CommScope Holding Company Inc. Q1 2023 Earnings Call

Although the environment remains challenged based on current visibility, including customer discussions and quote activity, we maintain the expectation to deliver core adjusted EBITDA in the range of 135 to $1 5 billion for the full year 2023.

With exit rates in the second half projected to strengthen over the first half.

Early.

Early analysis indicates that 2024 remains on track to deliver within guidance as well.

As we have indicated before.

Our full year 2023 core adjusted EBITDA range had already considered challenging market conditions in the first half.

Our guidepost confirmation is is predicated on customers delivering strong order rates in the second half per discussions, we're having with them.

With that said, we are using this opportunity to address our cost structure, including evaluating opportunities to manage improved efficiency in our period overhead costs and accelerating our commscope next cost initiatives.

Before turning the call over to Kyle I'd like to talk about expectations of our business position as we move further into 2023.

As we indicated throughout last year, we believe Ccs has strong market tailwind and that we were at the beginning of a multiyear build out of fiber cable and connectivity.

Orders were down in the first quarter and early second quarter as customers navigate the global economic uncertainty high inventory levels and our shortened lead times.

However, as we look to the future we expect the second quarter to continue to be supported by our backlog and expect a stronger second half of the year.

It should be noted second half revenue will be driven by significant significantly stronger order rates versus the first quarter.

We are well positioned to deliver against significantly higher demand, we have aggressively invested in our internal capacity to enable commscope to take full advantage of carrier footprint expansion driving fiber deeper.

In addition, we are well positioned to serve demand for the billions of dollars in expected government subsidies to help close the digital divide.

In fact last month, we were pleased to host the honorable Secretary Rimando of the United States Department of Commerce, and the Governor of North Carolina, Roy Cooper, among others announcing the expansion of our fiber optic cable manufacturing in North Carolina.

U S Secretary of Commerce General Rimando said as we've seen we can produce materials needed for broadband deployment right here in America with today's announcement of a $47 million investment Commscope is demonstrating its commitment to our once in a generation infrastructure movement.

Additionally, our innovation engine is fully engaged to deploy the products that will enable all of this to come to fruition.

Specifically designed to reduce installation complexity save time and trained the labor force faster.

We continue to design our connectivity in cabling portfolio with these themes in mind.

And we believe our innovations are driving strategic wins in the market.

More recently, we announced our Haley our fiber optic cable optimized for rural connectivity.

This innovative new cable and our capacity investment will support an additional 500000 homes passed per year.

Being smaller and lighter it will give our customers the ability to deploy cable faster and have an overall lower cost of deployment.

All said in the years to come we view, our continued technology innovations capacity investments and customer demand will drive incremental opportunity for Ccs and we remain bullish for medium and long term growth.

Turning to mix the business has significantly improved compared to the same time last year.

We believe it is it has turned the corner and is anchored on a trend of profitability that we expect to continue going forward.

Evidenced in the $58 million of adjusted EBITDA delivered in the first quarter.

Over the last two quarters. The next segment is on an annualized EBITDA run rate of $229 million.

We're seeing signs of chip supply constraints loosening in the market and expect gradual relief throughout 2023.

Additionally, Nick's ended the quarter with significant backlog supporting the ruckus and ICL businesses.

We continue to invest in services and recurring software as part of this segment's transformation growth initiatives.

I'm extremely excited about the future of mix as a business that has been a large benefactor of our Commscope next program.

For the remaining core commscope businesses OWS and E&S.

While there are overall growth potentials may be more muted our innovation engine isn't slowing down.

In <unk>, we mentioned in the latter part of 2022, we fully contemplated the decline in U S carrier capital spending into our overall core Commscope guideposts.

And while this may present headwinds for 2023 revenue and adjusted EBITDA performance in the business, we expect some level of offset driven by share gains from our new technologies.

This includes the mosaic antenna solution as well as opportunities to deliver high efficiency passive antennas and energy cost conscious.

Regions such as Europe .

Finishing with E&S as we have discussed this segment has transitioned to a leading supplier of edge related products, including <unk> and RMB nodes as well as amplifiers.

As we announced earlier this year, we shipped more than $1 million RF amplifiers to top cable operators in 2022, demonstrating our global leadership in DOCSIS and access networks.

In addition, we have developed with Comcast and Fts amplifier that will be used as their next generation amplifier as they move to <unk>.

In our legacy products, we continues to support our strong install base.

We continue to have opportunities in our legacy MTS products to gain market share, especially outside of the United States.

In addition to our strength and legacy technology and edge products, we are developing a virtual cm TFS alternatives.

Based on the broad product portfolio and is well positioned to support customers across all technologies from head into the edge.

In Q1, the EBITDA results of the E&S business were impacted by the seasonality of the business, but we expect this segment to continue to improve through the rest of the year.

And with that I'd like to turn things over to Kyle to talk more about our first quarter results.

Thank you Chuck and good morning, everyone.

I will start with an overview of our first quarter 2023 results on slide three.

For the first quarter consolidated Commscope reported net sales of $2 billion.

A decrease of 10% from the prior year driven by declines in <unk> and home, partially offset by strong next growth.

Adjusted EBITDA of $312 million increased 23%.

Adjusted EPS was <unk> 35 per share increasing 35% from prior year.

This is in line with our comments in the fourth quarter call, indicating that the first quarter was going to be down sequentially due to seasonality customer inventory adjustments and lower demand.

For our core Commscope net sales of $166 billion declined 4% from the prior year and adjusted EBITDA of $315 million increased 37% the.

The increase in adjusted EBITDA against the backdrop of lower sales was attributable to Commscope next initiatives focused on operational efficiency and price.

Also I would like to mention as reported in the press we experienced the cyber incident that resulted in minimal impact to the business operations.

Our historical investments in business continuity and it system resilience allowed us to minimize impacts from an aggressive attack.

We also learned some lessons and have implemented several new systems and tools to significantly minimize the probability of additional incidents.

Core Commscope backlog continued to decrease and ended the quarter at $2 4 billion a.

The decrease of 17% versus the end of 2022.

Core book to Bill for the quarter was <unk> 58.

We are still roughly $1 million above our December 2020 backlog levels that provides some offset to lower short term order rate.

Turning now to our segment highlights on slide four.

Starting with Ccs net sales of $823 million decreased 2% from the prior year.

Net sales for our network cable and connectivity product line increased year over year.

This was more than offset by a decrease in our building and data center connectivity product line.

Net sales given typical seasonality and continued inventory adjustments in the channel.

However, as mentioned Ccs customer conversations remain bullish on medium and long term growth.

Ccs adjusted EBITDA of $148 million increased 50% from the prior year, primarily driven by our Commscope next initiatives, including cost efficiency and pricing.

Next net sales of $285 million increased sharply by 51%.

From a business unit perspective, Ruckus led the way increasing 57%.

The next business is still seeing chip supply constraints, but the constraints are loosening and we expect the situation to improve as we move through 2023.

Next adjusted EBITDA of $58 million improved from negative $14 million in the prior year, primarily driven by stronger demand and better pricing.

The last two quarters is more indicative of mixed performance moving forward than the LTM results.

We continue to be excited about the growth opportunities in mix as we continue to invest heavily in R&D for a raucous in one cell.

Demand remained strong in mix as we ended the first quarter with a backlog of approximately $700 million.

OWS net sales of $258 million decreased 34% from the prior year and across all business units.

This was expected as North America service providers indicated significantly lower spending from 2022 to 2023.

In addition, the first quarter revenue was impacted by customer inventory adjustments that will spill into the second quarter.

<unk> adjusted EBITDA of $60 million declined 16% from the prior year.

As previously indicated we view the long term opportunity for OWS is having single digit growth that being said, we believe 2023 presents the anticipated headwinds that will drive OWS topline to decline this year.

The headwinds are primarily driven by the expected reduction in North American operator capital expenditures and customer inventory adjustments. This.

This decline was partially offset with new product innovations discuss throughout the last few quarters, such as our mosaic antenna solutions.

During the quarter, we saw our first meaningful orders of the Mosaiq antenna with large service providers.

It's also important to highlight that the lower North America service provider spending has been previously contemplated in our full year 2023 core adjusted EBITDA Guideposts.

<unk> net sales of $299 million decreased.

6% from the prior year due to project timing.

<unk> adjusted EBITDA of $50 million declined, 33%, primarily driven by lower revenue and product mix, which essentially represents a shift in customer spending toward more hardware centric and lower margin products like our nodes and amplifiers.

We expect that <unk> will deliver stronger EBITDA quarters. The rest of 2023 as project timing is second half weighted.

Finishing up the segments with home networks.

While net sales of $337 million declined 32% from the prior year across all business units driven by customer inventory adjustments and lower demand.

Home adjusted EBITDA of negative $3 million declined from $23 million in the prior year as a result of the lower revenue.

We continue to work on the transformation initiatives in home networks, including near term cost reductions. We continue to look for the right separation opportunity for the home business.

Turning to slide five for an update on cash flow.

As indicated on our prior call we expected the first quarter to be a use of cash because it is our second highest interest paying quarter and the timing of our annual cash incentive payouts.

That said for the first quarter cash flow from operations was a use of $346 million and adjusted free cash flow was a use of $40 million.

2023 cash flow from operations declined from the prior year, because the majority of our annual cash incentive payment occurred in the second quarter in 2022.

Our cash balance declined $71 million, which.

Alluded a use of $50 million to buyback debt.

Excluding the buyback cash balance declined only $21 million.

We expect to generate meaningful improved free cash flow for the full year of 2023.

As we indicated on the last call we would expect the midpoint of our EBITDA guidepost for 2023 to a little over $4 million to $500 million of adjusted free cash flow for the year.

Turning to slide six for an update on our liquidity and capital structure.

During the first quarter, our cash and liquidity remains strong we ended the quarter with $327 million and global cash.

In total available cash and liquidity of over $1 billion.

We did not draw on our ABL revolver during the first quarter of 2023, and therefore ended the quarter with no outstanding balance.

In the first quarter, we executed a debt buyback program and repurchased $57 million of our long term debt for cash consideration of $50 million.

To add more detail, we repurchased $47 million of the 8.25% senior notes due 2027.

$7 million of the 6% senior notes due 2025.

$3 million of the seven 125% senior notes due 2028.

We also paid the required $8 million of term loan amortization during the first quarter.

The company ended with an adjusted net leverage of $6, six which was below where we ended 2022.

Going forward, we intend to continue to reduce leverage and we'll buy back securities opportunistically across the breadth of our capital structure, when we see appropriate returns.

I'll now turning to slide seven where I will conclude my prepared remarks with some commentary around our expectations for the remainder of 2023.

Although our external environment remains challenged with lower order rates in the short term, we still expect to deliver 2023 <unk>.

Adjusted EBITDA in the range of 135 to $1 5 billion.

Again, the midpoint of this range already contemplates a relatively flat year over year top line growth.

This guidance is dependent on the recovery of our order rates in the second half, particularly in our Ccs and OWS segments.

As Chuck mentioned, we are implementing cost actions, including accelerating certain commscope next efficiency initiatives the.

The magnitude of this program will be dependent on how we see orders evolve over the next quarter.

We expect second quarter core net sales and adjusted EBITDA to be generally in line with the first quarter and improvement in the second half of the year as we expect to see a ramp in orders and cost actions.

As we continue to stress as a result of project timing and mix our business should be viewed on an annual performance basis rather than quarterly.

And with that I'd like to give the floor back to Chuck for some closing remarks.

Thank you Pal despite.

Despite the uncertain near term economic environment.

As Kyle and I have mentioned during our prepared remarks. This morning, we believe that our backlog and Commscope next initiatives provide a strong foundation for the company to continue to grow and create value.

I am pleased with our team's performance in the first quarter and we will continue to manage the things we control.

Our profitability profile has dramatically improved since the first quarter of 2022, driven by efficiency projects and pricing.

<unk> are a testament to that progress as we've improved those two segments EBITDA by $121 million over the same period of last year.

Again, we're aware of it.

So from a deleveraging standpoint.

Our next question comes from the line of.

Our targets.

And is that recovery going to be across both enterprise and service provider market or is it one space, we've seen it better but anything on the back half strengthened by your convicted that would be helpful.

Continues to get better, let's say as that gets adjusted that's going to help us and also on the enterprise businesses I would say the quote activity has improved a lot.

Okay.

What about the.

We have I would say strong opportunities mid term and long term.

Yes.

Okay.

Sure.

Okay.

Okay.

[music].

[music].

[music].