CommScope Company - Earnings Call - Q4 2019

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to the CommScope Fourth Quarter and Full Year twenty nineteen Conference 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. I would now like to turn the conference over to your host, Mr. Kevin Powers.

Speaker 1

Good morning, and thank you for joining us today to discuss CommScope's fourth quarter and full year twenty nineteen results. With me on the call are Eddie Edwards, President and CEO and Alex Pease, Executive Vice President and CFO. You can find the slides that accompany this review 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 see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance.

Before I turn the call over to Eddie, just a few housekeeping items to review. Today, we will discuss certain adjusted or non GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of non GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. All references during today's discussion will be to our adjusted results. Also note, the fourth quarter twenty eighteen results include historical ARRIS results reflecting certain classification changes to align to CommScope's presentation.

All quarterly 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, Eddie Edwards. Eddie?

Speaker 2

Thanks, Kevin, and good morning, everyone. Today, we reported fourth quarter sales that were in line with our outlook and adjusted EBITDA at the high end of our outlook. We're also pleased to report adjusted earnings per share above the high end of our guidance and that we generated over $300,000,000 of adjusted free cash flow. Similar to the third quarter, our results were largely consistent with expectations with the expect exception of, networking cloud software sales that were expected to occur in the first quarter of twenty twenty. In what remains challenging environment, our performance results reflect our commitment to strengthening the business and our solid track record of execution.

We are focused on taking action and actively managing operations to ensure CommScope is well positioned for organic growth in the near and long term. During the quarter, we maintained our focus on driving cost and operational efficiencies to deliver shareholder value. Turning to, specific business performance, let's begin with connectivity solutions. Despite a challenging copper enterprise market throughout 02/2019, we improved our position in copper infrastructure, extended our market leadership, and continued to lead the way with solutions and services focused on next generation application applications and intelligent infrastructure. Here are some examples.

As office connectivity moves from being in the walls to the ceiling, CommScope is actively in category six a capabilities and innovation to help customers manage the connectivity challenges of today and tomorrow. These include solutions for increased bandwidth and power over Ethernet needs from devices devices such as Wi Fi access points, video camera, Internet of Things, and indoor small cells. Our network cabling connectivity business remains soft as expected due to seasonal declines in fiber connectivity spending by international international tier tier one carriers and slower fiber to the home deployments by North American carriers. However, this was somewhat offset by a modest recovery in fiber cable, coax and passive subscriber devices, and tier one cable operators. This trend is encouraging and demonstrates the additional capacity is being added to the networks.

Tier two and tier three cable operators spending continued to be strong on the back of US the US government's rural broadband fund initiative. To assist our customers with these deployments during the quarter, we released the first family of products from our Nobux connectivity platform. Nobux features a new jail ceiling system, new identification technology, and common construction between products to allow for ease of use. We are seeing good momentum with European operators and alternative network providers looking for gate greater simplicity to train installers and network managers, and we're excited about its potential. Our inside plant business was down modestly versus our prior year, largely due to enterprise seasonal spending and continued weakness in China with the current trade environment.

However, our hyperscale and cloud data center business thrived during the quarter as hyperscale customers expand data center bills outside of North America. We continue to improve our position with these large customers as we apply focused resources to customize our portfolio to their needs. To support this effort, we are investing in products that feed the demand for higher fiber counts and greater density. Our ability to rapidly develop deliver these customized solutions at scale around the world is a key differentiator for Comsco. In mobility solutions, we continue to shift infrastructure for five g ROAS to leading carriers while also helping them densify and virtualize their networks in preparation for five g.

For example, our base station antenna business, we are releasing new products and incorporating incorporate five g spectrum while retaining the same physical footprint. We have built a leadership position with North American operators, and we are leveraging our expertise to win new business in Europe and other international markets. In our metro cell business, which features fully integrated smart poles and street furniture for services such as urban cellular, Wi Fi, and IoT applications such as security cameras or traffic management, management, we continue to see growth in The US for four g and five g deployments. Expansion is happening though not only in large urban areas, but also in tier two cities and municipalities where they have recently obtained zoning approvals. We're also supporting deployments outside the Continental US with key projects in Alaska and Puerto Rico as well as growing interest from Latin American markets.

In our distributed antenna systems and indoor small cell business, we are making progress across all product lines. Era, our digital desk solution with C band architecture, is quickly becoming popular with enterprise customers where revenues nearly doubled this year. We expect continued growth in 2020. OneCell, our industry leading indoor small cell platform, received additional approval from a major US operator for our next generation of radio points that brings multiband and multi operator support and are five g ready. We're also developing a five g millimeter wave o l n one cell solution for another major US operator.

Moving to our CPE business. In the quarter, we had successful field trials on self installable LTE fixed wireless access gateways, an important element of our plan for fixed wireless access devices. We saw positive Net Promoter Scores on our DOCSIS 3.1 gateway deployments in Europe, and we see growing demand for both IP set tops and DSL gateways in The Americas. And lastly, we drove a sequential increase and adjusted EBITDA in this business. We finished the year with the best quarterly EBITDA performance of 2019 with a nearly 50% increase versus last year.

Turning to networking cloud, we continue to broaden our virtualized and distributed access platforms as operators shift steadily towards DAA and virtual CMTS. We completed a major release of our vCore virtual CMTS product, which will prepare us for operator deployments in early twenty twenty. We also completed deployment and development of our Remote PHY shelf product, which enables operators to place multiple RPD modules in a single chassis for data distribution from remote hubs. Also, we expanded our broad distributed access portfolio with the launch of our remote optical line terminal module. Similar to the RPD modules, remote OLT allows operators to plug modules into new or existing distributed architecture nodes.

This new module supports 10 gig in Ethernet PON networks and provides operators with the ability to add passive optical networking to their broadband distribution networks. The product is currently in early field deployments with a major operator in Japan and in trial with US operators. Turning to our ruckus Wi Fi and switch, portfolio, we exited the year with better than expected Wi Fi six as Wi Fi six orders spiked on the heels of our r seven fifty introduction, and we saw nice growth in our cloud managed Wi Fi subscriptions. In addition, we're very excited about the upcoming launch of our cloud based analytics platform that uses learning to detect network anomalies and provide actionable insights. Turning to our switching portfolio, the Ruckus I c x seventy eight fifty, which enables modern, high performance 100 gig capable enterprise networks, one product of the year in network category from, CRM.

This product completes CommScript's offering of of Ethernet switches. In addition, we saw continued execution of cross selling the switches and access points together. The successful adoption of both sets of products by a common customer base can be seen by the rapid growth in attachment rate of switches to the smartphone network controllers. And finally, we are founding members of the CBRS alliance, and we're excited to launch the CBRS LTE portfolio, including access points and cloud services. These new devices and services combined with our existing SaaS and environmental sensing capability helps us maintain a leadership position in the enterprise market.

In conclusion, while 2019 was certainly a challenging period for CommScope, our industry at large, and our investors, when I reflect upon the accomplishments of the past year, I'm incredibly proud of our CommScope team. Our people have shown great resilience and tenacity to transform our organization and have made considerable progress positioning the company for future future growth. Now I'd like to turn the call over to Alex who will discuss our fourth quarter performance in more detail and our outlook for the first quarter and full year 2020.

Speaker 3

Alex? Thanks, Eddie. Before we discuss the details of the quarter, I'll start with a brief review of 2019. For the full year, net sales of $8,350,000,000 increased 82.7% year over year, primarily due to the contribution of $4,030,000,000 from the ARRIS acquisition. As a combined company, net sales declined 13.8 to $9,760,000,000 which includes approximately 1% impact of unfavorable foreign exchange.

Full year sales were down across all geographic regions as we faced a significant reduction in cable operator spending, geopolitical trade tensions and a temporary pause in spending due to the pending T Mobile and Sprint merger. For the full year, adjusted EBITDA increased 42% to $1,300,000,000 or 15.5% of sales. Combined company adjusted EBITDA declined 20% to $1,370,000,000 14% of sales. Adjusted net income for the year was $479,400,000 or $2.15 per diluted share as compared to adjusted net income of $442,500,000 or $2.27 per diluted share last year. Included in these adjustments to net income is a $376,100,000 noncash goodwill impairment charge that we took in the fourth quarter related to our ARRIS reporting units as a result of our annual goodwill impairment test.

Since the closing of ARRIS, these reporting units have experienced challenges that impacted our performance, including declines in spending by cable operator customers that resulted in declines in net sales and operating income as well as the loss of key leaders following the acquisition. We initially anticipated a recovery in spending by certain customers starting in 2020. However, during our annual strategic planning process in the fourth quarter, a number of specific factors arose, including an assessment of historical and future operating results, key customer inputs, new assessments of market trends, anticipated costs required to support the changing market dynamics dynamics which affected each one of these reporting units. As a result of these factors, we expect a more prolonged recovery, and we concluded that the fair value of each of the ARRIS reporting units was less than its carrying value resulting in the noncash goodwill impairment charge. Moving to Slide seven, I'll cover our fourth quarter consolidated results.

In the fourth quarter, net sales increased to $2,300,000,000 primarily driven by the benefit from the Eris acquisition, which contributed $1,330,000,000 Eris sales in the fourth quarter include a $13,200,000 reduction of revenue related to deferred revenue purchase accounting adjustments. Combined company net sales declined 19%, which includes a less than 1% impact of unfavorable foreign exchange. Fourth quarter sales were down largely due to the same factors that impacted our full year results. Consolidated orders for the quarter were nearly $2,500,000,000 providing a book to bill ratio of 1.08. For the fourth quarter, adjusted EBITDA increased 54.6% to $323,600,000 or 14.1% of sales.

Combined company adjusted EBITDA declined 18.4%. However, EBITDA margins did improve 20 basis points to 14%. The adjusted EBITDA results were primarily driven by lower volumes, particularly in network and cloud and connectivity solutions. We partially offset this softness with favorable commodity and raw material pricing as well as lower operating expenses as a result of the aggressive actions we have taken to preserve profitability as we manage a difficult operating environment. To that end, our synergy and cost saving actions for the year continue to track ahead of plan.

We continue to expect to exceed our stated goal of an annual run rate cost saving synergies of $150,000,000 ahead of the third anniversary of the close of the transaction. Finishing up the p and l. Book net interest expense was a $153,600,000. Excluding the amortization of debt issuance costs and an OID of $7,900,000, cash interest expense was a $145,700,000. The adjusted effective tax rate in the quarter was 20.7% versus our expected range of 27 to 28%.

The favorability in the fourth quarter was the result of lower than expected US US tax costs on foreign earnings. Adjusted net income in the quarter was a $106,600,000 or 46¢ per diluted share as compared to adjusted net income of $99,800,000 or 51¢ per diluted share last year. Moving on to our segment results. Connectivity Solutions segment sales for the fourth quarter decreased 9% year over year to $606,000,000. Sales were soft across all geographic regions, most significantly in the Asia Pac region as well as in Latin America.

As expected, results were negatively impacted by softness in the network cable and connectivity business. This was driven by spending declines by international cable operators and the continued trend of capital spending reductions on major projects by the large North American carriers. This trend was partially offset by continued strengthening within the North American cable cable operators in Tier two and three carriers. Within enterprise, sales declined most significantly in copper markets, particularly in China, as local brands continue to take preference as a result of geopolitical tensions. Despite this decline within the overall segment, our hyperscale business continued its momentum with double digit growth as we deliver key wins with major customers and their global data center build out.

Turning to profitability. Adjusted EBITDA was down about 32% year over year to $91,000,000 with adjusted EBITDA margins of 15.1%. The decline was primarily due to unfavorable mix with lower sales in our higher margin fiber connectivity portfolio and lower volumes given the high fixed cost nature of our connectivity supply chain. Moving on to mobility solutions. Segment sales for the fourth quarter decreased 6% to $366,000,000, primarily impacted by a pause in spending related to the T Mobile and Sprint merger.

This order delay impacted fourth quarter mobility sales by over 7%. While macro tower sales declined primarily due to the merger uncertainty and our decision to continue exiting unprofitable business in India, we delivered continued growth in our DAS and Metro Cell businesses. Operators continue to focus spend on densifying their networks, and this led to triple digit growth in Metro Cell deployments in the fourth quarter. We've now deployed more than 10,000 Metro Cell solutions in The US and expect to continue building on our momentum in the next decade. In the quarter, mobility adjusted EBITDA decreased over 11% to $55,000,000 or 15.2% of sales.

Adjusted EBITDA declines were primarily driven by lower pricing and volume, partially offset by favorable geographic mix and manufacturing cost reductions. Turning to Slide nine. CPE fourth quarter net sales were $824,000,000 a decrease of 25% from the prior year. While revenue declined year over year, adjusted EBITDA increased 48% to $72,000,000 resulting in EBITDA margin expansion of four thirty basis points to 8.7% of sales. The margin expansion was the result of continued lower material costs and aggressive actions to contain costs while sales volumes are pressured.

CPE revenues were impacted by increasingly weak demand from both Tier one carriers and Tier one cable operators. For Network and cloud, fourth quarter net sales were $366,000,000, a decrease of 32% year over year. Adjusted EBITDA was $97,000,000, a decrease of 36%, while adjusted EBITDA margins declined 26 to 26.5% of sales. The networking cloud sales continue to be attributed to the lower levels of cable operator spending. As the demand for bandwidth in both the uplink and the downlink continues to grow at a 30% to 50% rate.

Recent operator commentary confirms that their shift of capital expenditures will start to migrate back to network infrastructure investments going forward. We remain confident that network and cloud sales bottomed With underlying consumer bandwidth demand continuing to grow, coupled with our investments in virtualized and distributed access architecture platforms, we remain in a strong position to guide operators through the 10 g network infrastructure investments that they will deploy within the coming decade. Moving on to Ruckus. Fourth quarter net sales were a $138,000,000, a decrease of 9% from a year ago.

Adjusted EBITDA was $8,000,000, an increase of approximately $9,000,000 from the prior year. Despite lower sales volume and what's been historically, very high fixed cost business, adjusted EBITDA margins of 5.8% improved over 600 basis points from the prior year from favorable mix as well as cost savings and efficiency plans that we've executed over the year. We expect trends such as the introduction of Wi Fi six and cloud based architectures to positively impact the business in 2020 and beyond. Returning to our consolidated results, I'll address our cash flow on Slide 10. For the full year 2019, we generated $596,000,000 in cash flow from operations and $793,000,000 in adjusted free cash flow.

During the fourth quarter, cash flow from operations was $336,000,000 and adjusted free cash flow was $323,000,000. These amounts exclude cash paid for transaction and integration and restructuring costs. Adjusted free cash flow also reflects a $78,000,000 benefit from certain payments that would normally normally have occurred in the fourth quarter of twenty nineteen, but were made in the first quarter of twenty twenty because of the timing of the holiday. Despite our sales headwinds, the team has done a remarkable job delivering significant cash flow above our original expectations. While a portion of the cash flow benefit is associated with onetime working capital improvements that we don't expect to repeat, driving working capital primarily through inventory management will be a continued critical focus throughout 2020.

Given the significant cash generation in the second half of the year, we redeemed over $500,000,000 of long term debt since the close of the ARRIS acquisition, which has resulted in annualized interest savings of over $25,000,000. As we continue to aggressively pay down debt, the EPS accretion from the reduced interest burden will only continue to grow and become more meaningful over time. Now let's dig little a bit deeper into our capital structure. As we close the quarter with a net leverage of 6.3 times combined company adjusted EBITDA. For this purpose, adjusted EBITDA includes a $113,000,000 of synergies and other cost actions that we expect to realize over the next two years.

Because of the significant cash flow generation during the fourth quarter, we redeemed $300,000,000 of our 5% senior secured notes due in 2021 throughout the quarter as well as a mandatory $8,000,000 principal payment on our term loan in late December. In addition, subsequent to the end of the fourth quarter, we redeemed an additional $100,000,000 of the 2021 notes, leaving balance of $50,000,000 outstanding, which we expect to fully redeem over the first half of twenty twenty. Our original expectation was that debt repayments in 2020 wouldn't begin until the second quarter, and we're pleased to be ahead of that schedule. With that, I'll provide some perspective on our 2020 qualitative outlook. Before I begin, as a reminder, we announced a new operating model where we condensed our five previous segments into four.

This new operating model went into effect on January first, of twenty twenty. These four new segments are broadband networks, venue and campus networks, outdoor wireless networks, and home networks, which was previously called PPE. On slide 12, you'll find the underlying business units that comprise each of these four segments. You can find twenty nineteen pro formas in our news for our new segment structure in the appendix of our earnings presentation found on our Investor Relations website. Now turning to our full year assumptions.

For broadband networks, we expect modest growth in 2020. We expect growth in the major geographic regions, most pronounced in North America and Europe. Within the underlying business, we expect growth across most business units as operators pick up their network investments in 2020. While we don't expect any snapback to the 2018 levels of spend, we are encouraged by this growth trend as operators begin to chew through the overcapacity that was built out in 2018. Given these factors, we expect to grow broadband networks EBITDA driven by the volume shift associated with an increased focus in network capital spending by operators as well as efficient execution of our cost reduction initiatives.

For outdoor wireless networks, as we've previously stated, we expect the operator's short term focus to be concentrated on densification efforts, will benefit our metro cell solution significantly. This will precede the more intensive efforts of upgrading their macro cell towers as more spectrum is released and the upgrade refresh cycles begin to play out in 2021 and beyond. As a result of this dynamic, we expect outdoor wireless sales to be modestly down for the year as the growth in densifying the metro layer doesn't offset the cyclical shift from the macro side for 2020. In addition, we now expect FirstNet orders to moderate more than originally expected given the program is expected to be completed early. That being said, the earlier the T Mo Sprint merger closes, the more potential upside it could provide in 2020 given the network investments required to deploy the Sprint spectrum.

Lastly, we also expect return to more normal seasonal, trends within the year as 2020 will be less first half weighted than 2019. From a profitability perspective, we expect to offset a significant portion of volume, mix and pricing impact of the macro cell tower to metro cell shift through our profit improvement plans. These will be particularly focused on optimizing margin and production processes of our highest growth areas in the metro cell and other fiber products. However, when factoring in operating expense headwinds, this will result in an overall EBITDA decline for the segment. Regardless, we remain very excited about the opportunities ahead as carriers prepare their networks and launch their competitive campaigns to build out five g services.

The early twenty twenties will provide for deeper engagement and partnership with OEMs, familiar tier one carriers, as well as some aggressive new faces in the quest to build out the greatest network infrastructures the world has ever seen. Our venue and campus network segment segment is bolstered by the growth pillars of hyperscale data center builds, era distributed antenna systems, one cell small cell, and Ruckus WiFi and switching. With 80% of data consumption taking place indoors, our Venue and Campus business will provide licensed and unlicensed solutions and the required cabling, connectivity, access points and switches, essentially a one stop shop for stadiums, office buildings, hospitals, college campuses, and other enterprise applications. Therefore, we expect sales to grow in the mid single digits for 2020. This growth potential requires us to concentrate not only on the current year, but more importantly, investing for the future.

We expect the sales growth to be outpaced by the R and D investment costs resulting in an overall EBITDA decline segment for the year. Now to our home networks. Home networks faces a significant challenge this year as operators and carriers continue to deal with material subscriber losses. While we're optimistic at the eventual offset and shift of growth to broadband gateways and modems, we realize that DOCSIS three dot one, DOCSIS four dot o, and PON growth drivers won't begin to drive improvements until the second half of twenty twenty and beyond. Given these dynamics, we expect home network sales to be down about 20% this year, which is a larger decline than our initial expectations.

As home networks top line trends are challenged, the team is taking every available action profitability. While EBITDA margins are expected to be relatively flat over the year, considering the anticipated top line decline, we expect home network EBITDA dollars to decline this year. Taking all of these segment assumptions into account for 2020, we expect total sales to modestly decline on a consolidated basis. Consolidated gross margins are expected to expand due to performance results within each of the segments and from the favorable mix impact that results from lower home network sales. In addition to gross margin expansion, we expect operating expenses to benefit from cost synergies and cost reduction actions.

However, in 2020, we expect to make additional investments in high growth areas of the portfolio position the company to capitalize on future market opportunities. These strategic investments, combined with natural expense inflation, will result in operating expense growth year over year. Bringing it all together from a profitability perspective, we expect total EBITDA margins to expand, and we expect EBITDA dollars to be consistent with last year on a combined company basis. That being said, the company is working with a renewed sense of urgency to accelerate cost savings and deal synergies where appropriate with the goal of maximizing profitability across the organization. In 2020, we expect adjusted free cash flow of around $400,000,000 and debt pay down of around $450,000,000.

As a reminder, our fourth quarter cash flow was better than expected and also benefited by $78,000,000 from the payment that would normally have occurred in the fourth quarter of twenty nineteen, but for the timing of the holiday. Finally, a few additional assumptions to help you model for the year. In 2020, we expect an adjusted effective, tax rate of 26 to 27%, a fully diluted share count of approximately 237,000,000 shares, capital expenditures between a 110 and a $130,000,000, cash interest expense between 570 and $580,000,000, cash taxes between 130 and a $150,000,000 and integration, transaction and restructuring cash expense in the range of 60,000,000 to $70,000,000 Moving on to our guidance for the first quarter of twenty twenty. From a segment standpoint, in the first quarter, we expect broadband network sales to sequentially decline in the upper single digits in line with normal normal networking cloud seasonality, but with a mix of more hardware than software. Venue and campus network sales will modestly decline quarter over quarter.

Outdoor wireless network sales will increase sequentially around 20%, and home network sales will decline quarter over quarter between 2530%, while home network sales normally seasonally decline in the first quarter, this pressure is continuing to be exacerbated by spending declines at a large North American carrier. In addition to in addition, in reference to our guidance range, given the substantial uncertainty regarding the coronavirus situation, we're providing a wider than normal guidance range in the first quarter. Today, we're operating about 40% to 50% capacity, and we're slowly ramping back to more normal staffing levels. We anticipate volumes to recover as we move throughout the year. Given the fact that a portion of our raw materials and products are sourced directly from Mainland China and a significant piece of our international shipments are also manufactured in China, we are factoring in an approximately $60,000,000 adjusted EBITDA negative impact from the coronavirus in the first quarter.

We would expect to recover the majority of this impact as the year progresses. Based on these assumptions for the first quarter, we expect revenue between $1,900,000,000 and $2,100,000,000. Non GAAP adjusted EBITDA between 180 to $260,000,000, and non GAAP adjusted earnings per share between $03 and $08 Additional assumptions include adjusted effective tax rate between 2527% and a weighted average diluted share count of approximately $236,000,000 shares. And with that, I'll turn the call back over to Eddie for

Speaker 2

some final remarks. Thanks, Alex. The upcoming year will be a mix of challenges and opportunities impacting our business. That being said, we're focusing on making improvements across the business to to strengthen the organization, our go to market strategy, and our pro product portfolio. We have repositioned our portfolio to capitalize on key shifts in the marketplace, including Wi Fi six and the ongoing shift to five g.

By focusing on our customer needs, we've developed unique and innovative products to further differentiate CommScope from our competitors. We have armed our go to market team with powerful solutions. As we look ahead to 2020, we'll take the same approach to address and capitalize on the market dynamics, remaining commit committed to aggressively cutting costs while not sacrificing investment in the business. Importantly, we're ahead of schedule on our cost reduction targets and debt repayments and expect to continue paying down debt in 2020 given our free cash flow generation. With a dedicated and talented team, their portfolio of innovative products, and a clear road map in place, we're well positioned to lead the next phase of communications connectivity.

And with that, I'll turn the floor open for questions.

Speaker 0

And your first question comes from Simon Leopold with Raymond James.

Speaker 4

Great. Thanks for taking my question. Appreciate all the detail you've offered. Wondering if maybe we could drill down a little bit in helping us understand some of the patterns for the biggest North American operators, particularly AT and T's CapEx tends to have a lot of moving parts in vendor financing and interest expense and FirstNet. And you're obviously a relatively small part of that overall spending.

So if you could help us understand the trend there as well as your comments and maybe your thinking on the T Mobile Sprint, what you're assuming in terms of how that combination affects your business through the year? Thank you.

Speaker 2

Okay. Thanks, Simon. AT and T, while we are a small part of their overall build, it is an important customer to us, and we sell them product throughout portfolio. And so we're impacted by what happens at DIRECTV from the standpoint of our ARRIS business. That's not a positive indication from that standpoint.

We also are a primary antenna supplier to them, both in FirstNet as well as their, their their network as a whole. You know, when we, when we talk first started talking about FirstNet maybe four years ago, we said this was gonna be a three to four year project. I think I think we're in that range and and going toward the end of that. We still see revenue for the certainly the first part of the year but but declining. Now I think I've said on on some of these calls before, you know, it's hard for us in many cases to know if we're selling a FirstNet deployable antenna or or one for, for their traditional network because the antennas are extremely similar.

So we we expect, you know, continued, presence in that marketplace and, you know, ready to deploy a new and upcoming. Antennas and I think. As I said in my remarks earlier the the ability to put. More frequencies inside a a rate home of the same size. Is is hard to do.

I think we have unique skill in doing that. And so we look we look to continue the improvement in that relationship, and I I think the the relationship with them is extremely good. We see a great opportunities with one cell. It's fully approved at AT and T. We've had a significant trial of a million square foot deployment, so that's that's a large trial to start with.

And we have a lot of possibilities in the queue right now that we're working on as they see, and and we believe that this is a a unique game changer in the in building environment as well as small venues and so that that's something that we think will be a good part of the business during the course of this year. So we we are well positioned throughout the the entirety entirety of of the the of the AT and T network. As it relates to T Mobile and Sprint, I think what what we have said is that we sort of put this thing sort of down the middle of the fairway as to as to what this year would be, not knowing when approval we we anticipated approval, but not knowing when it would happen. And, you know, we're getting closer. But if it starts, you know, in the in the early months or early quarters, this this could be an upside for us because we we just assume sort of the middle of the road position.

We are a as as with the other US carriers, we are a major supplier to them for not just antennas antennas but but but other products in their network. Our position is is well established and and I think the relationship's excellent. We've been working with them on the new antenna designs anticipating this this merger happens. And so I think as it comes, we're ready. It it was a negative in indicator in the in the end of the year as they stop stop spending awaiting the merger.

So, you know, as soon as it happens, we would expect some pickup there.

Speaker 3

Great.

Speaker 4

Thank you very much. Okay.

Speaker 0

Your next question comes from Sami Badri with Credit Suisse.

Speaker 5

Hi, thank you. There's been a lot of industry discussion around CBRS and you are a founding member of the CBRS Alliance. But what are some of the implications of CBRS growth in the rest of your product portfolio as this product group begins You're hearing a lot of CBRS partners starting to come up and emerge. Just trying to understand what are some of the implications of some of your other product lines as this segment begins to ramp up?

Speaker 2

Well, you know, as opposed to just being a product supplier, we we operate a SaaS, and so, we will be one of the the companies that maintain the the integration of the network and how it flows, the information flows, and how, how each of the the participants in the, in the network are able to access the network working working with the government. And so we, we're ready, ready for that. We we are a major provider for the capability of private networks, which, you know, for CBRS will be a game changer. And so I think from a hardware standpoint, we're well positioned. From the operation of the SaaS and understanding what is happening in the network, I think we're well positioned as well.

So I think we have the full complement of being a provider of service as well as a provider of product.

Speaker 5

Alright. Thank you. And then just on debt paydown cadence through 2020, could you give us any kind of color maybe this is a question better for Alex any kind of color on cadence throughout the year? Should we think of this as a similar path to 2019, or is it gonna look a little bit different in 2020?

Speaker 3

Yeah. So a couple of, comments on both 2019 and 2020 as it relates to cash generation and debt pay down. 2019, we worked the balance sheet extremely hard. We took a lot of inventory out of the system, and then we really tightened up our discipline around working capital. We'll continue as we get into 2020 to continue to, you know, deploy all of our tools, managing inventory very, very tightly.

But, obviously, ultimately, cash generation requires EBITDA, EBITDA growth. And so to the extent we're looking at a relatively flat year over year comparison from EBITDA growth, you know, we we would not anticipate the same working capital, benefits. In terms of cadence through the year, it's, pretty back half weighted. We we typically see a seasonally weak first quarter, and then it strengthens as we go through the year. And we would anticipate that trend this year as well.

The only real exception is that there's some significant growth. If you look at the sort of quarterly cadence of earnings, we expect the the year over year growth to accelerate as we get into q three and q four, which will require some additions to working capital. So you likely won't see as strong a fourth quarter, as you as you get this year. So, you know, I'll put all that together. You say, okay.

Weak q one from a cash flow generation standpoint, you know, strengthening in q two, peaking in q three, and then probably weak in q four.

Speaker 5

Got it. Thank you. And then my last question is to do with the Ruckus business in campus and even the launch and release of Wi Fi six products, how is that materializing? Are customers, taking in WiFi6? Are they testing it?

Is it starting to ship en masse? Like, maybe you could just give us any real color on traction for specifically the WiFi6 standard and all the boxes that were recently released?

Speaker 2

No. We're, I think we're pleased that, at what we're seeing. I think, you know, we were the first, live introduction of WiFi five WiFi six product in the marketplace. I think the acceptance rate is good. And, you know, we're we're we have the capability providing the the connectivity for these access points as they go in the market because they, you know, they need they need throughput at a at a different different pace.

And so I think we're pleased as as the start of this is deployable. And and as said earlier, both both here in The US and and and international markets.

Speaker 3

The only thing I'd add, Sammy, to to Eddie's comments, which isn't necessarily Wi Fi six specific comment, but I think it's important for you to recognize is that we're now in the market with a cloud, solution to manage all of the access points and all of the architecture in the network. This is, you know, extremely exciting because that's really where the market's heading. And so, you know, being able to offer a a, you know, highly competitive, highly differentiated cloud solution with all the analytics analytics and machine learning capability embedded in it, you know, it's something that really provides a strong growth tailwind for, for 2020 and beyond.

Speaker 5

Got it. Thank you. Thank you for the color.

Speaker 0

Your next question comes from Amit Daryanian with Evercore.

Speaker 6

Yes. Thanks a lot guys for taking my question. Two for me as well I guess. First off on the March guide I think you're implying sales are down about 13% sequentially. That seems more severe, I think, than what core CommScope or even Erisa historically.

Could you just touch on what's driving that? And how much of a headwind on the revenue side are you embedding from coronavirus implications?

Speaker 3

Yes. So I guess the first point on the the weakness for for q one is really related to the decline in spending from one of the large North American operators that Eddie was referring to, earlier. So it's, you know, it really predominantly focused in the home networks side of the business. We do have just some normal seasonal softness. Q one tends to be one of our softer our softer quarters sequentially, particularly in the networking cloud business.

There's a lot of sort of capital flush happens at year end, so so you see that phenomena as well. Then we, we really have the coronavirus impact. It's, you know, very fluid at the moment, I would say. So we're modeling into our guidance about a $100,000,000 top line impact. The factory, as I mentioned in my remarks, is operating somewhere between 4050%.

As people come back to work, to the extent we can get back to more normal capacity levels, we expect we can recover all of that lost revenue and margin over the balance of the year. But but China is a significant piece of our manufacturing footprint. That's where we basically manufacture all of our products for non North American markets. And, you know, roughly a third of our our cost of goods sold is is represented there. So it is a it is a material, material market for us, and and we're, you know, trying to factor that into our guidance as best as we can given given what we know today.

Yeah. We we follow, what's happening there on a every other day basis.

Speaker 2

And, basically, representatives from throughout the company, Alex and I, on the on on those calls, you know, we wanna monitor health and safety of our workers, as well as the health and safety of our, suppliers and and and customers. So it's, it's, something that, you know, we we certainly hadn't planned for. And and, you know, we will address it as best we can. And and, you know, if we have to if we have to make shifts to to anticipate happenings there, we will. So it's it's a tragic thing.

Speaker 6

No, that's extremely helpful. And if I could just follow-up, I think about your calendar 2020 statements, especially on EBITDA dollars being flat, I think year over year, can you just help me understand and perhaps even quantify, a, how much are you thinking in terms of growth that you talked about and investments you're making in some of the areas? So what's that growth dollar number look like? And where are you investing those dollars really? And then secondly, how should we think about the restructuring savings that are expected in calendar twenty twenty, if you could quantify that as well?

Speaker 3

Yeah. So, so in terms of of investments that we're making, you know, the the the one of the places that we're most excited about is really, call it, the intelligent enterprise the intelligent enterprise space. And so this is all the venue campus in building opportunities that we that we have. So these are products like OneCell, where we're actively investing in making that five g ready and compatible with with millimeter wave type deployments. We're making investments in the metro cell layer where a lot of the densification work is going to happen.

We're making, investments with some of the OEMs on active antennas, which are gonna be extremely relevant, as we get into the higher, frequencies. So so those are just a a couple of examples. If you switch if if you and those would all be, embedded within a combination of the outdoor wireless portion of the business as well as the venue and campus portion of the business. Within, within Ruckus, we're continuing to invest in these advanced analytics and cloud platforms. We're investing in, CBRS, which was one of the questions earlier.

All of these are multiyear investments that'll, position the company for very strong growth as five g gets deployed. In total, you know, those investments are in the order of, call it, 50 to $60,000,000, incremental. And so that's one of the reasons why you see, you see some of the the flat trends despite growth in some of our higher margin businesses. We think, you know, that's the right thing. We're positioning company for longer term growth, and and that's really the the the right things to do.

Perfect. Thanks a lot, guys.

Speaker 5

Thank you.

Speaker 0

Your next question comes from Jeff Kvaal with Nomura Instinet.

Speaker 7

Yes, thank you gentlemen. Let me ask a question and then a follow-up. The question is, so we've heard some more encouraging things out of The U. S. Cable community as you referenced on the call.

How much of that have you included into your outlook for that particular segment? And is that something that happens really more beyond the first quarter and into the second and the back half of the year?

Speaker 3

Yes. So it is I would say that spending at the large operators, we anticipate to be stable year over year. And I think if you look at most of the public commentaries in aggregate, on their CapEx outlook, it would look, look that way. We are anticipating growth in our predominantly the former, network and cloud business as operators are beginning to invest in capacity in their networks and, kind of coming back to more normalized spending. We we don't anticipate that really springing back to 2018 levels, in 2020.

We do anticipate the growth rates accelerating as we get through the year predominantly kind of q three and and q four, But but we do anticipate that business returning to growth. There is, there are some headwinds, against it, which you'll see kind of in the consolidated results. And those are really related to a large North American telecommunications operator that's essentially completed the build out of one of their their network strategies. And then another telecommunications operator who's who's really not continuing to drive, fiber all the way to the home. So those factors will offset, but it but in aggregate, you know, we do anticipate, call it, low single digit growth from the the operator spending this year.

Speaker 7

Okay. And then secondly, could we, clarify the Sprint, T Mobile, pickup? I I wasn't clear if you were expecting a pickup sort of right after close and that theoretically could even be as soon as the beginning of the second quarter. And then sort of more deeply on that, to what extent your share position should benefit from the merger?

Speaker 2

They exited the year very soft. I think we talked about that, I think, at the last call as what we saw coming. They entered the year likewise, but, you know, we expect now with with approvals basically being done that that that will start to pick up as we get closer. Our our position is very strong at T Mobile. We had a position that's that's Sprint as well, although they spent a lot less.

But our position at T Mobile is is very strong. We've been designing antennas specifically for their networks for, for the bulk of the year in anticipation of this. So, you know, if it if it's early on, as I said before, that's a that's a positive thing for us because we anticipated this sort of down the middle no huge increase in the projections that we put together.

Speaker 7

Okay. Thank you both very much.

Speaker 3

Your

Speaker 0

next question comes from Meta Marshall with Morgan Stanley. Great. Thanks. I mean, just trying to kind of put a wrapper around kind of what downtick from your expectations around from last quarter? Is it really FirstNet finishing quicker than expected or DIRECTV kind of spending being net incrementally down?

Just trying to kind of from where you were expecting last quarter, what changed? And then maybe just a second question, just on the hyperscale penetration. Is that something where you really feel like your share could continue to grow this year? Or just kind of expectations for what you're seeing as far as, you know, you've improved your position, but could that improve further? Thanks.

Speaker 3

Yeah. Let me I'll take a couple of your questions, then I'll I'll turn it over, to Eddie, on some of the other issues. So in terms of what changed in our expectation, I you know, the biggest thing is obviously the coronavirus, pressure that I think nobody could have anticipated the threat of a a, you know, global pandemic impacting the supply chain as severely as it as it potentially could. And so that obviously is something that we're trying to factor into our our outlook, and we're, you know, actively developing contingency plans to mitigate that. I think the other big piece is, within the home, the home network side of the business.

So, as you know, you know, there's, pretty significant decline in one of the major, tier one, telecommunications players in terms of the the the CPE that they're deploying. And I think also the, you know, subscriber video subscriber losses across all the tier one operators is, is is pretty severe. And so I think that's, really a headwind that's probably, bigger than than what we anticipated. We do we do have, areas that I think are developing, much better than we anticipated. So I would point to the metro cell business, the triple digit growth or double digit growth in the the hyperscale business.

And I think all of the areas that we're positioning the company for five five g are actually, you know, on track to exceeding our expectations, but really just haven't gained the full momentum, quite yet. But I'll let Eddie comment more on the specific hyperscale dynamic.

Speaker 2

On hyperscale, that what what we've talked about and openly, I think, as to where we are we're in the market. We we were and are still not the leader in that market. We we were late in the market because of, portfolio. We had to develop, we had to develop a portfolio that was sellable to this this large customer or the the large base of of big customers. I think we've done a great job in doing that.

We've we've put a lot of emphasis on taking care of the customer and their needs, as I talked about earlier in in the prepared prepared remarks. And so we are gaining position, relative to the market. We we believe. We, we think our footprint, our geographic footprint, and now the the portfolio that we have of products are what the customers want. And so I think vis a vis others in the market.

I think our position is is growing. And I think we'll see that during the course of this year in a in a strong way. And and I think we will we will we will continue to a to a point as we become a more relevant player in the market. So we're excited about it. That as as well as the multi tenant, customer base, which has been a long term customer of ours.

It's a very similar architectures in many cases. So we think it is gonna be a continuing and growing market, and and we're happy for our international presence that that gives us strength in it.

Speaker 0

Great. Thanks. Your next question comes from Samik Chatterjee with JPMorgan.

Speaker 8

Hey, thanks for taking the question. If I can just follow-up firstly on the coronavirus guidance that you have for the first quarter, how are you thinking about the spillover effects of the supply chain disruption here into 2Q? And I think last quarter you had mentioned that by end of 4Q most of your set top production would be out of China. So I'm just curious which segment should we think this impacts the impact is more pronounced in, in January?

Speaker 2

Well, you know, as Alex said, it's it's more international business than it is, domestic. And so we we shifted because of, I guess, our issue of last year with the with the trade and tariffs. We shifted much of The US production of certainly of antennas to India. And so China's used primarily for other places as as we we don't want to absorb the the tariffs which are still in place. We, what Alex said is that the the impact on the profit side in the first quarter is about $60,000,000 that that equates to something greater than a $100,000,000 in revenue, based upon what we see today and and some estimations of when work gets back in place.

A lingering concern that I would have is is, you know, we we know where our factories are, and they're not in the to date, they're not in the the the problem areas. But we have a supply chain that is very strong in China that supports a lot of our businesses that is all over the country, no different than anybody else that that buys things and and makes things today. And, you know, we we want we'd like to see some stability of the of the virus as as it spreads or matches out or whatever as to, as how that will be impactful going forward. So it's this is not a good thing for business because of, the importance of that supply chain. I think that we're no we're no different than any other player in the market.

So

Speaker 8

Got it. And if I can just follow-up on your antenna business, you are a major player in North America. How's the how's the what's the market position in, Europe? And how are you thinking or kind of what's situation on the ground as you compete with Huawei there? And, given some of the recent scrutiny, what what is the opportunity that you're seeing there?

Speaker 2

I think we're seeing some improvement in Europe, you know, some of the new designs that we have and and, you know, outside of outside of North America and Europe, Huawei is more of a competitor. And, you know, that's the challenge. It's the the the antenna business that we used to do in in a lot of Asia is is smaller. But I think we still have a good presence in the in the Cal region, and we expect that to continue. North America certainly is our strongest region as we have significant positions with the four carriers today turning to three and then probably back to four.

And and, you know, we'll we'll still maintain that. But Europe, Europe's becoming a more important market. I think the consolidations that we've seen there have helped us. And, you know, we're working with, some of the OEMs to partner with some new designs that I think for the long term will help us.

Speaker 8

Great. Thank you. Thanks for taking my questions.

Speaker 2

Yeah.

Speaker 0

Your last question comes from Jim Suva with Citigroup.

Speaker 2

Thank you.

Speaker 9

And I have two questions, and I'll ask them so you can take them in any order. The first is, can you comment on pricing? Has it been kind of more historical, normal, a little bit better or a little bit worse? In the history of CommScope, there's been a lot of periods of normal and then there's been some pretty big hiccups sometimes. So can you just talk about the pricing environment?

And then my second question is, you mentioned a goodwill impairment on ARRIS. It seems like last year, a lot of your commentary was the integration is going well. It's going well. It's going well. And now we get a big write down.

So help us understand and and bridge the comments of going well to now a big a big write down. Thank you.

Speaker 3

Sure. So on on pricing, you know, it's it's definitely within the range of what we would expect normally. I think we've built into the plan, call it, one and a half to 2% pricing pressure. We generally all offset that with a mix, combination of new product introductions as well as, productivity improvement. And I and I think, you know, if you were to look at the the results in terms of margin expansion, you you'd certainly see we've more than delivered on on our commitments to preserve margins, even when you see, just kind of the natural pricing dynamics.

So we don't don't see anything different from what we've, you know, historically communicated and historically experienced. Regarding the impairment, you know, I I I think this is probably obvious to most people on the call, but just to make it explicit. When when you close the deal, you you have zero headroom in terms of of the value that you're carrying, the business on the books. And then as as you get farther away from the close date, you know, you start to build up headroom over time. But but because of that sort of phenomena where you have zero headroom at the time you close the deal, any any softness in outlook versus, versus the expectations that you underwrote the transaction on would would call into question the the carrying value.

And and, obviously, the decline in major North American operator spending, that we've experienced over the course of 2019 has created a headwind in those reporting units, particularly, you know, all all three of those And I think we've been pretty explicit that the, you know, the the the progression of the business out of the gate is certainly not what we anticipated. You know, that being said, we continue to believe in the strength of the long term strategy. So there's there's nothing in in our long range plan that would indicate anything different than what we've communicated. We're well positioned to take advantage of the five g trends that are beginning to develop.

We're extremely well positioned to take advantage of the intelligent enterprise space. We believe that the intersection of the licensed and the unlicensed spectrum gives us a product portfolio that nobody else in the world has. We think the ability to serve the cable operators with an end to end optimized network solution as they move to docsis 4.0 and and PON is extremely competitive. So, you know, this is really, you know, largely an accounting exercise that's, you know, you're required to do at year end, but, really doesn't reflect the long term prospects. And then I guess the last point I'll make on kind of progress of the integration is, you know, we are in fact on track to over deliver on the commitments we've made.

What we said originally was we deliver a $150,000,000 in synergies by end of the third year anniversary. We've now said we'll deliver greater than 150,000,000, in advance of the third year anniversary. And I think, you know, Eddie and I both feel extremely good about how we're doing on the, the cost side of the equation. And if you were to talk to Morgan and the r and d and the technical team, I think what you would would hear is that we've identified, you know, much greater than anticipated revenue synergies as we bring these technologies together and and make some of the investments that I described earlier. So, so I think this is largely an accounting exercise, the non cash issue, but it is something that we have to do given the softness we've experienced right out of the gate.

Eddie, would you add anything? Nothing.

Speaker 2

That nothing that, covers it. We are we are pleased and and feel still supportive of the thesis of doing this over the long term and certainly we're not happy as as to how this started out but you know we we have full focus and commitment of our of our people, and and that's what it takes to to win. So I I have no concerns about about winning.

Speaker 9

Thank you so much for the details.

Speaker 2

And thank you. And and we thank each of you for your interest in CommScope and your good questions this morning. We look forward to talking to you next quarter. Have a good day.

Speaker 0

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.