Q3 2020 CommScope Holding Company Inc Earnings Call
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Coverings, which identify the principal risks and uncertainties that could affect future performance.
Before I turn the call over Chuck just a few few housekeeping items to review.
Today, we will discuss certain adjusted are non-GAAP financial measures, which are described in more detail in 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 and reflect certain classification changes to align the commscope presentation.
All quarterly growth rates described during today's presentation or on a sequential basis comparing the results of the second quarter of 2020, unless otherwise noted.
I will now turn the call over to our President and CEO Shuck Treadway Chuck.
That had many challenges. This past year has also shown the world how essential network connectivity is and the vital role Commscope plays in keeping our connection strong.
Whether it's keeping business is running maintaining our education systems with virtual teaching are helping people stay connected to their loved ones COVID-19 has highlighted the power of network connectivity and the power of Comscore.
Moving to slide three.
My first month reinforce these great qualities observed before joining the company.
I spent the past few weeks visiting several of our sites in the United States meeting with our senior leaders touring our labs and centers of excellence and talking with our customers.
Importantly, as we continue to manage the organizational challenges brought on by COVID-19.
I've been very impressed with the rigorous health and safety protocols across our sites to maintain a focus on the safety for our fellow employees.
Our commitment to protecting the health and well being of our team is unwavering.
And the visits and conversations have been tremendously energized.
I'd like to share a few stories that initial impressions with you that I've gathered this first month.
First off I was struck by the level of employee commitment and the strong culture of teamwork in service.
As I met with our venue and campus team they highlighted our capabilities across das and small cell.
This discussion highlighted highlighted the entrepreneurial spirit of the team and their purpose driven nature to deliver innovative solutions for the customer compete.
Compete in the market and be a great partner to our customers.
In each location I visited without fail. The team was engaged passionate about what they do and committed to driving growth for the company.
The team took me on a tour of the Eightys stadium outside of Dallas, where I saw firsthand Commscopes solutions, serving as the backbone of the network, including a fiveg gas system.
I was amazed at what seemed to be a very limited amount of physical product delivering such a profound level of service throughout the venue.
I saw some before and after photos of prior deployments and a demonstrated how deep the technology expertise is in the team to evolve technology. So much in the past few years and provides such a strong service.
In addition to spending time with our team I've spoken to many of our customers and look forward to talking to even more.
And I'm, so proud to say that the common thread in those initial conversations and their feedback about the company has been about our character.
Our integrity shines through.
Even in my short time at the company have recognized integrity is paramount in the Commscopes culture and the expectation our customers appreciate.
It's clear that the principles that Frank Drendel, and art and Eddie Edwards instilled in our company are truly foundational.
And I will work tirelessly to sustain that legacy and drive innovation for our customers.
One specific way that our value of acting with integrity has been evident is through our diligence to keep our people safe.
I have been immensely impressed with the measures in place to protect our people and sustain continuity of our supply chain.
More than ever networks have proven to be the life blood to our economies the education of our children and the element keeping us connected on a personal level.
And while I'm just getting to know the people in the business. It's been a great start it's been a great start to a broad and deep exploration of our strategy tactics and areas of opportunity to ensure commscope reaches its full potential.
To give you a look ahead at the trends impacting our industry and the share some business updates I'd like to introduce our Chief Technology Officer Morgan Kirk.
Thanks, Chuck and good morning, everybody.
Across the entire business, we continue to innovate and push technology boundaries to solve key customer problems. We're.
We are driving essential programs to support our customers as they migrate to new architectures and face new hurdles.
In our broadband networks, we are progressing in key development areas and our lineup of industry, leading sealing solutions under the Novavax brand for fiber to the X applications are gaining traction in.
In addition, we are complementing our copper and fiber solutions with DOCSIS equipment advances to help our customers upgrade network capacity at the core and with nodes splits. Our next generation VA architectures of remote phy and remote Mac Phy are on track and our virtualization efforts continue to gain features.
We are also working on DOCSIS sport auto solutions, which will be deployed in future years.
In venue in campus networks, we are addressing indoor customers' needs with new product extensions.
The ability to move kilowatts over kilometers.
When power shift is deployed with hybrid fiber. It provides a cost effective solution for the metro layer of the network with an estimated 50% reduction in in installation costs as compared to AC power grid and the street discrete fiber cabling.
This will be critical to building the capacity layer of the network to support Fiveg.
Yeah.
As the impact of COVID-19 will likely impact the world throughout 2021 operators will need to enhance the fixed line access given how essential connectivity has now become in the home.
Broadband networks were put to the test by the Covid crisis, particularly in the off when can we expect this demand to continue for the foreseeable future.
Operators continue to focus on improving upstream bandwidth through a number of strategies, including nodes segmentation and increasingly available spectrum through mid splits in highschool architectures.
While slow due to the focus on more urgent capacity expansions, we expect to see the continued migration to da and virtualization from existing technologies.
This long term migration includes DOCSIS Bordeaux and is expected provide the network capacity to support end user needs well into the future. This transition will take place over the next decade and will lead to consistent network investments for years to come.
We also see pawn fixed line connectivity, increasing for new bills to that and one of the most exciting market opportunities will be in the support of borough coverage and the United States government is allocating $20 billion over the next decade for the rural digital opportunity fund or art off toward improving rural coverage.
Yes.
Net sales of $2.17 billion increased 3%, which was in line with our expectations orders for the quarter were $2.14 billion over the book to Bill of 0.98.
Adjusted EBITDA of $342 million and adjusted EPS of 51 cents increased 22, and 59% respectively.
Amanda and a key tier one customer refocusing on fiber deployment as the core growth strategy.
In response, we are prioritizing prudent investments to expand fiber cable in connectivity capacity to meet these needs.
While we have focused on C band and outdoor wireless.
The impact extends across our portfolio to include broadband networks. During the third quarter, we received over $50 million of orders associated with C band conversion and reclamation and we expect these benefits to continue throughout 2021.
Turning to slide 10, and our venue on campus segment.
Net sales of $512 million grew 7% led by growth in Europe, North America, and China from a business unit perspective growth was most pronounced in ruckus with modest growth across the other beaches.
Adjusted EBITDA of $56 million grew 47% led by higher volumes and continued tight expense control during an uncertain end market environment.
We continue to build hyperscale momentum with another record quarter as our market positioning strengthens and heavy cloud usage increases due to work from home dynamics.
We are leveraging our key capabilities to customize quick turn high density fiber accounts for simultaneous global builds while leveraging our technological expertise size and scale ruckus.
Ruckus benefited from strong growth in Wi Fi six and outdoor Wi Fi deployments and increasing cloud subscriptions as connectivity continues to be an essential need during.
During the quarter.
We also announced that Ruckus joined the Google or Ryan ecosystem, as a Wi Fi roaming partner, helping to ensure a simple and secure user experience for our customers.
Moving to slide 11, and outdoor wireless net sales of $272 million declined 17%, primarily driven by weakness in North America, the middle East and Africa, partially offset by growth in Central and Latin America from business unit perspective sales declined in both the macro and the metro layer.
Yes.
Adjusted EBITDA of $54 million declined to 29%, primarily driven by lower volumes and unfavorable geographic mix, partially offset by operating expense control.
Yeah.
Turning to slide 13 are unique and proven business model continues to generate significant cash during the quarter, we generated cash flow from operations of $172 million and adjusted free cash flow of $176 million. Both are above our expectations of note over the last 12 months, we've delivered cash from.
Operations, and adjusted free cash flow of $675 million and $673 million respectively.
Once again, our strong free cash flow generation is a testament to the great execution from the team to drive profitability and focus on operating expense control from a working capital perspective, we continue to see impressive performance on the collections front as our days sales outstanding was further reduced driving the working capital benefit for the quarter.
Said, given Chuck's limited time with the company as well as the significant economic uncertainty that we all see we on the board did not believe it would have been the best and highest use of Chuck's time to focus on the fourth quarter at the depth that would have been required for him to review and approve updated guidance.
Accordingly, we are not providing an update on our fourth quarter look.
Looking ahead and more broadly we expect to reevaluate our policy for providing financial guidance and we will address that policy with you all in greater detail next year.
Let me add some further context.
The board views Chuck's arrival as a much needed opportunity for a reset in the way we look at it manage the business in the long term.
Okay Wow, some wolf research your Lightnings open.
Yes. Thank you very much and this may be a question for Bud as much as it is for for Alex and Chuck but I'm I'm wondering if I caught that right that you will be taking essentially three quarters to do a strategic review that that seems like like an awfully long.
Time, so I'm just wondering if you could talk us through the thought process behind that behind that'd be typically you could think of 100 day Grace period as opposed to it 270 day Grace period or whatever and then you know given that that that is a bit of a long time I'm wondering if you could talk through what might have been items that were.
Off the table under the previous leadership team that may now be be back on the table under under under.
Under the New administration.
So I'll start and then I'll turn it over to Chuck to say a few of see more words, but as I said in my comments first and foremost the board is committed to getting chopped the time that he needs.
To really fully assess the business and build a plan. He's done this before and we think he knows how long it will take what the what the range of outcomes can be and I'll, let him comment further on that in terms of what's on the table or off the table or coming onto the table or going <unk> <unk> <unk> I think all I'll say is.
There is nothing that's off the table. This is we expect this review to be comprehensive and we're not gonna put any constraints on chuck's. Thank you.
And I think I beyond that we don't want to say anything right now.
Chuck Yeah. It look I understand you may think that Jeff, but you know.
When I think about it you know, it's an eight and a half billion dollar business and we just need to take this thing step by step right in what I'm doing is getting down to the 17 different business units inside the company right now, it's really trying to understand value and what they're thinking and where they Wanna go and all that and then we're going to look back and prioritized them.
Really think about what we have to do is Budd said to share with you.
Soon as we can you know what do we need to do to make a step function change in this business. So there's blood setup that it before it we just it's just a step by step process we.
We made finished sooner, but right now we're saying the third quarter you know the other thing I'd say jazz just had to build on what Chuck said as you know, it's not as though we're going to be sitting on our hands for the next 270 days I'm, Sir I'm certain that Chuck will uncover things that become more immediate priorities in the context of.
Building, a more comprehensive plan and when when we discover those things will act with with all urgency.
Okay and did you all have a template for how you would like to communicate the intermediate term trajectory between between now and then just just to make sure that we don't either Miss So inflections, one way or the other.
Yeah. So I think you know I'll I'll take that and maybe maybe Bud will want to build on it. So as I said, we're we're not undertaking to provide to provide guidance until until we have this comprehensive plan that that chucks described.
But also mentioned, which I think is important to underscore that we don't see market changes in the market conditions from in queue for from what we saw in Q3 and I think you can look at.
You can look at the earnings release of a number of our competitors and customers and I think you can enter and listen to what what Morgan said and I think you can feel like there's.
Some nice tailwind as we get into 2021, whether it's the C band option or or or cloud and rockets or some other things the growth and the hyperscale space. So I think we have a lot of tailwind that ought to help you get an outlook on on what the next.
Few quarters is going to look like and then obviously just don't don't overlook the normal seasonality patterns that we face Q4 is typically seasonally weaker Q1 is typically seasonally weaker and then Q2 and Q3 tend to be our our strongest quarters. So I I hope that gives you at least some.
Some some direction and I don't know about it if you'd like to build on that at all.
Yes, I would like <unk> I'll, just look where we're going to be completely comfortable talking to you all about the environment that we're operating in but.
But just to kind of.
To it we just don't want Chuck and his team head down focused on pennies per quarter or something that like that right. Now we want as Chuck used the term step changed step function changed <unk>, that's what we want Chuck working toward.
Okay, we will will sharper and pencils. Thank you everyone.
Thanks to early next crashing your.
Your next question comes from Simon and that for some reason my teens.
Hi, guys. This isn't a victory chew interest sign in April Uhm.
Could you help us quantify the size of the art off opportunity and you know maybe what you were expecting around the tiny and trajectory of the contributions from this opportunity you know get a nephew.
Seem to be at the Sun can shine through the material opportunity for you guys <unk>.
On a number of users that you're actually going to cover and so various different geographies in various different.
Very well various different geographies in various different populations will require various different keys coverage. So it will impact virtually all commscopes product line.
As our various customers compete in in this area. So.
I can't quantify it specifically.
<unk> okay.
Your next question comes from the line of finally battery from Credit Suisse. Your line is open.
Hi, Thank you.
First question for Chuck and Chuck I was hoping you are in the middle of what are some very large technological until the <unk> telecom secular trends you have wi-fi six C. Band you have large five G build outs, taking place as well and you'll have hyperscale opportunities from a cabling perspective I was.
Hoping if you could you know without really kind of treading on the open close boat guidance projection, but could you rank these trends as areas of focus for US just to understand you know what we should expect from like a.
Thought process or Decisioning criteria perspective over the next year or two.
Indoor wireless is critical as as both indoor and outdoor try to cover both the enterprise and the home and then art off funding. We we talk about because again, if it opens up a new marketplace that wouldn't have been economically viable without some sort of government health.
Got it thank you.
One follow up for you Morgan is when you think about what these cable companies and telecommunications providers are doing with your intellectual property and you guys executing the software sales.
Thank you and then can I can't wrap up my today without asking Alice a question on cash flow. So Alex I. Appreciate you guys aren't trying to give guidance, but if we were to think about what you guys gave us into Q and then just the prior consensus trajectory modeling of operating cash and free cash flow before 2020 2021.
It does.
Does anything look different today than when you guys last gave us this kind of framework for cash flow, Yes, Let me I'll give you a few markers to work with so north of $350 million year to date, we generated I think adjusted free cash flow north of $175 million this quarter typical seasonality.
The stock performance has been unacceptable for the last few years.
What are you are the bold really think whether two or three reasons why the soccer's done what <unk> what it has done for the last couple of years.
I I think the the single reason is financial performance.
And.
We're gonna that's what we're talking about addressing.
Alright, It guess, maybe I'll shift that out you know the the strength on the Hyperscale side has been really notable I think you you folks talked about 25% growth on the Hyperscale side cause you just touch on how big is the Hyperscale revenue seemed today within within venue in campus or just Bob before the company and then.
Importantly, how sustainable do you think there's growth is because I'm trying to figure out is this growth coming more from Hyperscale Capex man, just as well or is it dot plus you're picking up more market share.
Yeah. So it's both so hyperscale right now is you know call it call it low triple digit millions that's been growing and a double.
Double digits for you know probably the last four or five corners. So you've heard you've heard us talk about a lot. If we roll back the clock about probably 18 months or so we really didn't have a number of the capabilities to serve these these players the way they wanted to be served.
And you know the the things like the quick turn manufacturing capability, the global footprint the ability to customize based on unique needs. So we really didn't have a lot of those capabilities through the cable exchange acquisition, we built that plus we built access to.
To Ah to one of the Big accounts, and then quite frankly through the just hard work in an operational discipline of both the supply chain team and the product line management team, we built a fundamentally new set of capabilities and this is going to be one of the huge growth engines for the company. So the reason you don't see it right now.
And the venue on campus.
Benjamin campus segment.
Segment is because you know we have these headwinds that we're dealing with on the inside plant copper side and currently inside plant copper is bigger than our hyperscale business, but it's not going to be that way for long I think we continue to see very very strong growth in hyperscale and at some point that will overtake the secular declines in copper and you'll see that.
Perfect appreciate all insight thank you.
Your next question comes from the line of George Notter from Jefferies. Your line is open.
Hi, guys. Thanks, very much I'd love to maybe start off with a in order to have question can you just tell us what the mix of your business looks like from rural operators do you have that number by any chance.
Yes, I don't have a specific.
The second Oh go ahead Alex.
Yeah, but maybe it was maybe it was Chuck I'm, sorry, but I knew what was that comment was put into the commentary I'm just kind of curious about why that was in there and what you guys were looking at.
Can you repeat that it anyway, just to make sure we got it well understood. Yeah I bought it from my notes strategic market opportunities to Mount manage the balance sheet quote unquote.
Oh that was that was her in my remarks.
Sorry, it's taken out of context, I wasn't sure I I I think.
What we're talking about is was in relation to managing the cash on the balance sheet and the focus on deleveraging and and what we basically said is.
Rowing deployments within specific customers, just as the customer count growing or is it just growing deployments within a certain customer so it's a little bit of both so we're now we're now qualified at a at a tier one major north American operator, which is extremely exciting we're not working on gaining additional.
Additional qualifications, which we think are you know that the traction that we're getting in the market. We think will generate more success had additional north American operators. We also have deployments in Europe that we're excited about but really you know what you're seeing here Mehta is.
Just as people are becoming increasingly aware of the criticality of.
The indoor wireless and the intelligent enterprise space.
They're looking at at indoor wireless propagation, how do you come up with a better solution and one sell quite honestly, it's just that it's a better solution and that's going to be increasingly relevant as we get into into Fiveg and you know that in conjunction with with the Ruckus product line, providing an unlicensed spectrum option really.
It creates a platform for us to serve the intelligent enterprise space that nobody else has.
Great. Thanks.
Your next question comes from the line of Jean <unk> from Citigroup investment Your line is open.
Thank you very much I'm I understand the need definitely to do the strategic review and take the necessary time, but you also mentioned that a lot hasn't changed other than you know things are progressing well compared to three months ago. When you gave your not necessarily outlook.
Cool or expectations of more of a framework, where I think you said Q4 should be up sequentially from Q3, and then in your comments, though today you said that he remembered you had a software pull in from Q4 to Q3 and remember seasonality and if my memory is correct on a seasonality that would do.
Winter months or you know to December quarter months quarters are typically softer. So I'm just trying to calibrate your remarks from three months ago to what you said today in consensus expectations. It seemed like consensus is kinda calibrated up correctly because of the strength of work from home.
For Q4 or is it the software pull in from Q4.
For Q3, and the seasonal we need to kind of re sharpen our pencils on just some better framework would be much appreciated yeah, and so and so I'm going to try to not take the bait to provide that guidance unintentionally because there is a reason why we aren't providing guidance for Q4.
You will note that that Q3 was an extremely strong an extremely strong quarter.
But did mention or and I mentioned that the license, Poland, which I think is important to consider we.
We do generally have a.
A little bit of seasonal downturn in Q4, as the weather gets colder and crew deployments.
You know crude appointments slowdown so.
So those are sort of issues to factor in you know you've also got accelerating spending at Timo and.
I think we feel good about that.
You know you've got continued mid split in high split node activity in the broadband segment. So you have a you have a number of puts you have a number of puts and takes but I think the important thing to really underscore is what Budd mentioned that we don't see material change in the market conditions.
Between Q3 and Q4, so so really there's there's nothing internal to the company or external to the market that led to.
The change in philosophy around guidance.
Okay. That's useful and then my follow up question is there's been times in cycles, where pricing has gotten much better and pricing has gotten much worse and given the work from home environment in coated and demands on networks and such can you talk a little bit about pricing, whether it be in broadband or your other products about our.
Are they getting better or stable or maybe less declines than normal or are the customers still kind of in the sensitivity than normal average selling price declines. Thank you yeah, I mean, the way the way I'll answer the question as we operate in a very competitive market with very large very large.
Customers and price is.
Something that we're always we always pay attention to as we've said previously generally we plan for about 2% price erosion in our legacy products and that is offset by a combination of introducing new technologies with better better value and different functionality.
Yes, as well as just the ongoing supply chain excellence operation. So that's one of the reasons why you see the margin stability that you do is because we're able to.
Take steps through new technology introductions, as well as operational excellence to offset the natural price erosion, but.
I would say that's kind of the macro trends that we've seen.
You know as long as I've been with the business at a at a more micro level you know I would say, we aren't seeing any anything fundamentally different now from a pricing environment than than what I, just described that a more macro level.
Thank you so much for the details it's greatly appreciated.
Thanks for the question.
Your last question comes from the line of semi Cheddar cheese from JP Morgan Your line is open.
Hey, guys. Thanks for squeezing me in here just a couple of questions. Firstly, just following up on outdoor wireless Alex you kind of would be a positive on the credit for that business for Q.
I don't want to guide.
Guide, but just kind of if you can give me kind of your thoughts on how you're thinking what the environment for all good why listening good way to anyone, particularly just kind of thing anything between macro and micro says how do you think about the drivers.
Should we think of him how should we think that of that impacting segment margins as well given that makes sure I'll I'll start and then I'll hand, it over to Morgan.
So let me just detail a couple of things that we've we've seen we minute mentioned the front end load.
Loading of the capital spending the operators right now are in the process of developing their 2021 plans of record and you certainly seen from a number of our.
Competitors and and.
And it.
And peers in the space that you know, there's a lot of excitement around Fiveg and you know what that portends for 2021 and beyond there.
There have been some delays at the metro layer as as co that impacting permitting timeliness. So I would say a lot of what we've seen in.
In 2020 is is more transitory in nature and and we're still at the very early early stage of this fiveg.
Wave, where fiveg is largely currently are more of a software and a radio play and that will evolve.
Into more of an antenna players new spectrum gets introduced so.
This is where morgan's comments around the C band auction become really important and then also the acceleration of capital spending from Timo becomes really important because this is the first real in the introduction of Fiveg spectrum into the market, which will create a level of of competition to to build out than that.
Works and Morgan, what what would you add to that.
Yes, you said it very well Alex.
What.
What T mobile has been doing as they are starting to build up the spectrum.
Places additional pressure on their competitors to utilize whatever spectrum is available. So one of their competitors spent a good deal of money a couple of billion dollars on the Crs spectrum and it is expected that all their competitors will and Ben maybe cells may.
Bid for the C band licenses and the first of those C band licenses are expected to be available late next year, but that does not limit anybody from a building.
Building the sites, but not turning it on so so I think there is optimism toward.
Everybody having to compete to build up these networks as quickly as possible. So that they do not lose subscribers and in fact gain new applications in aiotv or or for that matter in the industrial segment or other segments, they're going after or or to the home.
If I can just follow up and with the question on art off and maybe this is more for more than.
Oh, I understand like fiber connectivity is going to be.
I used to get that connectivity done, but any kind of bleed that you would have with your fixed wireless access business.
This portfolio to be on that front and is there any opportunity to maybe some sort and part of that opportunity funds outside fiberlan into fixed my list would you be able to kind of keep good luck.
Yes, so I think you're absolutely correct, there will be the trifecta, there will be a predominantly fiber for new build areas, perhaps some hybrid fiber coax networks for expansion areas.
But predominantly fiber or.
Fiber to the tower and fiber to the home and these new build outs as well as some satellite competition for any of the fixed wireless or per satellite. We have variety of products that may or may be used in this if you consider fixed wireless it's likely to look a lot like a traditional cellular so.
So everything that goes on the tower, but the radio is fair game for us.
And so I think there's a good opportunity there if the if the satellite industry matures. There is going to have to be rebroadcast satellite. It's not just of the home. This money is for four homes.
Homes as well as for other.
Ecosystems, I would say so towns and cities and that will enable a lot of other equipment on the other side of the satellite like why access points or cellular systems. So I think this is why it's so exciting to us because it's all these technologies converging and when you have this type of competition.
We'll be able to help service all of our customers as they compete against each other.
Okay, great. Thank you.
Thanks for the question.
That will be our last question presenters. Please continue.
So I think we're we're complete if that's our last question I really appreciate everybody, taking the time and and we look forward to following up so Kevin powers will be available for questions and obviously, Chuck myself, but I will also make ourselves available if need be.
Thanks for your support and I hope everybody stay safe out there.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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