relationship with Nokia and partnering with them own owned a active antennas and and the technology outside of what Commscopes of historical strength has been so we'll continue to do.
That as necessary.
It is not a it is off the focal point of what our businesses from that standpoint, but we do we do a support our customers as necessary. So we'll continue along those lines.
Excellent. Thank you gentlemen.
Yes, good teams China.
Your next question comes from NASA Marshall from Morgan Stanley. Your line is open.
Great. Thanks couple of quick question for me on the broad brand broadband strength that you're seeing.
Do you think it's all just accommodating the corn environment are you starting to see decisions on architecture changes that could maybe stabilize spending you know into 21, and then maybe just any update on one so congrats thanks.
A meta could you just repeat the first part of your question sorry about that it was a little bit audible on all right.
Sorry, just on any of the broadband strength that you were kind of speaking to just wanted to see is that all just say accommodating the current environment and elevated you know elevated usage by people on the home or are you starting to see decisions architecture changes that could make that momentum more stable I do kind of future.
For years thanks.
I think the answer is both of you know, we're we have a large influx of licenses that are necessary to support a support our customers are you know, we're making a inroads into virtualization product areas and so I think that will add stream because we get as we get towards the back ended the year we've talked.
About in the remarks that we are selling these products both here and internationally and so I think I think the answer would be in both in both areas that you asked.
Yeah met at one of the things just to help you help you from a modeling standpoint as you know typically the operators that around 20% to 30% additional capacity per year, just just to keep up with normal bandwidth demand and competition.
When we were in the early stages of the Covance crisis, we saw network utilization jump by somewhere between 30 and 50%. So you saw significant acceleration of that need to add capacity, which is one of the reasons why we're seeing the strengthened the broadband business. So.
That is.
What we're benefiting from substantially but they will continue to add this 20, 30% capacity, even after things normalize and you know if you want to come out of an upside scenario you could have a point of view that all of that the video conferencing. They use of advanced gaming augmented and virtual reality those sorts of things.
Our really are really not driving a fundamentally different use of the network, which is certainly what what were seeing and then maybe just to transition you asked a question on the progress of oneself or eat I'm sure Eddie will add to my remarks Sarah.
Yeah sure one one sell a oneself continues to be a straight you know we've invested a lot of time and effort and money in that product or it is taking hold.
I think we have close to 100 venues under a under review as to how to deploy with a with one customer.
So that that's pretty exciting it's getting a lot of interest from other people looking at it as well and we continue to sell all the product or in Europe. As you know as our that's where we first launched in and it continues to be a strong product. There. So we're we're extremely excited or you know we've talked about the radio.
Business that is Ah that is an opportunity for us.
In the the venue business.
And it's also usable outside in some areas. So so we're excited about what it's going to need to listen to future and we're excited as we evolve from a a single carrier to multi carriers to multi right. The multi frequencies that this is going to be a great platform for the future.
One thing Meddata that yeah, I, probably should have mentioned in in response to.
Stevens comment on that where the strengths Tom's from in the second half the year one of the things were seeing out of Cove. It as an increased reliance.
On sort of health and safety in the enterprise space, you know everything from from Iowa teachers to monitoring to remote elevators, those sorts of things and all of those types of applications.
I need to reside on either a one cell solution or a rockets Wi Fi solution. So you know to some extent the success. We had in late 2019 getting one sell into the market. We're really reaping the benefits from now as we as we work our way through that crisis and it's also one of the things as providing stability in the enterprise space.
Yes.
Great. Thanks.
Your next question comes from George Notter from Jefferies. Your line.
Hi, guys. Thanks, very much I guess I wanted to ask about your structured cabling business and [noise].
Yes, you know.
I heard the calling it certainly does did the copper side being softer is we would expect going through this period of time, but where do you think that business is now in terms of.
Run rate relative to what may be a normalized run rate might look like going forward I guess I'm. Just wondering if you you've already seen kind of the step down in that business and a worth some sort of seems stable type of run rate. There is that you can prove upon going forward what's perspective there. Thanks.
If you take the or if you take the entirety of what where that business is you know that that's where hyperscale is located two from restructuring tailing standpoint.
That business is growing double digits every quarter or has been for several for several quarters and we continue to see a considerable strength there. The traditional data center business is soccer ER and and you know we expected to be so until we see some some clarification.
One of where this economy is and multi tenant datacenter business is good just like Hyperscale is so that's that's the two growth areas and copper is a transitional our business right. Now you know it's a it does provide us a lot of strength in certain markets.
But that a you know it as it is not a growth engine today. It is a considerable money or a and we absolutely support it and we think it has a a lot of opportunities in PEO, Lee and things like that in the future. So it's something that we think is important to us.
And it's something that a dinner they will so a lot of the cash generation that the company sees.
Yeah, just in just building on what Eddie what Eddie mentioned, obviously, the P. OE is that it's a really big deal right as everything in the enterprise space that is is being re revisit it you know more access points like in sort of touchless, Alabama all of those re.
Furbish men out the enterprise space are going to require a you know in advance Cadsix say cable, which as you know the most premium product that we produce so.
There are well, where we are experiencing some secular declines in that business. There are also tailwinds as you know, though the role of the office play plays out and and they need to upgrade upgrade the infrastructure.
You know George the other the other thing I think and then and all the buildings that were in three or fiber is included the copper is there is a is the base the anchor of the building and so a you know I think it still has a long life that it might be used in different ways, which which both Alex and I talked about.
But it is still in important product ports.
Any sense for how big the copper piece of that businesses relative to fiber in the the content provider component.
It's still very there's still the largest component of what enterprises, but you know as I said, it's not at this not the growth engine. That's a that's that is fiber a and within fiber connectivity is extremely important. So that's where we're spending a lot of development money on as as we see the transition or.
The technology.
Yeah Fair enough. Thank you just taking shape terms at the overall portfolio, so where fiber would play predominantly or I'm, sorry, where copper would play predominantly would be in the commercial real estate space, that's about 8% of our overall of our overall portfolio.
And then copper would be a subset of that 8% you know that a commercial real estate is really where.
The traditional enterprise fiber business sets. So the ruckus business and then the top of business and one cell.
Great you know that's a this business a as we entered uncoated, though it it was one of the first to react I guess downward.
It has been stable of since April and and the last couple of months has been increasing so you know it ebbs and flows with a with expectations of the market and a and that's a fed it is an important product for us from a report of the of the whole portfolio that would have.
Your next question comes from timeline the ball from Raymond James Your line children.
Great. Thanks for taking the question.
I wanted to ask a about two or the verticals trends first on on the cable TV market. It sounds like you're starting to see some of that that D.A. outside plant cycle.
One of your customers has been vocal about optimizing its network I'm just wondering how that optimization system, it's affecting your street cat business and your overall trends in broad band, whether you're seeing in effect and then on a on the wireless business.
We're hearing a lot more about open ran and given your position in the industry I have to imagine. This is important here. When you were playing in the standards bodies, but I'd like to get in understanding about how you see open ran affecting your business. Thanks.
Okay. So Ah. So one sale is open ran and we're excited about that were on the committees that talk about open ran for were vocal promoter of unlike some of our OEM Oh friends.
So we see it is a is a great growth opportunity for for others, such as Commscopes, who have a lot of technology to be able to participate outside of maybe where they normally have.
You know we are a radio manufacturer today in our one cell product and I think a you know in our long history. We have a we have been tangentially attached to a the radio business on the on the macro tower were not as a.
Formal radio supplier, but a supporter and so what we think the move to open ran which is gaining traction is good for the industry.
And we welcome it and so we're glad to see the operators starter and starting to support it and we're all were all for that.
Thank you know in the Oh, we have a large installed base I think you as you know in the in the Oh.
See cap market and all of that we are so we're seeing a a lot of seen see MTS nodes splitting them and all that and we've talked about this in the early or meetings, where airport square we versus others. So we think we have a very cost effective wait for for our customers to try.
In addition.
I said in the Im a one of my first question. So that that's what we're seeing in licensing has been a significant benefit in the broadband business.
And I think we see a continuation of that our customers have seen as this or is this market shifted when people have stayed at home for to which we still are of that that the need is going to be different than what it was before and so there was a lot of catching up for optimization that was necessary.
For them to stay competitive.
We think we think that will continue.
We think the offerings that we have in place now for virtualization are highly competitive and significantly cost beneficial to to the marketplace. So.
We think that that market for most of the customers than it is open to us.
And we look forward to competing.
So just a couple of a couple of points Simon to underscore.
The first is that RCM Ts business is actually up sequentially hand up year over year. So the point Eddie made about the operators continuing to invest in the network. We're certainly seeing that within our out within the Cmcs portion of the port portfolio on the traditional kind of access technologies portion of the portfolio.
We expect to see firms like there as the notes flooding activity that Eddie mentioned, you know begins to build momentum what we saw early on in the crisis was there was such demand.
[laughter] that Ah that operators preferred debt to optimize the network more more virtual late then physically and obviously that gets them a certain amount of capacity addition, but ultimately they're going to need pushed the notes deeper which will drive up the physical part that's the hardware part of the business as well.
And on your other point on optimization and this is this is one of the things we do with operators. So we actually work with them to design somebody software solutions to help continuously optimize that the network and get the most out of their investments. So you know what if anything that gives us a platform for incremental customer relation.
Shifts and incremental product sales so it's actually.
People to have that level of collaboration going on.
Thank you very much.
Thank you.
[laughter].
Your next question comes from Gene Suva, Fran Teen Girls investment research your line children.
Thank you so much for all the details will slow can you comment a little bit about discussions.
Pricing, how it's been you got throughout the quarter, especially in a world of kroner virus and.
Yes in person meetings, you know a more uncertain world is pricing has been a little bit more stable normal a little bit more pressure should we can kind of think about it as we can actually looking to kinda 2021, and the reason why you ask is in the past.
I'm scope is how do you know you know quite a bit in GBM once in awhile. It seems some unexpected pressures that have come up on pricing. Thank you.
Yeah, our I remember that as well so you know as I said earlier to one of the earlier question. Joe. This is an ongoing process with our customers. Your though we're continually bidding on a new designs and new products and things like that in and they all take in a price.
Discussions.
And so with with our customers that is something that we normally do wonder if there are pressures in the market as some people are or coating for business and they offer they all for pricing that is a maybe outside the norm.
Think of from from the standpoint, what do we do about that I think we have shown in the past as we have to remain competitive in the in the marketplace. A that that we have a way to to take cost out to redesign to be more efficient and do things like that and at the end of the day the margin.
As far as important to us and I think that we'd and we've been pretty a pretty good at maintaining a some consistency in endos margins.
There are sometimes lags, but Ah you know those those who happened over time, but I think overall, we were very a were very good at a it taking care of that so.
No I, we don't see right now or things that are outside of a of the control now there are some businesses that that.
Pricing is is.
A challenging to understand.
And you know, we but some of those businesses. We are we need to make sure that we do a earn a reasonable return are we not have to make some other decisions and so so that's the sort of the synopsis nothing yeah. If you were to if you were to try to model. It generally what we anticipate as we think about the business [laughter].
Due to 3% or price compression, that's been offset by ongoing productivity up you know that and we haven't seen anything.
Different from that if you were to look on a kind of a mix normalized basis, you'd actually see with a business that you're referring to that was impacted by some price.
Well years ago <unk>, you would see that we delivered on our commitment to more than a lot more than claw back the margin compression that we saw a from those actions through through a combination of cost action as well as new.
New product introductions, because as we introduce new technologies dose carry with them higher price points. So we actually don't see I don't see margin compression driven by pricing.
Great. Thank you so much further clarifications in detail.
Your next question comes from Steven Fox Fox Advisors Your line Shield.
Thanks, Good morning, I'm, just one question for me I'm wondering as large competitors on indoor and outdoor fiber connectivity has also seen allows a similar trends you've talked about this morning, but seems a little bit more cautious on the type of cycle that we could be having.
On optical going forward I was just wondering if maybe you could sort of not to go tit for tat with what they're saying, but could you just sort of highlight why you think maybe this is a good cycle on the optical side and maybe even Oh historically has the normal cycle like you seem to be intimating could happen. Thanks.
Steve. Thanks. Thanks, a question I think a in some regards where to differ.
A different point in some of the verticals within fiber than than that person may be and and I think we still have some growth opportunities to become more relevant I would speak a hyperscale beans example, there and so I think that that might be a different answer from the from.
The two office.
What we see them and the the rural telephony needs going forward. We think is gonna be a great opportunity and insight as we said in there we are adding capacity because we needed.
Today.
And and so we see we see the benefit a there we think that this is a this is a competitive market I think that we have not just cable lane, but but a very very clever connectivity products to go along with it and this though is the full solution, which some of us happen and.
And others don't have that full complement so I think that market is good for those that that do habit and so we we really don't see a slow down.
In the in the near term or in the medium term relative to what we what we see in the marketplace you know.
I have seen virtually every cycle and fiber and what can happen. So you know which is something that you do watch.
And but I think right now and what we see we feel comfortable with a with what weve.
Scott.
Thanks, very much for that that's for sure it helps there either.
Operator, we will take a one final question. Thank you.
Sure.
Your next question comes from some neat Carnegie from JP Morgan Your line Toby.
Hi, Good morning, Thanks for squeezing me too if I can do so.
Two quick ones you had on the broadband Nick books business, you had a strong improvement in margin sequentially.
So in some of that does the increase in revenue, but Oh can you add some capital relative to what are you seeing a in the quarter, where do you saw in the quarterly to soften seems forces hardware and if I interpret field golf comments correctly, you I think you indicated that going forward you might see more of hardware seen says Oh.
No. It added so if you can just clarify that that's the how you're thinking.
Flows in hardwood itself.
I have a quick follow up thanks, Yeah, So I would.
First and foremost this strong performance in broadband is driven by.
Really excellent cost control and so you know we did that across the board and just to point back to my original marks are correct patients coming into the year, where period of pad and the ZIP code of EUR $2 billion annualized and and will deliver around 1.8 billion that's across the portfolio.
And really not broadband led the way on that with some actions that they took last year as we were seeing softness in that business. So we're really reaping the benefit of that that business, the other area where where.
Seeing some lift is through mix. So I mentioned CMT ask sales up a year over year.
And up sequentially quarter over quarter. So that will you know clearly have a positive.
Mix impact and we do anticipate that dynamic continuing through the back half of the year supporting that that is the point that I mentioned previously, which you know we had seen some.
Some softness in that and the hardware side and the access technology side, we expect that to abate somewhat as as the operators began pushing a note getting back to more notes splitting activity and you see more physical or physical disruption of the networks as opposed to just virtual disruption of the network.
Says that that makes sense that get that yep Yep no food I'm just a quick follow up on the cash flow he will.
You can be historically, you've generated most of the cash flow in the back half of deal absolute queue. At this time is exceptionally strong oh, and you're still guiding to just over 400 million, which does indicate some wonderful maybe it's really difficult beavis he was more lower seasonality gosh.
During the back half. So just wondering if there was anything one off there that has to Q and is getting well supported for award from the Guy. So that you would ideally you shouldn't read in the back half of deals.
Yes. So that's that's a great question I appreciate you asking it because I I do think it's important to know how strong the cash flow was.
In Q2, so that you know north of $200 million a cashless in Q2 was really a great result in a product a really strong management of the balance sheet, which was which was well done by the team on Q3, we expect a bit less than that there's some normal seasonal or 80 runs that we have to do for.
Some of our large contract manufacturers suppliers, which will lead to a bit of up a bit of a decline there in Q3, but but then that will rebound as we get to Q4. So you. So yeah that gets you to your.
North of $400 million out for the year. So so we do expect to be substantially positives for the balance of the year and I think you know all things considered I feel pretty good about [laughter] generate a really strong cash not in a challenging operating environment.
Great. Thank you.
Thank you and and ER and we thank all of you for your continued interest in Commscope. We Ah we want you to keep you in your family safe.
We're not through this pandemic, yet, but we look forward to talking with you next quarter. Thanks very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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