Q2 2021 CommScope Holding Company Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Commscope second quarter 2021results call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask your question. During the session you will need to press star 1 on your telephone.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to Russell Johnson. Please go ahead.
Good morning, and thank you for joining us today to discuss Commscope second quarter 2021 results with me on today's call are Chuck Treadway, President and CEO, Alex Pease Executive Vice President and CFO and Bud Watch Chairman of the board you can find the slides that accompany this report 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 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 I'll have a few housekeeping items to review.
Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail on this morning's earnings materials.
Leading fiber and copper cable and connectivity are distributed access network solutions or are innovative service offerings, where market leader in technologies that enterprise and service provider customers need to deliver the network. So the future.
Second we are well positioned to take advantage of some of the most powerful tell winds in the communications industry.
Key demand drivers include the Royal digital opportunity fund the introduction of new mid that spectrum to power <unk>.
And the fundamental shift toward distribute it work in education.
All of these forces and more are creating unprecedented need for high reliability low latency network connectivity.
And as a result, we are experiencing record demand for our products.
Third we are seeing encouraging signs of recovery and spending from last year's Covid driven softness.
Our enterprise markets more and more 5 G related use cases are coming to market.
Many company that venues are upgrading that network to support the return of employees and customers and.
And service providers continue to invest in additional capacity to meet growing demand.
While significant uncertainty about the future path of Covid remains at this time, we believe the worst aspects of last year's depressed business demands are now behind us.
Lastly, the strength of the Commscope employee base has never been more evident.
As I meet and work with more and more of our people are continued to be impressed by their talent domain expertise and desire to win.
Our team's response to the industrywide supply chain challenges is just 1 example.
During the quarter, we experienced significant supply chain issues, but as our results demonstrate our people from the factory floor to my senior leadership team worked hard to mitigate a significant portion of the impact and continue to do so.
Meanwhile, we're innovating at an unprecedented pace introducing technologies, such as cloud and analytics advanced optical networking remote Mac 5 devices and and building LTE solutions to support our customers most advanced networking needs and support future growth.
This and much more is coming together well under the umbrella Commscope next which I will describe more in depth shortly.
Before moving on to our business results I would like to provide more color on the supply chain disruptions on referred to earlier.
Across many industries companies are dealing with acute shortages and delays Commscope is no exception.
Subcritical items, most notably semiconductor chips lead time, so pushed out beyond a year and in some cases manufacturers of day committing and prices for many key production inputs, including copper rather than steel and freight at spike dramatically.
While we navigated these issues well during the second quarter and are proud of our performance. We acknowledged that these factors will persist at least through the balance of the year and likely be on.
A strong backlog an order entry right gives me great confidence in our markets and our future our future performance.
But these extended lead times will challenge our ability to convert backlog in the sales as quickly as we'd like in the near term.
Alex will discuss our supply chain challenges impacts in mitigation in more detail during his remarks.
Now I would like to provide more detail on our second quarter results before concluding with an update on the ongoing progress account scope next and our previously announced spinoff of the home network business.
Turning to slide forward.
On a consolidated basis during the second quarter of 2021 revenue grew almost 4% year over year, and we achieved an adjusted EBITDA $308 million, a 10% increase over the second quarter of last year.
As I mentioned previously core Commscope, which consists of 3 businesses 3 business segments that remain after we complete the plant spinoff of our home networks business grew.
Through revenue nearly 18% year over year.
Our broadband network segment led the way with revenue up 22% benefiting from strong notes splitting activity by cable operators and strong demand for fiber and connectivity products.
And our venue on campus network segment, we also delivered significant year over year improvement with.
With segment revenues, increasing almost 18%.
This growth was driven by a significant recovery and the sales of copper and fiber cabling to enterprise customers and robust fiber demand from hyperscale datacenter customers as well as strong ruckus sales and key vertical markets.
And our outdoor wireless network segment second quarter revenue increased by 9%, we're seeing steady progress by major North American wireless operators and upgrading macro cell sites to state of 5 G ready Eunice and we continue to be confident that our extensive wireless product line, which we describe as everything about the radio will play.
A a major role in the transition to <unk>.
During the second quarter outdoor wireless experienced healthy demand and a growing backlog for a variety of macro sales site related products, including base station and talents Heatley acts fiber to the antenna solutions power shift power management solutions cabinets in enclosures and related components.
Together, our core business had a strong quarter and that performance from rights clear evidence of the growth and profit potential of core commscope out to spend on home networks.
As a reminder, we announced in April of this year that we plan to spin off our home networks business into an independently traded public company.
We are currently on track to complete the spinoff during the second quarter of 2022.
This is slightly behind our initial projections of completing the transaction by the end of Q1.
22, due to operational complexity of the transaction.
The full strength of the core Commscope team and home networks teams are working diligently to separate the businesses and create standalone organizations I haven't the plan spend update and both of us and and position both organizations for a successful start independent from 1 another.
In the meantime, we continue to see strong demand for many home networks products.
However, the segment performance was heavily impacted by supply chain disruptions.
As a result quarterly revenue fell to $457 million, a 28% decrease versus prior year.
We continue to believe that these supply disruptions are transitory in nature and will abate over time as supply catches up with demand.
As this occurs home networks should be well positioned to return to 2 more normalized sales and EBITDA trends due to its large and growing backlog.
Turning to slide 5 I want to provide you with an update on how we are progressing with our Commscope next initiatives.
As you will recall Commscope next is a comprehensive program to improve business performance by focusing on 3 key drivers growth cost efficiency and portfolio optimization.
We have committed the Commscope Max will deliver on annual run rate of at least $500 million and adjusted EBITDA improvement over the next 3 years split equally between incremental growth and improved cost efficiency.
I am very excited to report that we're making excellent progress on Commscope next.
It is rapidly moved from the design and planning stage 2 on operational stage.
Consisting of building highly granular execution plans directly tied to concrete growth and efficiency targets and track essentially.
These plans will be created and owned and managed at the individual business unit level with business unit leaders in operational leaders held directly accountable for delivery.
And an evolution from past Commscope practice, we have already taken steps to better empower our line leaders with comprehensive general management growth and P&L responsibilities and they are responding enthusiastic Lee.
And we just passed an important milestone in the process in mid July we gathered approximately 100 of Commscope most senior leaders in Dallas for a 3 day Commscope neck strategy session.
LOL. This event was to introduce explain and generate excitement from the key components account spilt net.
These sessions were invigorating and brought alignment around the nature and scale of the opportunity was evident.
Moving out of this session our leaders are now.
To communicate the strategy to their respective teams enable our goal realigning priorities and ways of working across our entire organization.
We're leaving notes down on term in this process and we will challenge head on every bias and roadblock in the way of growth and change and.
And we are and when we have finished the job commscope will be a change company and physician to succeed like never before.
And in that regard I would like to share with you a few examples of early wins, we've achieved through Commscope next.
The primary mission of the growth vector Commscope next does this will create a customer centric company that can offer differentiated value propositions and achieved above market growth across our core business segments.
While we're taking a multi pronged approach to accelerating our growth through Commscope next.
A key component of our growth plans is ensuring that we have ample manufacturing capacity in areas, where we expect the largest and most enduring demand increases over the next decade.
During the second quarter, we made significant progress on implementing a new capital investment program at 4 of our manufacturing facilities to increase our production capacity of fiber cabling at Dx cabinets and fiber terminals enclosures.
The first of these projects came on line during the second quarter, and we will become operational throughout the next.
4 quarters and more will become operational throughout the next 4 quarters.
This increased fiber capacity will allow commscope to capture a meaningful sure if the rapidly emerging fiber everywhere trend being driven by increased competition for homeland for home broadband customers in government spending on rural fiber initiatives, such as the World Digital opportunity fund.
Overall, we expect these new capacity investments to support $350 to $400 million of incremental annual revenue growth by 2023.
I can also reports from early progress of the call Spector Commscope next.
Where are key goals is to implement best in class procurement and operating practices to achieve significant and reoccurring cost savings.
We recently completed an initial pilot across control towers at our manufacturing facilities in Claremont and Kitab on North Carolina.
Cost control towers introduced a rigorous and highly structured approach to direct spin management, where functional committees are empowered to review challenge and if necessary reject any proposed purchase above a minimum threshold.
The result of this pilot, we're better than we expected on average the pilot program reduce spending by 8% to 14% during this initial period.
Across a variety of indirect categories.
And we've seen even stronger results as we scale the program globally.
For reference across Commscope, there's at least $500 million of indirect annual spend that could be appropriate targets for these types of local cost control towers.
These are just a few examples of what are talented commscope employees can achieve when challenged and given the right tools and latitude to execute independently on.
Look forward to sharing more details on success stories from Commscope next journey at our Investor Day event. This December.
In the meantime, our task and our challenge on the upcoming few quarters is clear where press board with Operationalizing Commscope next while also continuing to meet our customers increasing demands will.
We will manage through a volatile supplying environment and emerge stronger when these conditions abate as.
As we execute on these priorities.
Mind, you some of my very first comments as Tom scope CEO.
Commscope next is a fundamental transformation of the company and it is key to unlocking a new level of shareholder value.
We are aggressively focused on delivering a step function improvements in the company's growth cost structure and portfolio structured by the end of 2023.
And while we will encounter challenges along the way.
I am confident that we will be successful.
With that I would now like to turn the call over to Alex to provide further details on our second quarter results talents.
From shot.
And good morning on on starting with an overview of our consolidated results on 5.7 during.
During the quarter net sales includes 4% to $219 billion, which include the 2% favorable impact in the foreign exchange orders for the quarter were $2.5 billion yield on the book to build a short 118 times.
And EBITDA, driven or $8 million increase 10% and adjusted EBITDA margins of working 1% increased databases on.
Could earnings per share was 43 cents per share and increased 34% from the prior year period.
Shifting focus to our core Commscope businesses net sales increased nearly 18% recorded on $173 billion core adjusted EBITDA improved over 21% from prior year $293 million or adjusted EBITDA percentage of sales was 17%.
Orders for the core business, who are again very strong yielding a core book to bill ratio of over 1.2 tons.
Strong revenue growth was driven by significant growth in our broadband network segment as well as solid growth within both menu on campus and Albert wireless.
Robust demand environment, where it's Sharon from continues to validate the convergence of wireline on wireless spend cycle and the strong products and solutions that we're offering to our customers.
Adjusted EBITDA improved across all 3 core Commscope businesses notable improvements and banging on campus network and another quarter of strong performance by broadband networks.
Bringing it together Q2 with a strong quarter force and demonstrated the underlying strength of our core business lines.
And before we discuss segment results I want to provide additional context for the current unexpected segment performance.
As most companies are we're dealing with a challenging supply chain to.
The conditions were navigating include shortages and decommit of input materials and components increased prices on lead time for input materials on components and increased cost delays and unreliable delivery company. While these issues are affecting all of our core businesses.
Our business lines on incorporate semiconductor content are the most effective primarily broadband networks. The ruckus in that Subsegments with on your on campus network from home networks.
Prices up significantly on lead pipes have been extended per months, sometimes even for over a year. While I'll note supply chain impacted perfect segment is a review segment performance.
I will help quantify the specific magnitude here.
On a growth basis in the quarter this represents $45 million and $270 million for the full year before any mitigation stepped on I'll explain shortly.
Finally, what we fully expect these issues can be transitory nature. They are likely percent from the early 2022 to some degree.
Let's think that day.
It's our job to adapt to these challenges and we're actively working to mitigate these issues and we were able to offset roughly half of the impact described above and Q2 and expect at least the same degree of offset on the full year impacted in order in order to preserve our margins and minimized negative impact on our cash flow and balance sheet.
Steps, we have taken on will continue to take include dynamic sourcing qualification of additional vendors better leverage of our scale and redesigning of products to accommodate alternative inputs and where necessary we've increased prices for a customer and we will continue to day so when required.
At <unk> noted our team has mitigated many of these impacts to date on a strong Q2 results are a testament to the teams dedication to delivering price stakeholders, we're proud and thankful for our teams Greg work, thus far but we're also mindful that some macro challenges will continue for the near term.
Turning the slide 8 for an overview of our segment highlights.
Beginning with the broadband network segment net sales of $808 million grew 22%, primarily driven by the strength in all regions, except the Asia Pacific with the growth predominantly stemming from the Caribbean and Latin American and North American region.
Net sales growth within the segment was driven by both network cable line on connectivity and the access technology business.
Dusted EBITDA of $154 million grew 21% on over the prior year period, driven by higher sales volumes.
Brought them network segment delivered another quarter of both top and bottom line growth as operators continued to put fiber deeper into their network and address capacity constraints within existing doctors network, particularly on the airplane.
Over time, we expect spending within the physical access lay on the network to continue moving moving further to the edge, creating a shifted Max from head on into electronics and optical components to note denounce.
With our cable operator customers discussions pertaining to the evolution to adopt the sport auto are becoming more relevant.
On operators are evaluating the next generation hybrid fiber coaxial architecture choices and Commscope is planning on important role on these discussions.
Given commscope technology leadership in this space, where increasingly investment with our customers in the initial phases of testing and development for the network needs of the future.
While the material financial benefit from doctors for an auto are still a few years out we're encouraged about the role that we will play in the technology roadmap for delivering can gigabit network fee.
For our network cabling and connectivity business first thing meaningful progress.
On the bill direction behind on off the Royal Digital opportunity fund.
Is stimulus plan participants are working to solidify their adat build plans and other customers are driving fiber deeper into their network from passing more homes, we're seeing a strong backlog and momentum on our fiber connectivity goodness and mentioned in his earlier remarks are timely investments to augment internal capacity of being deployed and we expect this will become a macaw.
Ariel revenue generator for years to come.
As we look towards the second half of the year.
It's important to note that there will likely be several dynamics impacting overall mix specifically in Q3 of 2020 were experience we experienced a large high margin software sales that will likely not repeat an addiction that strong growth in network cable on connectivity nodes and taps curious structurally lower margin than some of the active.
Chronic components. In addition to this product mix. The business is also feeling the impact of the supply chain disruption, both Chuck and I described in that.
Turning slide 9 for our venue on campus network segment.
Net sales of $563 million grew 18% from the prior year on across all regions with the most significant growth driven by China, North America, and Europe from business unit perspective, net sales improved improved across our inside plant copper fiber on ruckus businesses adjust.
Digested EBITDA for the segment improved 55% $59 million is higher sales volume.
Partially offset by higher input costs scenarios, such as copper revenue and pray.
Betting on campus businesses on impressive growth in order entry right because the demand environment is recovering from last year's COVID-19, pandemic related lockdown and associated slowdown in enterprise spending.
On Commscope ending on campus sales are reaping the benefits of enhanced focus on.
You'll note that in November of last year, we made the strategic profit to begin moving our businesses into a general management structure and created 2 decades sales forces within the segment.
Sales team have been aligned to focus more directly on either structured cabling on networking opportunities on are well positioned to capitalize on this returning to spend environment.
[noise] within our inside plant copper business project bills are returning to a more normalised pays driven by various Tom order entry, particularly in North America.
Zion plant fiber business also experience strong growth during the quarter as multi tenant Hyperscale data center Buildout continued to intensify in service Spider spending was from.
As we previously mentioned are Hyperscale business has been an area of strategic purpose for the company and we're pleased to announce that the second quarter continued to show continued song performance from this critical growth engine for the company.
Or that in small cell business experience some year over year topline declines as it faced the challenge in comparison to the prior year period.
As a reminder of 2020 included several extremely large saving projects, including the At&t's day in which do not repeat that being said the business continues to grow in international regions in the pipeline for opportunities remains encouraging as we enter a rip and replace cycle with our industry, leaving next generation Aerograph platform looking forward, we see a large.
Pipeline on projects stemming from venues such as casinos hotels care ports translations in hospitals as demand for in building <unk> connectivity becomes even more critical for the future.
Specific to 1 from our final of opportunity continues to grow and during the quarter a number a site for a major U S quarter U S carrier went on mind using lifestyle.
While it's still not a meaningful contributor today's P&L, we continued to drive efforts on 1 on adding 1 additional carrier for its deployment and expect continued success in this regard in the back half of 2021.
A ruckus business delivered another quarter impressive year over year growth driven by some similar dynamics mentioned within our insight on copper business.
Ah more normalised focused on infrastructure network and networking projects alongside government stimulus are driving demand to improve the availability of Wi Fi access to communicate and connect these factors are driving demand for both on Wifi high and Wifi 6 products within vehicles, such as education healthcare and the Federalist day as well as.
A strong recovery within the hospitality Vertigo.
All of this is despite a very challenging semiconductor supply situation extending lead times and cotton on the supply shortages.
Turning to slide 10 for outdoor wireless segment.
Net sales of $358 million increased 9% heard from Maryland by growth in North America, and Asia Pacific regions somewhat moderated by Europe and Caribbean in Latin America within the segment sales improved in both our macro on Metro later solutions, particularly relating to site preparation deployment as operators in North America begin.
Rapid buildouts.
Adjusted EBITDA $80 million for the segment improved 5% from the prior year period, primarily driven by higher sales volume and partially offset by rising commodity costs.
Or outdoor wireless segment sauce, Sop, both strong revenue growth and order on through right on the second quarter.
The strike on our outdoor wireless business was particularly notable on North America as operators have begun focusing their efforts on site preparation for the coming wave of 5 G investments in their networks.
Commscope product sort of everything but the radio on it comes from macros Bell site deployment during the birth birth during the quarter. We saw an increase in demand for products such as power shifts are power management solution that helps regulate the electrical current up the tower Helios Caitlin steel reinforcement structures to help with power loading and new.
Cabinet free to has the increased number of electrical components employment macro site.
We view this site preparation stage the meaningful step on the ramp for 5 G deployments as operators contemplate their radio and and and kind of architecture for the next generation of mobility networks wireless.
Wireless evident that some portion of the networks will geared towards active and passive.
With massive mine on technologies that solutions that will not be the most optimal for every area of the network and will vary by carrier region in areas of the market that due to the active antenna route. This provided an opportunity for a variety of Commscope macro site solutions to help manage power has electronics and provide steel reinforcements from that and towers from becoming.
Overloaded and some configurations. This will also present opportunities to rip and replace legacy band antennas and 10 on coverage with newer and more efficient passive antenna with higher port counts to accommodate the lack of space and weight on fully loaded.
I'll just set the momentum for 5 G deployments is starting to pick up on north Macrolith strong demand from the big 3 U S carriers as well known as well as a number of successful projects picking up on the Canadian markets.
Within European markets, we continue to make fashion with baggy deployment as European carriers begin to reassert their initial build intentions universe utilizing massive mimo, we're providing solutions like are active passive antenna radio and direct collaboration okay. So.
Similar to the U S market. This presents organic growth opportunity as each carry on region will have to define their department strategy accounted for tower congestion and power consumption alongside the geopolitical competitive dynamics.
Turning to slide 11 for our home network segment.
Net sales of $457 million declined 28% from the prior year and across all regions, except the middle East and Africa. Despite.
Despite a continuation of healthy demanded order entry sales declines were evident across both video and brought day.
Broadband gateway businesses as we continued to navigate the challenging supply chain environment.
All of our businesses up all of our businesses home network has been the most impacted by chip shortages chip prices are up significantly on lead times have increased substantially sometimes to more than a year.
These factors combined but severe pressure on homes ability to ship caught on as well as its profitability.
Adjusted EBITDA $15 million declined 62% from the prior year as the impact of lower sales volume more than offset the benefit from the segment cost optimization efforts.
With respect to our announced announcement on the plan spin on the home network fitness as Chuck mentioned, our core Commscope and home network teams are working diligently to create standalone organizations ahead of the projected spending.
While the home business remains challenged by the supply environment. The demand environment continues segment, we continue to make strong inroads within the syndication market for X B 7 gateway product with particular aside from the Canadian markets.
Side of North America, we saw product plans for both video and broadband products once again in markets, such as South Africa and Eastern Europe.
And then a retail channel. We're also seeing proof once a success such as the expansion of our Wi Fi 6 match product I felt that by an Amazon.
This time as North American carriers are focused on delivering new products and higher speeds listen to consumers for their connectivity 8 we are encouraged by winds in both LTE gateway products for fixed wireless access as well as pawn gateway for fiber to the home deployments.
Turning to slide 12 for an update on on cash flow.
The second quarter cash flow from operations generated on $100 million to $192 million.
And adjusted free cash flow of $190.800.
As expected our cash flow generation rebounded significantly from the seasonally we first quarter.
Working capital with a net and use of approximately $47 million of cash primarily driven by an increase in inventory.
Increases in inventory were driven by a number of factors, including revenue growth increase inventory on the water is shipping times and delays increased by ahead input perfect purchases to ensure future supply and increase work in process inventory awaiting input necessary to complete finished product.
Given the mentioned consideration within the supply chain, we expect that the elevated levels of inventory may persist for a period before quicker.
Quickly returning to the historical levels as the disruptions a day.
Looking back to historical comparisons it is reasonable to expect free cash flow generation to be stronger for the second half of the year, although our full year cash generation will likely be negatively impacted by the economic dynamics described above as well as the incremental investments, we're making the support both growth and cost reduction programs.
Turning to slide 13 for an overview of our liquidity and capital structure.
During the second quarter or cash and liquidity once again remained strong.
We ended the quarter with over $446 million in cash and no outstanding draws under our ABL.
The company is total available liquidity improves slightly from the prior quarter to nearly $1.2 billion and there were no significant debt repayments during the quarter beyond the required $800 a term term loan amortization.
With the year over year growth in second quarter adjusted EBITDA. The company ended the quarter with a net leverage at 6.6 times a significant improvement from this on.
On the 7.1 times at the end of 2021.
Note that of Hartsville driver of its leverage improvement was on inclusion in pro forma adjusted EBITDA of additional projected cost savings related to a commscope next cost efficiency initiatives, where.
We remain committed to a longer term goal of significantly reducing leverage and expect to provide additional insight into our path and timetable towards this goal as we further refine our commscope next strategy around cost efficiency and growth.
Finishing on slide 14 for an overview of the demand environment and the relevant supply chain considerations impact on me the business.
From a demand perspective, our view of the respect in this segment and markets from him remains largely unchanged within broadband networks were pleased to see additional firming up and confirmation of art off and fiber deep operator build plans within North American and international markets and within the Doctor's network side of the business model location on <unk>.
We're spending occurring is starting to shift the overall intensity of that spending persistent.
Our role remains the same in providing operators that are required solutions to reduce network congestion and breaks the progression network standard architecture from centralized and DOCSIS 3 dot 1 to distributed assets architectures and doctors for auto on the coming years.
The environment within our venue on campus segment is showing additional signs of normalization an increased demand.
Spending activity and structured cabling for enterprise Multitenant and Hyperscale network that is continuing to improve and this is being amplified by stimulus dollars being corrected into infrastructure buildout to improve the connectivity experience.
A ruckus business not only benefits from a similar impact from government government's stimulus, but also the technological refresh cycle of life by 6.
Hi Fi 6 E. In addition to the recovery key strategic vertical such as hospitality.
And within that on 1 cell, we continue to expect meaningful demand as customers look to build out the indoor layer covered so critical and a 5 G network deployment.
For our outdoor wireless business as reference in my earlier comments. The <unk> cycle is just beginning to gain traction, particularly within North America, while the focus debate and mainly on site preparation a significant market share presence of nearly all questions on the macro site other than the radio stand to benefit for the year that day.
Within our home network segment demand for the Commscope product and backlog continues to grow.
Customer visibility into their forecast the need is improving and we're making strong progress in syndication market and new technologies developments for things like Streamer Zapper video project products and fixed wireless in Palm Gateway.
Despite the encouraging demand environment, our business will not be immune to the supply chain challenges. We've described in depth and while we have mitigated. Many of these factors diligently during the second quarter and we will continue to work aggressively or mitigate them going forward. It is reasonable to expect some bottom line weakness in the second half of the year.
Finally, the Covid situation is highly fluid and evolving rapidly none of our assumptions about considered a potential for another major COVID-19 macroeconomic disruption we remain extremely intelligent.
Vigilant and are prepared to navigate through the return of Covid restrictions are necessary for the moment. However, we remain intently focused on our Commscope next goals of incremental growth cost optimization and portfolio management. While we will also work to mitigate the supply chain issues and with that will help from the line for questions.
Operator.
Thank you day at this time he would like ask a question. Please press far then the number 1 on your telephone keypad.
Once again that's R..1 on your telephone keypad on.
First question comes from the line of semi battery.
Fred Smith here Lenny Susan.
[noise], Brian transact marrying anything.
Hi can you hear me now we can hey.
Okay great.
Want to go back to the comment that was made regarding the software software transaction on a broadband segment I think there's really 2 things.
Guess, maybe myself and some others want to understand but.
The first thing is.
Is it was it always kind of part of Commscope business to sell intellectual operating like the software licenses to your customers. If we go back 510 years ago.
Has this always been part of the business.
Business to business with customers and then the second thing I think that would be very helpful. If you could tell us how this specific edge later build out by cable and telecom customers difference vampire cycles is this more elaborate is it more in depth as it extending further so durable cycle is it just on.
The things that.
I would like to know a little bit Marvin.
Sure Let me, let me take academic so on the software transaction just to clarify something that you said, we're not actually not selling IP, we're selling a license to increase capacity and the and the chassis that's in the head and so on.
This was part of the Arris business that we acquired back a couple of years ago and has always been part of the business. So the strategy is you sell.
E 6000 chassis that goes into the head and and then add capacity needs grow you sell additional line cards and licenses.
Cassidy and so that has been an ongoing and sort of enduring part of the business model.
It happens specifically within the the cable modem termination system or the integrated integrated C cap platform and that's sort of nothing nothing different.
But but the reason I pointed out that remark is because they are pointed out that transaction because the software licenses do have substantially higher margin than hardware and so there is a pretty significant mix impacted year lapping a period, where you don't anticipate that recurring revenue.
So hopefully that makes makes that clear in terms of what's going on at the edge really what we're seeing is operators because of on this.
Technology refresh between doctors, we got 1 adoptive score.
Operators.
Choosing a strategy to push.
To increase network capacity through more notes splitting activity and adding nodes pushing fiber deeper and then adding apps kind of downstream from those notes. We do believe that this is enduring.
At least for the for the near term as we're awaiting a build out of doctors.
And so what we're seeing is.
The investment is shifting from the core from the head on into the edge as operators are pushing this note flooding activity and these notes for.
For the time being carried structurally lower margin that net headed equipment. So you do see some mix shift as as that happens what you're going to see in the coming years is on migration stop for sport on though which will have a combination of sort of virtualized architecture and more electronics being.
Pushed into the note and so you'll see the economics of the note of alcohol as we move into darkness on now and get on.
Just.
Remote Matt 5 remote fight architectures.
And you'll see that the asset intensity of the head and migrate to the cloud. So hopefully that explains a little bit of the head of the shift in spending that we're seeing.
Got it. Thank you for the clarification on software and that's fine.
So I just want to go back all sorts of broadband networks growth and maybe you could help us triangulate. This.
How much of the growth that we're seeing course on 2 Q22021 is being driven by specifically are adults and any kind of government stimulus programmes could you give us kind of like a an idea on how much of the strength to be driven by those programs.
Yeah. So we are at the very very well I would say no growth is attributed to on off at this point right. There. The awards have just been made operators.
Thinking about how they're going to deploy their art on spending. So so we're really just that the cost of that level of investment.
What's driving the growth in network cable on connectivity is I think Chuck mentioned in his remarks is really that push.
Of fiber going deeper. So you are seeing an increase in spending for fiber all the way to the home as the note business as we're driving increased note splitting that's pushing fiber in and connectivity deeper. So that's really what's driving the current growth trends and then we see accelerating growth trends.
From the spending and by the way probably worth mentioning the increased.
The infrastructure Bill that's being negotiated and Congress right now has about 3 times the level of investment in broadband spending that the original art off proposition time. So we see on additional surge in investment which is behind the increased capital and capacity investments to Chuck described when he was pointing to.
The wind on on constant next.
And the only thing I would add to that Alex is that this is going on all over the world. It's not just a us phenomenon and.
And I think that's important to note I mean, we are deploying things in Philippines right now we have lots of opportunities all over the world and it's just 1 place, but their stuff going on everywhere for us outside of the United States as well.
Got it thank you.
Thank you next.
The next question comes from the line of Stephen Path. So fast advisors. Your line is open.
Thanks, Good morning, Uhm I guess, just 2 questions first of all you mentioned some additional capacity expansion on the fiber connect.
Connectivity and also some other fiber products I think so I'm just trying to get a handle on what what capacity has come on line recently cause I know you started on some other plans and sort of the timing for the latest capacity and then secondly, just in terms of the top line intact from all the supply chain and inflation issues, how much of that do you think drops to the bottom.
Line versus.
I think you talked about in terms of how it's hurting your ability to ship them meats.
The revenue demand.
Well I'll take the first part and Alex will take the second show.
It was very early when it started company probably 9 months ago. When we realize what was coming and we knew that was opportunities area in the payback was quite significant so we did make the investment in the capital.
It takes about 9 months for some of this stuff to go on line.
We're going to have our first.
Some of our first equipment coming on line already this quarter.
We have more for the next 3 quarters going forward.
We're talking about somewhere between 350 and or on a million dollars additional revenue dollars coming from this.
So that's that's the the capacity partner outlet chip second growth.
So I'm gonna try to provide some specific.
Just so so it will help with your modeling.
What I mentioned in my prepared remarks is.
For the quarter the impact of the costs, the combined cost inflation and frayed inflation was about about $45 million and we were able to offset roughly half of that got through mitigation steps that we described for the full year that number of growth.
To sort of $250.270 million give or take and again, we anticipate being able to offset.
Half of that these mitigation steps so that those are the specifics that I described I just wanted to give you a couple of other.
Points, if you think about semiconductors specifically.
About 96% of our revenue within home is exposed to semiconductors. So home is very disproportionately.
Disproportionately exposed to the semiconductor within the other visitors.
That number is between 25 and 50% so you get to a blended average for the portfolio about 45% of our revenue is exposed to the the semiconductor if you try to translate that too.
To the revenue impact if we did not have the supply constraints for the full year, you'd probably have around $465 million of incremental revenue and about $130 million of incremental EBIT just from semiconductor alone. So.
Based on the demand that we're seeing in the backlog that we see so.
Trying to point out that this is a transitory issue and for these issues you'd have a much stronger.
Result, a few.
If you look at some of the other inflationary effect that it's actually <unk>.
Smaller so residence impact about 35% about a third of the business and then steal it fairly fairly de minimis. So that hopefully give you. Some some sense of how the supply issues or impact from the they've got from what the upside looks like once we get get through that from the.
Hopefully the back half of the year as we get into 2022 and just to get your specific point on.
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What kind of margin would we expect to get from that capital in net topline growth I mean, it's more like let's say a third of that should be should be positively affecting up on line of our of our business.
Great. That's helpful. Thank you.
Thank you. My next question comes from the line of snaps him.
No shame bank your line is open.
Hey, guys. Thanks for taking the question.
Wondering as we think about free cash flow, how should we think about the trajectory an upcoming quarters and maybe you can help us quantify some of the impact from the investment you're making.
I think there were some working capital enemies inventory discussion on and then also somebody investments in revenue on Opex initiatives I believe Chuck disgusting, what I'm ultimately trying to get a is how does this sort of impact 2020 cash flow and how does it look like maybe relative to the somewhat.
Normalize sort of 600 million target I think you've talked about.
In the past.
Yeah. So I think this year is going to be.
Little bit unusual from a capex from a cash flow standpoint, and it can be driven by a couple of things first of all on.
Honestly, the the lower EBITDA being driven by the supply chain issues is probably the primary driver and then you will have.
Meyer working capitally driven by a couple of things the first is on.
The inventory issues that I pointed to in my prepared remarks, essentially really trying to address the supply issues by Prebuying inventory some of the congestion in the freight lanes is leading more inventory on the water.
So we will see higher inventory as part of the working capital equation will also actually see.
A slight increase in our in our accounts receivables and that's actually driven by mix shifts. So we continued to perform very well on.
On on collections activity, but as you see a decline in home networks revenue, which carries more favorable payment terms, you'll actually see the days receivables sort of go up and that that's also true as we as we have more sales on our international market. So you will see.
Higher working capital needs than you might otherwise C. And then the last day driver is really on the athlete.
On the capacity issues that Chuck described so relative to sort of prior periods. This year will probably come in.
Call at 70, or so million dollars more in Capex and that's driven by these capacity investments that we're making that 1 of the things that I think.
I want to underscore it but these these payback periods on the Capex investments are actually quite sure there and the order of 4 years or so.
So, they're they're very attractive sort of payback and it's the right investments make strategically, but it doesn't cash flow for this year and then the last piece is on.
Severance related costs, and so as we restructure and take costs out of period overhead.
There are restructuring costs associated with that and.
Those are in back in cash flow and again just to help folks get comfortable the payback period on on any sort of restructuring cost is generally under a year. So again, the right thing to do strategically, but willing that cash flow for the year. So if I sort of bring all of that home.
You should expect this year this year cash flow to look somewhat weaker than than last year, and we will follow the normal seasonal trend of second half thing stronger than the first half, but it just won't be as much stronger as.
As you've seen in prior years.
And not not the best of all but just to follow up if he did about 544 last year and cash flow I mean between the supply chain.
Net supply chain headwind and then the Capex I think that alone gets me to an incremental $200 million worth of headman headwinds like 130 for the supply chain in about $70 million Capex. I mean is that a fair way to think about it or is it on my sort of in the ballpark I guess, there's 1 on getting out here, Yeah, I think you're I think you're directionally on the right way.
Okay, great. Thanks.
Thank you next question comes from the lineup front Hall of Goldman Sachs. Your line is open.
Yeah. Thanks for the question guys I wanted to first Oswald on they'll go wireless on I've got a bigger it gives you a question for you.
So I'll go wireless claim they're pretty good number there and I'm curious what we see some evidence that Cvs Replanning is.
Completing in the outlook for Buildout looks really pretty good there in the second half of the year I'm curious if you guys are seeing that better visibility now, especially given supply constraints.
I'm wondering how much supply constraints effect that opportunity.
Is that as severe as what you're describing any other businesses.
Not as much so just curious how much whatever that opportunity is get capped by the supply situation and then I've got this follow up for your child.
So to get on on Sudan that would say we're we're in the very early on a R. C bands honestly a lot of the initial.
A deployment station.
Station on Hannah deployments are with with a massive mimo accident on architecture, which benefits our business because that carries with it.
Power solutions for the power shifts solution that I described.
As well as steel reinforcements up on the tower and so it will pull through a lot of that business.
And then eventually that will lead to.
Ah written replaced cycle for the for the bands that are on the tower, because you will need to address some of the tower loading issues through higher court channel.
More streamlined antennas and so.
That work I think we see sort of ramping in the kind of 2022 timeframe and then also there's.
As you're probably aware, there's gonna be another C that option as we get into the into next year and beyond as well, which will further drive sort of the day then 5 G deployments.
The other piece of outdoor wireless where we're benefiting is really in the cabinet business. So we're seeing extremely strong cabinet demand and this is being impacted by supply constraints. So.
The good news is we have got a very strong backlog not there.
The challenge that we're having is we need to we need to address some of the supply constraints that we're we're seeing but we we've got positive confirmations from the customers that that.
Demand is real that backlog, Israel and as soon as we can address the supply chain constraints. They want delivery of that of that product. So I think the outlook for outdoor wireless we feel we feel pretty good about it if you think about that.
At a more macro level the supply chain issues are less acute and outdoor wireless than they are in any of the other 3 segments because they just have less exposure to semiconductors than than the other segments and right yeah.
Okay. Thanks for that.
I'm sorry.
I was just maybe just a little bit to that is just to make sure that you are tuned and we put a new tower up.
There is also the 4 G piece that goes on that on that on that tower as well.
And of course, we have the active passive product.
With with Nokia that's available and then we're working for the future to get this universe. So active passive intend on that could work with everyone's radio.
And the same thing on the rip and replace scenario, where they pull that down they're going to need for G to go back up there as well and.
And hopefully they'll they'll use our active passive from it too and I will just.
So add that this is going on around the world as well so.
Right right, Okay, great. Thanks for that and then carefully I.
I guess I wanted to check where we are on the.
Sort of your review of the Alpha.
The business.
Perceived maybe a quarter ago, you felt like you were in a at least first half of that and I. But then you you had indicated it may be by fall you'd be complete and I'm just curious how far through that process. You feel like you are now you're done. The do you think you'll be done in the fall I kind of weird, we're all week.
With a new process.
Well, let me just start with Commscope next overall, maybe I'll just give you an update on that and then and then I'll hit portfolio piece, while we're there is that helpful.
Yeah that'd be great.
Okay. So related to Commscope next growth portion. This is all about targeting opportunities that are tied to customer needs.
With.
Kind of a lining the technology and the geography as well so we're going to put more key account managers out on the field and we're starting to get more feedback on exactly what the needs are and where do we lighten up our capacity and where the constraints and what we can do to improve we've moved to gentlemen, General management model, where we have dedicated sales teams.
The vertical focuses are already starting to pay some dividends force.
And we're starting to push push out a lot more application value propositions.
And as we talked about geography, a lot of the solutions that we have or applicable all around the world. So it's very encouraging on the growth side and.
In addition to the capacity investments, we just put in place, which when they get online that will make up about half of the 250 number that that we talked about from the beginning right on the.
Top side.
We had a P O H a period overhead address we ran out of the gate.
Now or in the procurement side, where we're looking at direct material.
Where.
We're putting commodities by way. So we're we're already evaluate the first way we're starting the second.
And what were we have a great team I think it's important to note we have a good costs costs culture and the company is just the team didn't have the tools. So we're we're putting in should cost.
Tools for them to look at things, we understand what the impact of the commodity is on the product Where's the labor all this to tear downs and we're seeing some pretty nice pretty nice opportunities there and on the indirect side, we talked about the cost control towers on my remarks, but I want you to I wanted to highlight to that we're looking at everything above 5.
Dollars.
And pillows and this attention to details is really what we're driving across the whole company and.
And we're seeing some like I said, 8% to 14% tax.
Savings, there and he's a pretty significant numbers and.
In terms of portfolio optimization.
We're breaking everything down and 1 other thing I would say we're operationalizing the plants. That's what we got the 100 people together for so we're putting these plans.
For growth to cost.
And could portfolio optimization, we're putting those plants into.
The business unit levels X matrix, so they're going to it's going to be tied out there and each 1 of these actions will be tied back to the piano and that's the hard work that we're doing right now to make sure that they will have an impact.
In terms of portfolio optimization I mean, there's things we're looking at every day in terms of should we be making it should we buy it is a core is it non core made these are nothing to the level of what we did in the home.
But when we get to that business unit level, all 14 of them were deciding what's important and what's not important and were.
We're making sure that we have the capacity to drive it. So what we are on that process I would say.
We're moving pretty far I'd say, probably halfway through the process.
Okay, and when do you think you'll be done on there I mean, I guess, you've never done when do you think this first phase will be complete in your mind.
Well I would say I would say in terms of the portfolio evaluation first past, we should be done by by the by December to be saying when we get to that Investor day, we should be saying you know what we feel score not core make by whatever from that perspective, when you talk about Koston and growth I think these are just.
Continuous.
But there'll be more progress we make more progress every day and we'll have more to share with you then and obviously with portfolio optimization, it's a continuum.
Okay. Thank you I appreciate it.
Thank you and our last question comes from the line assignment Leopold a frame and James Your line is open.
Thanks for taking the question I I know, we talked a lot about supply chain and costs, but I guess, what I'd like to try to dig into a little bit is is maybe a timing issue.
In that I'm trying to understand in terms of input costs versus when you recognize so for example, you may have locked in some prices for steel or chips, and so you might have a little bit lower gross margin this quarter, where the higher costs might hit you 1 day or 2 quarters away from just trying to get get kind of a sense of.
The timing relative to these higher costs and then I've got a quick follow up on venue.
Sure so.
Maybe a couple of things that will help you, but first of all recall that home networks really lead the way on the chip issue. They started seeing the chip issue in queue for.
And it wasn't really until probably late Q1 that we started seeing seeing these issues manifest in the other segments.
Generally your inventory turns.
Every 40, 45 days give or take and so you will see a bit of a lag impact. So we did some cat their answers on the balance sheet. So so that's why the number that I quoted for the for the full year impact is substantially larger than the number that I quoted in quarter impact on.
Offsetting that or or.
Related to that.
Is.
Chuck mentioned the pricing actions that we're taking so we are going out.
And really having a lot of hard discussions on pricing and passing through these costs to our customers, which is in line with what everybody else in the industry is is doing as a way to manage margin and it would take time for that to work through the backlog given the strength of the backlog. We're obviously not on a re price the backlog.
So there is Ah Ah lagging impact of when you see the full benefit of the pricing actions that we've taken so.
That's 1 of the reasons why again as I as I mentioned in the second half of the year.
You see a bigger impact and you won't see the full the full effect of the pricing actions that we're taking but again.
Really important for everybody to note that these are transitory issues and there'll be behind us as we get into 2022, and we'll be able to capture the margin that we historically have.
That's helpful and that's just on the venue business. This was I think a record quarter on an absolute basis.
And I I think a discerning that the ruckus wireless Lan was super Super strong.
Just wanted to check in on whether 1 that's right to that sustainable where if there was something 1 time ish like large E right or something like that affecting the corner. Thank you.
I'll take that 1.
I think when you when you think about our dedicated sales force that we put in place in November when we have dedicated ruckus teams I think that's that's part of the driver.
I think people seeing the lead times push out so much I think people there might be a little bit of by ahead as well or so.
So I would say that that was a ruckus was a big driver, but I would also emphasize that copper and fiber inside plant copper and fiber in Hyperscaler also really big drivers for the venue on campus business.
But I guess.
The headline would be that that the business is firing on all cylinders I would not say that this is.
Something something.
A 1 time issue, it's really looking looking good they've got really good backlog in.
Obviously.
Ruckus in particular is going to be impacted by semiconductor issues, but the backlog is great. There's nothing nothing.
Nothing to point to that was sort of abnormal in terms of the strength that we saw.
Okay. Thank you for taking the questions.
Thank you.
Holding I'd like to turn the call back to our Ceos child friendly for closing remarks.
Right. Thank you first of all thank you for your time to day, we spent a lot of time on supply chain, but I just wanted to let everybody know on call, but the focus of the company is commscope next driving growth cost portfolio optimization in our focuses a step function change in the business and we've got to keep our eye on the price I appreciate your time.
Day, and thanks for your patience.
Patients.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a great day.
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