Q4 2020 CommScope Holding Company Inc Earnings Call
[music].
Ladies and gentlemen, Hello, and welcome to the Commscope fourth quarter and full year, 'twenty and 'twenty results call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone phone.
As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host Mr. Russell Johnson, Vice President Treasurer and Investor Relations.
Good morning, and thank you for joining us today and welcome to our fourth quarter and full year 2020 earnings call I'm Russell Johnson, Vice President of Treasury, and Investor Relations and joining me today are Chuck Treadway, President and CEO, Alex Pease Executive Vice President.
And CFO Morgan Kurk Executive Vice President and CTO and segment leader for broadband networks, and Budweiser and chairman of the board you can 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 on our current view of our business and actual future results may differ materially. Please.
Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance.
Before I turn the call over to Chuck just a few housekeeping items to review.
Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials rec.
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 unless otherwise noted.
Also note the full year of 2019 results include historical Arris pre acquisition results, reflecting certain classification changes to align to commscope presentation.
Our quarterly and annual growth rates described during today's presentation are on a year over year basis, unless otherwise noted I will now turn the call over to our president and CEO Chuck Driveline.
Thank you Russell and good morning, everyone.
Today I'll start with the review of our 2020 highlights and our fourth quarter results.
I will then provide a preview of our transformational initiatives to drive growth and value creation, which we referred to as Commscope net.
Let's turn to slide three.
As the COVID-19 pandemic was beginning to unfold, we moved aggressively to keep our people safe continued delivering for our customers.
We pivoted quickly to remote work put in place and robust health and safety system and initiated a business continuity program.
Our team leveraged the diversity of our global manufacturing footprint and mitigate supply chain risks and respond to the evolving regional challenges.
Within a matter of weeks, we mitigated the vast majority of our supply chain challenges and our factories were running at capacity.
And and the team and I are proud of Commscope <unk> ability to deliver on our promise to meet customer needs and such a challenging time.
In addition, we continue to innovate across a wide range of technologies and businesses.
At Commscope and the future of wireless networks.
Wifi, six and 60 are rapidly taking shape and.
Net new <unk> and C band Spectrum is introduced we are ready to bring all of this by developing innovative technologies.
One example is our new Interleaf passive active antenna that we developed together with our partner and Nokia.
Last year, we delivered the largest SaaS and the world to AT&T Stadium home of the Dallas Cowboys.
And to enable five day services to their fans.
We also helped education customers like from <unk>.
New Zealand Ministry of Education, and connectivity demands for their students and faculty with Wi Fi six access points and switches.
And the U S. The rural digital opportunity fund there are about.
Generated enormous demand across our portfolio of fiber cable and connectivity and fixed wireless products.
Actively investing in capacity and technology to meet this demand.
And across our portfolio virtualization cloud and analytics are defining a new generation of products and solutions.
Whether it is helping operators mitigate and distributed access architecture managed and network ecosystem through the cloud or optimize performance through self healing tools and technologies.
Scope is leading the way for the next generation and networks.
Thanks to the hard work of our dedicated employees, we delivered a solid financial results, we delivered solid financial results. Despite many challenges faced by our company industry and broader economy.
And the fourth quarter, we delivered $362 million and adjusted EBITDA of.
Up 6% from the third quarter.
And 12% from the prior year.
Despite declines in revenue.
We also delivered an adjusted EPS of <unk> 59 per share and generated $65 million of adjusted free cash flow.
Since the close of the Arris acquisition.
The team has over delivered on and synergy commitment of $150 million one year ahead of schedule.
These results are directly tied to the hard work discipline and efficiency and 2020, which we will continue to build on and 2021.
While I acknowledge and we need to do more of the company and commend the team on delivering consolidated adjusted EBITDA margins up sequentially and year over year.
It is important and note that these results reflect lower incentive compensation.
From the MTS license sales and certain COVID-19 related benefits, such as reduced travel and marketing spend.
We attribute our performance in 2022 are strong and supply chain and decades of experience supporting our customers through challenging times and periods of network transformation.
And 'twenty 'twenty, one and beyond we will continue to build on our ability to provide next generation solutions and executing with agility.
There is a lot more work to do and we're not slowing down.
As the business environment normalizes from the pandemic a portion of our cost savings will come back.
It's true increased travel resumption of customary sales and marketing activities are normal inflationary effects.
We will also continue to invest and next generation R&D program, the lead and the markets, we serve and fully realize our growth potential.
This is one of the focus areas of Commscope next.
Let's go ahead and turn to slide four for some more perspective on Commscope net.
Commscope next which we launched in January we will focus on driving business growth that outpaces the market controlling costs optimizing business performance and unlocking significant shareholder value.
And we shared last quarter, the board and management team understand that our stock has underperformed.
We're confident that execute and Commscope next strategy.
And ensure the company is on the right path for the next level of growth and profitability.
Next will be a defining capex of the company and my highest priority as CEO and will focus on three primary vectors and value creation.
First from a double down on delivering growth.
Even in my first quarter with the company our team has uncovered many opportunities for profitable growth.
The areas. We will explore include vertical market and strategies designed to gain market share capacity.
Capacity constraints, and our factories to deliver more product where demand already exist.
Vesting and international expansion and.
Enhanced channel relationships and development of critical technologies.
As we continue to animal analyze and prioritize these opportunities and I'm confident we will be able to accelerate growth.
Commercial excellence and refine our go to market strategies.
Second we will focus on business optimization.
Initially evaluating and reducing non value added costs.
While the company has a strong history of cost control, we can do more.
We are eliminating unnecessary complexity and cost by streamlining duplicative systems and redundant processes that exist today.
And as we dig deeper into the business units per disc.
Covered unproductive investments that can provide us with additional financial flexibility to reallocate development from the higher return projects.
We also see opportunities to implement tools and advanced business operations.
Take the company to the next level of efficiency through continuous improvement.
We'll be tackling all of this quickly and we will share more details on our plan and our financial goals as we progress.
Third we will actively evaluate the health of our full portfolio of products and businesses.
We intend to dynamically reallocate capital to those businesses, where we have a winning value proposition and industry, leading technology, and a clear path to growth and value creation.
And our businesses that are more commoditized, and we will either manage those free cash or where appropriate and evaluate alternative ownership structures that can unlock greater shareholder value.
We're confident that by implementing commscope and back to create a stronger more efficient commscope and deliver long term value for all of our stakeholders.
With all that said and I'd like to manage expectations on time.
And we will not see the impact of this initiative immediately and some cases and to take orders and others longer.
And it should be expected and immediate future as COVID-19 related restrictions on travel marketing and other business activities subside, we will see some cost coming back into the business.
There will be one of the jobs with Commscope next to accelerate past the short term Netherlands.
In addition to Commscope next we have taken other significant actions.
Oregon Morgan Kurk was appointed the segment leader and broadband networks, and addition to continuing responsibilities as it comes.
And as Chief Technology Officer.
Mortgage strengths and technology and business leadership will serve broadband and commscope well because we develop the next generation network architectures and drive profitable growth.
We also brought and Jack Carlson as true.
Commercial officer to help Commscope drive above market growth, and kylo, rens and to assist and execute and Commscope net.
And I've worked with both Jack and call and previous companies have firsthand experience with their ability to drive go to market excellence and achieve sustainable cost efficiencies.
All told the team has mobilized enthusiastically delivering strong strong bottom line results through the end of the year and we are energized by the opportunity to hit.
And we've begun to put a foundation in place to shape the future of Commscope deliver a step change improvement and the shareholder value through a commscope next initiative.
We look forward to providing more detail and the progress we've made implementing commscope next during our first quarter earnings call.
And with that I'd like to turn the call over to Alex to recap the full year and provide more detail on the quarter and trends, we are watching and slide 21.
Alex.
Great. Thanks, Chuck and good morning, everyone. This morning, I'll start with a recap of 2020 and before moving to our fourth quarter results segment format, and Pulmicort and out of hospital and hospital staff.
I'll finish with some closing thoughts on key industry and apologies.
Back to pinpoint and Commscope performance during the coming year before we open the call out of Manhattan.
Turning to slide up there.
And preliminary 2020 net sales of 81, and four 4 billion declined about 14% from the prior year and Viacom, Inc. And saw a moderate growth and our broadband network segment from 2020 sales decline and all other segment.
Most notably home networks, which was down 30% from.
Geographic perspective sales decline across all regions.
The order book.
Full year adjusted EBITDA of $1 2 billion declined 11%, while adjusted EBITDA and a definitive sales and improved more than 40 basis points year over year and the combined company.
And we've over delivered on our 2020 and synergy plan and moving quickly to take additional cost actions and home networks.
And at the bottom line and in response to challenging and buyer.
And.
From a segment perspective broadband networks delivered significant growth and profitability of over 18%, but this was more than offset by adjusted EBITDA reductions and all other.
And as Chuck mentioned embedded in these results and the favorable impact certain COVID-19 related benefits such as lower travel and Marvin I think that are likely to return in 2021 reported <unk> commscope and overdose.
Excellent.
And if you got to buy six Investor day.
Net income for the year was 300 per $1 million $4 56 per share compared with $479 million.
Or $2.15 per diluted share and the prior year and.
Adjusted free cash flow and $450 million and $8 million compared to $793 million and the prior year, noting that in 2019, we generated significant cash flow and working capital wise and integrated the aircraft.
From here, we think many unexpected challenges and this model has proven remarkably agile and resilient and deliver on our bottom line results.
Our global supply chain team worked tirelessly and mitigate disruptions caused by the COVID-19 pandemic.
And while simultaneously prioritizing the safety of our employees.
And.
We over delivered on our radio $150 million and a retired well ahead of our original timeline.
The second half of the home networks and respond.
And for increasing price and the video platform.
We also leverage out variable cost structure.
Secondly to reduce operating costs out of it.
And the resolve we are in a position to emerge from this cycle dynamics and a more streamlined and modeling and one that will be made even stronger and in fact hospitals and that.
And as the industry tab onto the <unk> art non sport auto again.
We believe we're screening wall ambitions about that for many years.
And a smoothed flight centre and that's for a deeper dive into our fourth quarter results.
And as a reminder, all of my references to quarterly growth rate on a year over year basis, otherwise noted.
Net sales per quarter, a $2, one 3 billion decline and pilots.
Primarily driven by declines in home networks.
Orders for the quarter were approximately $2 five 4 billion with a book to bill ratio of 118.
While we're pleased with the strong order flow, we do not expect to realize all of this backlog immediately due to capacity can span and.
Other supply chain related considerations and a portion of these orders that are related and support agreements or multiyear deal.
Adjusted EBITDA of $360 million and Augusta.
Yes, 59 per share increased.
12% and 28% respectively.
Company ended the year and a positive element profitability highlighted by our sales strength and a higher margin and broadband networks combined with a laser focus on company wide harmful.
The quarter, we reported adjusted operating income plan for $450 million and 80% reduction from the prior quarter, primarily related to approximately $40 million.
And the compensation favorability.
Turning to slide eight I'll move to our segment results.
Beginning with our broadband network.
Net net sales were $789 million per annum.
Over 17%, primarily driven by growth in North America, and Caribbean and Latin American region.
Okay and of course value.
And the growth.
And the mid to high teens, and both network and cable cabling and connectivity as well and as a network and cloud.
On a sequential basis and any other kind of comes and active technologies revenues were strong and although this was offset by supply from Australia, and our outdoor fiber and copper cabling.
Bottom line and the acceleration on the Lager MTS license deal and other third quarter, which we spoke to on our last call.
Low rates and backlog from the business hormonal extremely strong and a cable operator and doing that and their networks and Jeff.
And EBITDA $213 million grew nearly 49% driven primarily by higher volume and strong expense control.
During the quarter, our broadband network segment benefited from our continuing trend of network investment and.
Cable operators seeking to reduce cost from the upfront and a portion of their network planning and by the new normal.
Home video conferencing and virtual learning.
And the existing networks and were not designed for mix and sustained demand and the home alongside continued video demand.
That said, we continue to see more notice and wedding.
And and DOCSIS, three one and bad.
Turning to slide nine per our venue and campus networks segment net sales and a 410 and $7 million declined 7%, primarily driven by softness across all regions, except China.
And the Caribbean and Latin America regions.
And copper copper cable product line was down significantly year over year, COVID-19 had a substantial and back on the commercial real estate market that this product line and serve.
We also saw a moderate decline and our Robert.
And were somewhat offset by growth and our Hyperscale and multi tenant data center fiber business as long as our das and small cell there.
On a sequential basis sales were relatively flat and our enterprise client copper and fiber day.
But declined and our das and small cell and Robert and.
In line with normal seasonality pattern and in addition to the completion of several large mining projects and.
Adjusted EBITDA of $48 million declined, 19% driven by lower volume as well as commodity cost inflation, particularly in copper.
Within the bank and cameras and because we continue to see extremely strong growth and our hyper scale and multi tenant data center and bigger and.
And we gained share and a highly strategic growth segment of the market.
We expect continued future growth and the cloud based professional and total collaboration tools and data storage and streaming media and become more mainstream Henry news reliance on legacy.
And.
Our das and small cell business pipeline remains strong and Commscope era and digital that platform continues to be the wireless infrastructure applications and choice for some of the world's largest and most demanding and new applications.
A lot of patients.
As an example, alright.
Alright, and the quarter Commscope and limit our suite of solutions to the Grand Hyatt San Francisco International Airport, and the antibody and at our structured cabling rocket back and appointment and switches and era and building and cellular into a seamless ecosystem for their customers and staff.
And also low starting from triad of owner operators are taking advantage of lower value items. During the holiday and then proceed with major communication and I played and projects and prepare for the coming five revenue revolution and emerge from the pandemic even stronger.
We are also optimistic that our one cell product line will become an integral part of providing future ready and indoor mobile connectivity for enterprise customers and five key world.
Moving out of the product line detail and indicated previously and we have experienced significant headwinds and those products, having exposure to vertical negatively impacted by COVID-19, particularly and structured copper cable and rocket given the language to commercial real estate and hospitality.
And offset somewhat by gains and the federal education, and health care verticals, where scale and solar and we're continuing to drive that.
Turning to slide 10 for our outdoor wireless segment networks and.
Net sales and $295 million and increased modestly in just over 1% driven primarily by the Asia Pacific European and North American regions, North American sales increased slightly despite the schools and the three major operators are indicating a redirection of capital spending priorities as part of our recently completed and the C band auction from.
And the standpoint, the bulk of the growth occurred at the macro layer.
Particularly and base station antenna and offset by weakness and macro cell and apartments, which was created by COVID-19 related and permitting and crude away.
Adjusted EBITDA of $50 million grew nearly 24% primarily driven by the higher sales volume favorable mix and ongoing strong cost control.
From a customer standpoint, and the model and went out and ingress and egress and investment cycles and build out their five day network, what they were two and a half taken her background and our vacation and antenna and cable business and solid solid benefits from our long and very constructive relationship with T mobile done and for the fourth quarter.
Given the very active role and by the other could be carrier and the recently concluded a C band auction.
Prior to that.
And build out at newly acquired mid band spectrum will create significant new opportunity for Commscope in 2021 and beyond.
However, the timing associated with the <unk> ramp relevant and as well our product line is likely to be weighted towards the latter portion of 'twenty and 'twenty, one and beyond and operators shift focus to building out nationwide coverage.
Internationally and the momentum of our active and passive and radio solutions and collaboration with Nokia is growing and various global trials and other opportunistic stages of evaluation.
During the quarter, we had some march one and from European operators and advanced discussions around several additional opportunity and.
And other areas of our international portfolio, we've seen positive momentum.
And the key Asia Pacific market, and also driving future growth.
Lastly, while the Microsoft business growth was slower than expected during 'twenty and 'twenty due primarily from COVID-19 related and municipal office, other and associated and zoning and permitting delays.
And I think that and Covid receipts and the country begins to reopen.
And and returned to his prior roles for January.
And major U S carrier proceed with five G related and build out the new day.
And they've been and spectrum and absolutely critical component will be examined Acadian and recovery within the natural buyer using commscope spot.
Turning to slide 11 per home network segment.
Net sales of $571 million.
And 31% and across all regions, while we saw strong growth and our broadband gateway business and this was more than offset by declines and video.
Adjusted EBITDA of more than $40 million declined 14, 4%, primarily driven by the volume decline and the video.
During the quarter.
Our networks are strong and consistent demand for broadband gateways, and Volvo and service provider and retail channels, which serve as a part and a positive catalysts for growth from there.
Offsetting continued weakness and the video market.
New platform wins like the <unk>.
And by an additional tailwind for broadband gateways going forward.
And also benefited from international growth trends as illustrated by Vodafone, Germany vs impact from a millions of subscribers using commscope with DOCSIS three one gateway.
And like many other global interest rates are all network and experiencing silicon and supply constraints and.
And the weekend development has extended lead times across the whole network ecosystem that may protect throughout 'twenty, and 'twenty, one and that likely accelerated revenue from certain key customers and Q4 and advance of anticipated shortage and declining volume.
Turning to slide 12 are not paid on a cash flow.
Full year cash from operations was $436 million and adjusted free cash flow was $415 million.
For the fourth quarter cash from operations and adjusted free cash flow of $98 million.
$5 million respectively.
While 2019 cash flow significantly benefited from working capital as we integrated the air.
We experienced a more normalized usage and increased capital and back on and plenty big.
We continue to make progress on expanding our harm and about our planning and remain focus on collecting timely from our customers.
For the quarter working capital was a net and use of cash driven by accounts payable and the timing of certain payments.
Looking forward to the annual improvement targets and maybe organization as well as the Africa Commscope next we continue to evaluate opportunities to optimize working capital and other.
Cash and particularly on the inventory from.
Turning to slide 13 for an overview of our liquidity and capital structure.
And the fourth quarter, our cash and liquidity remains strong as it had throughout the prior quarters and 2000 and funding and.
And in the corner with $522 million and cash and no outstanding draws on our ABL revolver and our total available liquidity of nearly $1 $3 billion was relatively flat from the prior period, we also repaid $180 million of debt.
And as a result, net leverage declined modestly as compared to the third quarter.
And so forth not repaid over 800 million debt.
From the close of the Arris acquisition in 2019, which speaks not only to our ability to generate cash flow, even when faced with challenging market conditions, but also to our continuing commitment to reduce leverage as quickly as possible, while maintaining ample financial flexibility and honest.
Before we open the line from Q&A I'd like to and my with my view on that would be the market at all and throughout 2021 on slide 14.
Before going market by market I would like to remind everyone of our normal seasonality pattern.
For all of our businesses and Q1 and is typically the weakest quarter of the year driven by combination of and weather related factors as well as a general pause and capital spending and as budgets are being finalized.
For outdoor wireless networks, and the portions of our broadband networks and tied to construction spending.
And I would tend to P and Q2 and Q3 as operators take advantage of more favorable weather conditions.
For the portion of the broadband network and venue and campus networks tied to electronics and license and such and CMT and rifle product line and I think.
And sort of ran and towards the back half of the year.
Finally, the venue and campus networks business can be very funny, and large portion of that portfolio or kind of individual project awards.
Because the debt.
It is reasonable to expect a weaker Q1, especially coming off the strength we saw in Q4.
For the individual segment within broadband networks, we are seeing a fundamental change and how networks are being used as a persistent trend.
Considerable strain on the uplink will require a steady and consistent investment and the pressure on the network and is driving more traditional noticed flooding activity at a higher pace, while occurring and some of the next generation of Virtualized and better.
There is also increased demand from ubiquitous high speed low.
And I can see broadband funding and partner by the rural digital opportunity fund our Argos. This represents another significant opportunity for Commscope and the back half of the year as those investments begin to ramp.
Within outdoor wireless and the release of the who and mid band and backgrounds and they seem to have.
Adoption is likely to drive the first real way and the <unk> spending across the U S.
And it will also be more back half weighted as operators finalize and strategies for supply and was back from nationwide. There is an increasing level of urgency and T mobile spending and continues to ramp.
Internationally, we're seeing improved competitive conditions and many of our markets and had several strong wins in both Europe and Asia Pacific region, which shows a generally favorable trend as five day spending and take share.
Within the venue and campus segment markets, we expect a variety of cancers and conditions to contribute to some choppiness throughout 'twenty and 'twenty one.
Commercial real estate and spending is likely to remain soft, which will negatively impact both the copper and structured cabling and volume as well as the orders from traditional on Prem data Center.
Italia and a highly strategic and important vertical for US is also likely to remain under pressure and creating challenges for those product lines.
And actually we're seeing from potential headwinds relating to our ability to access silicon used by some of the rocket product line and beginning in the second quarter.
Offsetting these headwinds will be continued growth and to either scale and multi tenant data center market as well as increase and opportunities and growth and the federal education and healthcare verticals and lastly.
Lastly, we expect our next generation era das platform as well as our industry, leading one Sal and building LTE solution begin ramping meaningfully in 2021.
Finally on our home network segment and the.
Work from home and virtual learning and inquiry from media consumption continue to fuel the need for higher performing broadband gateway devices, and we see continued growth and this important area.
What we have achieved several wins and video streamers offsetting the declines in traditional video set top boxes. We see continued pressure on the video product line and cord cutting and cord shaving momentum and continues to create a meaningful and why.
We also recognize and the global silicon shortage as mentioned earlier.
It created a significant headwind to revenue and adjusted EBITDA, particularly and the FERC in 'twenty and 'twenty, one and and lead times are pushed out and pricing pressures emerge.
Before turning the call back over and chocolate Q&A I'll close with a few words on our cost structure in 'twenty and 'twenty one.
Chuck mentioned auto net and the actions, we will be driving aggressively in 2021 around both cost and one of them.
And we kind of have inflationary effects, we need to contend with as well as from one time and cost savings. We experienced from 2020 that are likely to come back and co innovate and business activity starts to return to normal and.
And we realized approximately $70 million and travel and marketing related savings are directly attributable to COVID-19.
A million dollars of which we expect to come back into the day there.
Non.
In addition, we expect approximately $20 million.
Additional incentive compensation expense and the first quarter of 2021 as compared to the fourth quarter of 2020.
We're also seeing and placement of attacks and many areas, most notably and copper steel and resin.
Later, we will need to reinvest and core strategic marketing and technology to achieve and the growth aspirations and it's not played out.
With that I'll turn the call back over to Chuck for Q&A and thank you all.
Alex.
And before turning the call over to Q&A I want to close with some final thoughts regard regarding Commscope next.
And while we initially indicated and attention to preserve formal commentary and my plane until Q3, and I'm encouraged by what I'm seeing and become increasingly comfortable that we can share certain aspects of the plan and advance of this and Mr. Farmer.
And we started the process today and a very high level.
It will begin to communicate certain directional targets and we will report earnings in Q1.
And with more detail to follow in Q2.
Culminating with an Investor day, featuring the extended management team later this year.
Thank you very much for your attention and with that and I'll turn the call over for Q&A.
Right.
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Your first response is from meta Marshall with Morgan Stanley. Please go ahead.
Great, Thanks, and congrats on the quarter and <unk>.
Couple of questions. Just as you start formulating next you had noted international opportunities because that is an area that you would potentially evaluating you know and the past theres been some volatility there with kind of what the margin opportunity is there. So just kind of how youre thinking about that and then additionally, and just how you're thinking about.
You know the strategic makeup of the business and whether there's anything that can be separate and distinct.
In terms of and international market expansion I mean, when you think about Europe and middle East.
And some parts of Asia and Japan.
Korea.
There are actually some pretty price pretty good price levels, we can get there very similar and what we would expect to see and the United States.
We're targeting areas. There. However, we also were looking and.
Across the board what can we do it and in India. We just have to think about a completely different design concepts and it's gonna take little more time, there, but we have to think about you know barebones things.
And that particular market.
With that.
Your question about what what businesses could we disconnect or whatever we're going to just hold our comments on that too weak and so.
Finish our analysis of all the different businesses and portfolio of products that we're gonna be reviewing.
And obviously in retail and the middle of that so I'll hold my comments, there, Matt and let me just pile on a little bit on the international because you're probably remembering a couple of years ago, we talked about exiting certain regions that were extremely margin standard and we felt like and just couldn't compete I think theres been a bit.
Okay.
T J pivot, which John alluded to.
That time around how do we design our products that are much much lower cost for those markets where the market.
The price and it is just it's just so depressed and so that cause a bit of a shift from what we've communicated previously, but we're pretty excited about the work from team has done to really innovate and drive costs down for those costs and functionality down and for those.
Challenging markets.
Great. Thanks.
Thank you. Your next response is from George Notter from Jefferies. Please go ahead.
Hi, guys, thanks very much.
I guess I wanted to try and dig into the Commscope next program a little bit more you know Chuck you said a lot about the different aspects of the program.
Uh huh.
<unk> and reallocating capital.
And the removal of redundant costs.
<unk> issues, you can kind of hash through but could you give us some more tangible examples of things you've found if you've dug into the company and.
And you'll realize these opportunities to take cost out and I guess frankly.
You know the company has been restructuring costs for a long time now and it feels like you know a lot other low hanging fruit nave and pick but is that a view you agree with you and walk us through the picture at this point on cost restructuring.
What do you think about duplicative systems and they just think about the acquisition of Arris. So you've got two very large company together.
5 billion plus company and when you when you put those together you find a lot of duplicative system. Great example, is what we have and the IC side.
Once one company runs Oracle went up and he runs our safety and we've moved to one strip one system, we're going to have significant savings from that we really dug in and we're starting to do a pretty deep dive with all other business units and.
So I understand you know where are we spending money and what are we investing in.
And we're finding things that we can frankly, if somebody outside without developing and our own. So we can take that money and and double down on things that are really critical and core for us.
And that's just a couple of examples.
I would also say that when we think about.
Discretionary spend whether that's indirect.
Well, let's just start with discretionary indirect inter.
Indirect discretionary spend and there's an opportunity when we moved to a general management strategy.
The general managers are gonna be able to look at all those expenses for the split and I desktops. Other business leaders. This thing and I don't want to get allocated and Boston now and they don't have to do they can really make decisions on their own and we're gonna be really giving them a lot of opportunity there and we can also be fighting some oversight and more so and when we think of those types of expenses and then.
Think about direct procurement and we doubled book by right. So there should be some opportunities depending on what's bodies are that we can see more debt.
So sales.
And just say Theres, a lot and I think as we really start with socks and scheme.
And that's the general manager and really getting excited about looking deeper and we're getting into each other and we're finding us.
Great. Thank you.
Thank you. Your next response is from Sami Badri from Credit Suisse. Please go ahead.
Oh, great. Thank you.
I just wanted to flip back to the broadband networks slide where you talked about Hong Kong.
And being strong and.
And you know we've seen the same exactly bullet point or let's just call them and come up a couple of times over the last year and a half. So could you just elaborate on what your customers are doing with the CMT and license sales versus actually buying the equipment.
I'll take it from the historic case, and just kind of unpack this for us and what's going on and you can let me know.
Let me start and then it was actually a portion and morgans and here because he runs that portion of it and install it him pylon, but effectively what we saw at the early part of the Covid, but there was a desire by the network operator, not physically intervene and the network because there was so much pressure.
And network, so that the easiest way and do that would be to add capacity virtually basically by adding licenses to be existing E 6000 infrastructure that they had and that and.
And we've gotten and towards the latter part of the year.
And what we're seeing is there is some license activity with some of the operators, but a number of the operators, having basically exhausted the capacity.
And so we got one investments and their head and and so rather than invest and the head and infrastructure, they're pushing the investments into the nose and theres a mix shift from the <unk> piece of it there and then the two they know and pieces of debt.
Which is where we were just talking about the more physical intervention and the network as we look out sort of debt part of the year and then into 'twenty 'twenty, one and so that's kind of the dynamics, that's been going on but I'll, let and Morgan talk and a more tactical level, Yeah. Alex is exactly correct. So the network spin.
And moves between hardware and software depending on what you have in your network and what your needs are.
Covid has has driven us to the point of breaking particularly and the uplink.
So much less spectrum and allocated to the uplink and at this point that our operator customers have had to split nodes and and make smaller user groups that are sharing that uplink capacity, that's node splitting and that's largely hardware.
And and as such more of our capital has been has been pushed toward that and physical equipment. In addition, and Theres a dance that goes on between.
Adding more and more licenses, adding additional capacity to hardware that you have and buying new hardware in that and the head and and so that goes on and you'll see this going back and forth over the years and so.
They continue to invest and the network one of the things that they're doing to invest and network now is there theyre going to what's called the high splits or allocating more spectrum to the uplink to try to solve this problem and of course once they've upgraded the hardware there will be software upgrades as well.
Okay, and then maybe just so we understand some of the dynamics here and there is almost like a built and expectation that commscope piece.
Same customers from probably come back to you guys. A few times with CMT S related licenses and Reits, just as they continue to densify and harmonize and members.
Structure is that.
Safe assumption from an industry outlook perspective.
So they come back to us when they need more capacity and their network. So they they they buy physical cards and then they add additional.
Our capacity to those cards and effect, it's a software related capacity add over time and and they do that until they exhaust the amount of bandwidth that's available to them. So it is it is an opportunity to continue to sell additional licenses to them until they reach a certain point and then they go back to buying hardware to increase that those those.
And that available capacity again, that's the dance that's going on of course. There is also the upgrade to the network whether it is to go to docs will support auto which expands the amount of <unk>.
Spectrum available and thus the amount of both hardware and software that they can buy from US and also the change and architecture from from the.
Centralized the CCAR to distributed access architecture, whether it's remote Mac or remote phy, which puts more of this equipment out toward the edge of the network to reduce.
Reducing costs and the head and and to increase the capacity of the backhaul network and reduce latency. So all of those things will be going on for the next decade.
Got it thank you.
Thank you and nice responses from Simon Leopold with Raymond James. Please go ahead.
Thanks for taking the question I just want to see first if you could offer.
Correct.
And where it was this quarter versus last and then the.
A longer term question I wanted to see if you'd maybe and Ah.
E band and comment a little bit I appreciate the and.
Indication around the second half weighting what I wanted to ask about was how you see the green and timing and scope.
You mentioned spending on macro towers. This year I assume we see that expand off the towers and 22.
And you get some some idea of how to size this opportunity beyond second half of 'twenty, one and maybe help us understand how it gets funded given the amount they are paying spectrum.
Okay.
Yeah, So I'll take a swing at that and that more than a day, that's sort of China and as well so and in terms of and I think youre asking about head count.
And so there's a bit of a tough question to answer in general we have and in the order of 30000 employees globally.
And that majority of those are and our manufacturing facilities and it's one of the way we manage our cost structure is by and by.
By eliminating essentially labor when demand is soft and so that number can move between let's call it 28, and 29000 and and $32.
Really what you're asking and what have we done on the period overnight and.
And I think we mentioned we are we achieved our $150 million synergy target.
More than a year ahead of schedule.
And the piece of that.
Does that head count related costs. In addition, and the home network segment and we took out.
Significant cost, particularly in the video side and the video R&D side, a large portion of that was Oh and head.
Head count related as well so a significant piece of the improvement you've seen and period over and is it head count related I think the total number of year over year, it's something like 100 million a $100 million. So I think that's what you were getting I'm in it and if not you don't have to get it.
Hi, either and a follow up question or or after the call.
As it relates to C band.
We mentioned the two large operators and substantially higher than our original expectation I think the total award was $80 million versus your original expectations and something like $60 million.
They will be using the first part of the year too.
The first part of the year to basically designed and their networks and there are some choices that they have to make around what type of and kind of configuration.
And they want to use and so that will carry with it and the implications for wind and voting and share on the towers and will carry with it implications per power going up the tower and all that will benefit us, but that will take through likely the first part of the year before they are ready to move and in fact, our actual physical power and lines, which begins in the lab.
Part of the year and that will ramp up.
And will ramp as we get into 'twenty and 'twenty two.
And the other piece, which you mentioned, which is absolutely right.
Is the importance of identifying the network. So we talked about and the prepared remarks that day.
Integrated solutions piece of that business and metro cell piece of that business has been weak and 2020 largely related to permitting.
Always and crew delays and a lot.
And Kobe.
Related so and so's identification and investment return.
We expect to see that business return to it.
Normal growth trajectory so.
I think you know.
They bring all that together.
2021 field life.
Modest growth.
And so getting would be and a real opportunity and as we get out into 'twenty and 'twenty two and some of these competitive dynamics and the on all but one of them and what did that Matt Yeah. So Alex do you only missed one thing which was that there was billions of dollars, but they they they spent you said millions and if they if they only spent.
88 million and I think all of our carrier customers would be a lot happier, but clearly clearly the reason that the carriers have bought this large amount of spectrum is because there is going to make their networks a lot more efficient so theyre going to want to put this into.
And to play as quickly as they can they have a competitive dynamic where one of the operators is already putting mid band spectrum into play.
But this takes time it takes time to do the planning and it takes time with the new technologies like massive mimo and it takes planning because it really is a big network upgrade one of our one of our customers that has been dealing with this and in and Europe said this is a big and upgrade as we've seen since two G.
Which is a massive upgrade its an upgrade to power on the tower, it's an upgrade to potentially architecture and some places and so it takes time to do it but we expect because.
There is this competitive dynamic and because this will make the network so much more efficient.
The build out as it starts to ramp up will be positive for us, but it will take little bit longer to ramp up and then immediate which is what everybody would like.
Thank you very much.
Thank you. Your next response is from Rod Hall from Goldman Sachs. Please go ahead.
Yes, hi, and thanks for taking the question I guess I wanted to come back to the cost structure and the R&D reduction that we saw and a quarter and I know you had you had alluded to maybe reduce outsourcing things and so on but I wonder if you could dig a little bit more into how.
And how you've reduced net R&D numbers so much.
The color on this is typically when we see R&D reductions like that it's not always a good thing.
But admittedly there could be a lot of inefficiency and there were and aware of so just wondering if you could dig into that a little bit more and then I've got a follow up.
Yeah sure so.
So you know theres been a lot of action on costs and period overhead a lot of that is just natural synergy capture which is elimination of predominantly and then a lot of that and I would say moving to and next generation operating model and then the third part of that and and R&D optimization. So I think the.
And Asia redundancies is an obvious one I won't spend any time on that in terms of moving to a next generation operating model and we've been looking very aggressively at how we leverage low cost and resourcing across both of them.
Back office as well as the R&D function.
And so we recently completed a large and.
System conversion and we've ramped our our territory and activity and go.
And India, and Taiwan and Japan.
Ireland and Mexico, a lot of that had allowed us to just run the finance and it and HR functions more efficiently and so there.
And the substantial activity on there and shop talks about Commscope and Arris.
That up and that will be a big unlock for us as well as we drive further system consolidation on the R&D side. This has been a pool of money and call it $700 million or so that historically has not been a.
Very very actively managed and it's been sort of a very bespoke management style and I think as we've gotten into it what we found is there's really two things one.
And we're making investments and air and essentially low ROI and no ROI.
Areas. So there is an opportunity that the harvest those investments that arent meal and the returns that we want and redirect those bond area areas like cloud and analytics and virtualization virtualization technologies that we really think are that the tickets for the future book.
Also found and historically just by the nature of the way. These two companies have grown up a substantial amount of the R&D spending happens and very high cost region and so we've been deploying our playbook that really.
And the Commscope team had developed over years of how do we build up R&D capability and lower cost regions like.
And again Mike.
And out of like India, like Ireland, and places like that where we can and it's got a lot more bang for our box and that work is.
The only really just forgotten and so again, if we start talking about Commscope. That's you know that's one big area of opportunity because again.
And I'll just add one more thing and I Wanna be crystal clear that we will not be cutting anything that we've heard from future I'm working very close with the segment leaders and Morgan to look at every single thing we're working on it and the company and anything that's critical to our future.
And we're either keeping as it is or doubling down on that so I don't want to get any impression that we are anyway.
Looking at this from the short term. This is a long term play this is gonna be about investing where we see it make sense. This is getting closer to our customers and understanding what they need and getting that information back to our R&D teams and <unk>.
The other thing exactly what we need to take it to the next level and once you take anything away from this debt book.
And we're gonna be cutting anything that you don't need we will be doing everything you can.
And just one one last point and I'm, sorry to keep piling on but its an important one when you look at the year over year decline and R&D that is driven by home video and so really that was the actions that Joe.
Joe child, and the teams up to scale and the R&D appropriate with the size of that business, which I think everybody can understand and given how dramatic the topline declines worse.
Point, there was not R&D spending harvested from the growth area.
Could you repeat that last part you broke up when you said what.
What drove that R&D reduction and.
Came out of their own network segment and in particular to the video and ease of that business, which is down 30% year over year.
Is that right.
Okay. That's helpful. And then my follow up was on C band again, maybe Morgan I guess this one's aimed at you but.
Do you know I mean, I know there are they are and the process of re planning spectrum now, but do you know and I'll call them.
And are you that that spectrum can be allocated to macro towers, where you guys would benefit more versus smaller cells and metro densification and kind of projects and and.
And if it is that a wrong perception. If you go into Densification and smaller so sort of deployments without spectrum do you guys benefit just as much there and maybe just talk us through that a little bit.
Sure so.
I am very confident that this will be used on the macro layer.
It is an enormous are both capacity add to the network and also an efficiency play and the output power and the technology is certainly available to blanket your network from a macro tower will be most efficient way or for the operators. So there's certainly going to do this.
I believe Theyre also going to do a metro layer.
And additional capacity and cities because just doubling your amount of available spectrum, which was roughly what C. Band does the operators is probably not enough to last through more than a first couple of years. So I expect him to do a metro area as well and we do benefit from both other.
Lot more metros, the metro cells, and there would be macro sales per square kilometer.
And so our benefit per per area would likely remain very very similar although the types of products that we sell are different the cost of the products are different the margin profile would be similar.
Regardless of where it is and the network.
Great. Okay. Thank you.
Yeah.
Thank you. Your next response is from Dmitry <unk> with J P. Morgan. Please go ahead.
Oh, great. Thanks for taking the questions I had a couple of Chuck I just wanted to Oh.
Ask you one more on the strategic direction and cute I think if free D. Blaine PV to be weighted to the time, okay and its acquisition.
Arguments made for a broader portfolio and more and Glenn solutions, particularly in equal or keeping net broadband customers and Uh huh.
How are you thinking about the value from.
That strategy and direction do you see that and you wouldn't happen, though and.
And to institution for certain customers.
And maybe the Ocwen and behind that is acquisitions and I have a.
Gogo.
I think I think we absolutely are seeing the value of having India and solutions and what we're gonna be doing as we you know as we think about our portfolio there could be some things that we leave removed, but there could be also opportunities for us to make acquisitions that are lined up with exactly where we want to play.
So I'd just say debt.
We do feel there's a good day and play here and we also think that.
There's opportunities to do add on where we need and we're gonna be diligent on what we think is really not creating value.
So I'll I'll add in here.
An example, just so that everybody can make it real one of the real network challenges that will go on and this next decade, one of the ways and you measure measure the quality of and network will be based on latency and jitter and other.
Other words, how snap and your network deals and how reliable it isn't stopping us and by providing and a complete and 10 solutions all the way through the network from let's say the core of the network all the way through the access layer and even through and into the home through the Wi Fi access point, all the way to the edge is one of the ways that.
And integrated Commscope can really add value beyond that which somebody who just makes it a point source could do and we think these are these other types of areas, where we're really benefits by having having a tight integration.
A follow up for me.
Alex I think you mentioned weaker one can we just wanted to clarify you mean, the weak euro would you.
Because I think seasonally we understand <unk>. It and then just in terms of consensus expectations.
And I expect to see growth.
Top line for most part of the yield I know youre not guiding to it but just based on visibility and the constraints that you talked about do you think that's realistic.
Yeah, you've kind of answered your own question, we're not guiding so it's a tough question from me to answer.
The commentary and I did yes.
Sequential and other.
Trying to help US help you understand what the sequential kind of velocity and looks like as we think about normal seasonality as well as <unk>.
Some of the costs and where you see coming back.
And 2021, and then I tried to give you some commentary and qualitative commentary on how we see the market unfolding, particularly with some of these tailwind related to auto spending.
C band and the like.
And.
Beyond that I don't think I can really comment on consensus numbers are or what our point of view.
Okay. Thanks for the clarification, but thank you.
Yeah.
Thank you final question is from Jeff <unk> with Wolfe Research.
Yes, thank you and the gentleman.
And I have a couple I guess first of all I was hoping that.
You could add a little bit of color to the leverage reduction story and it hasn't been as much of a scene.
On the call other aspects.
And others and what can you tell us about how we should expect leverage to decline.
Yeah through 'twenty, and 'twenty, one or over a broader range.
Yeah.
Okay.
Youre going to ask two questions jazz and that's a question you had.
That's why I'm sorry, Alex.
I misunderstood and I thought you were going to ask two questions. So I didn't want to copy law.
Okay.
Okay, that's fine.
And I guess my my second question would be on the on the broadband margins. My my sense is that some of that is a little bit one time, but if you could.
Let us know how much is and sustainable improvement and how much do you expect to and to give back to some other factors you mentioned before.
And thank you share.
Sure. So let me kind of take the leverage one first.
We are absolutely committed to.
To aggressively deleveraging the balance sheet and I think Barry.
Obviously, two ways and you do that by paying down the debt, which we've been doing and the other is by growing EBITDA, which we aspire to do and certainly through Commscope and <unk> and really that that is priority hasn't changed.
Thanks again.
And I'm not at Liberty and that would provide guidance. So I can't I can't give you and outlook for or what 'twenty and 'twenty one will look like.
Unfortunately, what because I know what you were you were asking for but.
And that's sort of a pause.
Part of our guidance philosophy at this point.
And as it relates to broadband margins I actually.
And would say that the margin improvement and is absolutely not one time in nature, but it is transitory in nature, and what I mean by that and had.
Mix shifts and the issues that more than were talking about previously as mix shifts between <unk> and software.
I suppose solutions for adding capacity or upgrading the network to a hardware type of solutions, where the physical zone and our.
Interventions and the high flow activity that Morgan described and you will see a negative mixed trend and as we look into 2021, and we see more of the activity and the broadband networks segment.
Moving towards physical node splitting activity you will see the margin compression, but that's not per se that as the cycle matures and there is a next level of investment and more Virtualized solutions that you won't see that reverse each other.
And if there's sort of a sophisticated and they've been trained whether it's physical activity or software made exactly.
And hopefully that debt.
You get a sense for what we see in 'twenty and 'twenty, one as it related to broadband market.
Okay.
Thank you Alex.
Thank you I would now like to turn the call back over to Chad Lane.
Well, we appreciate your support of Commscope and we hope you have a great day. Thank you very much.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a great day and you all may disconnect.
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