CommScope Company - Earnings Call - Q4 2020

Transcript

Speaker 0

Ladies and gentlemen, hello and welcome to the CommScope Fourth Quarter and Full Year twenty twenty Results Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr.

Russell Johnson, Vice President, Treasurer and Investor Relations.

Speaker 1

Good morning, and thank you for joining us today, and welcome to our fourth quarter and full year twenty twenty earnings call. I'm Russell Johnston, Vice President of Treasury and Investor Relations. And joining me today are Chuck Treadway, President and CEO Alex Pease, Executive Vice President and CFO Morgan Kirk, Executive Vice President, CTO and Segment Leader for Broadband Networks and Bud Watts, Chairman of the Board. You can find the slides that accompany this call on our Investor Relations website. Please note that some of our comments today will contain forward looking statements based on our current view of our business and actual future results may differ materially.

Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Chuck, just a few housekeeping items to review. Today, we will discuss certain adjusted or non GAAP financial measures, which are described in more detail in this morning's earnings material. Reconciliations of non GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. All references during today's discussion will be to our adjusted results unless otherwise noted.

Also note, the full year 2019 results include historical Era's pre acquisition results reflecting certain classification changes to align to CommScope's presentation. All quarterly and annual growth rates described during today's presentation are on a year over year basis unless otherwise noted. I will now turn the call over to our President and CEO, Chuck Treadway. Chuck? Thank you, Russell, and good morning, everyone.

Today, I'll start with a review of our 2020 highlights and our fourth quarter results. I'll then provide a preview of our transformational initiative to drive growth and value creation, which we refer to as CommScope Next. Let's turn to slide three. As the COVID nineteen pandemic was beginning to unfold, we moved aggressively to keep our people safe, continue delivering for our customers. We pivoted quickly to remote work, put in place robust health and safety systems, and initiated a business continuity program.

Our team leveraged the diversity of our global manufacturing footprint to mitigate supply chain risk and respond to the evolving regional challenges. Within a matter of weeks, we mitigated the vast majority of our supply chain challenges, and our factories were running at capacity. The management team and I are proud of CommScope's ability to deliver on our promise to meet customer needs in such a challenging time. In addition, we continue to innovate across a wide range of technologies and businesses. At CommScope, the future of wireless networks, five g, Wi Fi six, and six e are rapidly taking shape.

As new CBRS and c band spectrum is introduced, we are ready to bring all of this to life by developing innovative technologies. One example is our new interleaved passive active antenna that we developed together with our partner Nokia. Last year, we delivered the largest DApp in the world to AT And T Stadium, home of the Dallas Cowboys, to enable five g services to their fans. We also helped education customers like the New Zealand Ministry of Education meet connectivity demands for their students and faculty with Wi Fi six access points and switches. In The US, the Rural Digital Opportunity Fund or RDoC has generated enormous demand across our portfolio of fiber cable, hardened connectivity, and fixed wireless products.

We're actively investing in capacity and technologies to meet this demand. And across our portfolio, virtualization, cloud, and analytics are defining a new generation of products and solutions. Whether it is helping operators mitigate a distributed access architecture, manage the network ecosystem through the cloud, or optimize performance through self healing tools and technology, CommScope is leading the way to the next generation of networks. Thanks to the hard work of our dedicated employees, we delivered a solid financial result we delivered solid financial results despite many challenges faced by our company, industry, and broader economy. In the fourth quarter, we delivered $362,000,000 in adjusted EBITDA, up 6% from the third quarter and 12% from the prior year despite declines in revenue.

We also delivered an adjusted EPS of 59¢ per share and generated $65,000,000 of adjusted free cash flow. Since the close of the ARRIS acquisition, the team has over delivered on a synergy commitment of a $150,000,000, one year ahead of schedule. These results are directly tied to the hard work, discipline, and efficiency in 2020, which we will continue to build on in 2021. While I acknowledge we need to do more as a company, I commend the team on delivering consolidated adjusted EBITDA margins up sequentially and year over year. It's important to note that these results reflect lower incentive compensation, strong CMTS, license sales, and certain COVID related benefits, such as reduced travel and marketing spend.

We attribute our performance in 2020 to our strong supply chain and decades of experience supporting our customers through challenging times and periods of network transformation. In 2021 and beyond, we will continue to build on our ability to provide next generation solutions and execute with agility. There's a lot more work to do, and we are not slowing down. As the business environment normalizes from the pandemic, a portion of our cost savings will come back, whether it's through increased travel, resumption of customary sales and marketing activities, or normal inflationary effects. We will also continue to invest in next generation R and D programs to lead in the markets we serve and fully realize our growth potential.

This is one of the focus areas of CommScope Next. Let's go ahead and turn to Slide four for some more perspective on CommScope Next. CommScope Next, which we launched in January, will focus on driving business growth that outpaces the market, controlling costs, optimizing business performance, and unlocking significant shareholder value. As we shared last quarter, the board and management team understand that our stock has underperformed. We're confident that executing CommScope's next strategy, we will ensure the company is on the right path for the next level of growth and profitability.

House of Next will be a defining chapter for the company and my highest priority as CEO. It will focus on three primary vectors of value creation. First, we will double down on delivering growth. Even in my first quarter with the company, our team has uncovered many opportunities for profitable growth. The areas we will explore include vertical market strategies designed to gain market share, capacity constraints in our factories to deliver more products where demand already exists, investing in international expansion, enhanced channel relationships, and development of critical technologies.

As we continue to analyze and prioritize these opportunities, I'm confident we will be able to accelerate growth as we drive commercial excellence and refine our go to market strategies. Second, we will focus on business optimization, initially evaluating and reducing non value added costs. While the company has a strong history of cost control, we can do more. We will eliminate unnecessary complexity and cost by streamlining duplicative systems and redundant processes that exist today. As we dig deeper into the business units, we've discovered unproductive investments that could provide us with additional financial flexibility to reallocate development funds to higher return projects.

We also see opportunities to implement tools to advance business operations, take the take the company to the next level of efficiency through continuous improvement. We'll be tackling all of this quickly, and we will share more details on the plan and our financial goals as we progress. Third, we will actively evaluate the health of our full portfolio of products and business. We intend to dynamically reallocate capital to those businesses where we have winning value proposition, industry leading technologies, and a clear path to growth and value creation. In our businesses that are more commoditized, we'll either manage those for cash or, where appropriate, evaluate alternative ownership structures that can unlock greater shareholder value.

We're confident that by implementing CommScope next, we will create a stronger, more efficient CommScope and deliver long term value for all of our stakeholders. With all of this said, I'd like to manage expectations on time. We will not see the impact of this initiative immediately. In some cases, will take quarters and others longer. This should be expected in the immediate future as COVID related restrictions on travel, marketing, and other business activities subside.

We will see some costs coming back into the business. It will be one of the jobs of CommScope Next to accelerate past the short term headwind. In addition to CommScope Next, we have taken other significant actions. Morgan Morgan Kirk was appointed the segment leader of broadband networks in addition to continuing responsibilities as its company's chief technology officer. Morgan's strength in technology and business leadership will serve broadband and CommScope well as we develop the next generation network architectures and drive profitable growth.

We also brought in Jack Carlson as chief commercial officer to help CommScope drive above market growth, and Kyle Larinson to assist in executing CommScope Next. I've worked with both Jack and Kyle in previous companies who have first hand experience with their ability to drive go to market excellence and achieve sustainable cost efficiency. Also, the team has mobilized enthusiastically, delivering strong bottom line results through the end of the year, and we are energized by the opportunities ahead. We've begun to put a foundation in place to shape the future of CommScope and deliver a step change improvement in the shareholder value through our CommScope Next initiative. We look forward to providing more detail on the progress we have made implementing CommScope Next during our first quarter earnings call.

And with that, I'd like to turn the call over to Alex to recap the full year and provide more detail on the quarter and trends we're watching in 2021. Alex? Great. Thanks, Chuck,

Speaker 2

and good morning, everyone. This morning, I'll start with a recap of 2020 before moving to our fourth quarter results, segment performance, and some commentary on cash flow and our capital structure. I'll finish with some closing thoughts on key industry and technology trends that we expect to influence CommScope's performance during the coming year before we open the call up for q and a. Turning to slide six. For full year 2020, net sales of 8,440,000,000.00 declined about 14% from the prior year with combined company.

We saw moderate growth in our broadband network segment during 2020, but sales declined across all other segments, most notably home networks, which was down 30%. From a geographic perspective, sales declined across all regions. Full quarter adjusted excuse me. Full year adjusted EBITDA of $1,220,000,000 declined 11%, while adjusted EBITDA as a percentage of sales improved more than 40 basis points year over year for the combined company. We've over delivered on our 2020 synergy plan and moved quickly to take additional cost actions, particularly in home networks, to help preserve the bottom line in response to the challenging business environment.

From a segment perspective, broadband networks delivered significant growth and possibility of over 18%, but this was more than offset by adjusting EBITDA reductions in all other businesses. As Chuck mentioned, embedded in these results are the favorable impact, certain COVID related benefits such as lower dollar and marketing spending that are likely to return in 2021 before the impact of Comsco Max is fully reflected in the financials. Finishing on slide six, adjusted net income for the year was $371,000,000 or a dollar 56 per share compared to $479,000,000 or $2.15 per diluted share in the prior year. Adjusted free cash flow was $465,000,000 compared to $793,000,000 from the prior year. Noting that in 2019, we generated significant cash flow from working capital as we integrated the aircraft position.

Throughout the year, we faced many unexpected challenges, but our business model has proven remarkably agile and resilient in delivering bottom line results. Our global supply chain team worked tirelessly to mitigate disruptions caused by the COVID nineteen pandemic while simultaneously prioritizing the safety of our employees. We've over delivered on our original $150,000,000 energy target, well ahead of our original timeline and took significant cost out of the Home Networks business in response to increasing pressures within the video. We also leverage our vertical cost structure effectively to reduce operating costs throughout the entire business. As a result, we are in a position to emerge from this cycle a dynamic and more streamlined company, and one that will be made even stronger through the impact of hospital net.

As the industry tailwinds of five g, RDoS and DOCSIS four dot o begin to take shape, we believe we're extremely well positioned to benefit for many years to come. Now let's move to slide seven for a deeper dive into our fourth quarter results. And as a reminder, all of my references to quarterly growth rates on a year over year basis unless otherwise noted. Net sales for the quarter of February declined approximately 7%, primarily driven by declines in home networks. Orders for the quarter were approximately 2,540,000,000.00 with a book to bill ratio of 1.18.

While we're pleased with the strong order flow, we do not expect to realize all of this backlog immediately due to capacity constraints, other supply chain related considerations, and a portion of these orders that are related to support agreements or multiyear deals. Adjusted EBITDA of $362,000,000 and adjusted EPS of 59¢ per share increased approximately 1228% respectively. We ended the year on a positive note for profitability highlighted by sales strength in the higher margin broadband networks product combined with a laser focus on company wide cost control. The quarter, we reported adjusted operating expense of $4.00 $6,000,000 an 8% reduction from the prior quarter, primarily related to approximately $40,000,000 in incentive compensation favorability. Turning to slide eight, I'll move to our second result.

Beginning with our broadband network segment, net net sales of $789,000,000 grew over 17%, primarily driven by growth in North America and Caribbean and Latin America region. From a business unit perspective, sales grew to in the mid to high teens in both network cable cabling and connectivity as well as in network and cloud. On a sequential basis, video systems and active technologies revenues were strong, although this was offset by supply constraints in our outdoor fiber and copper cabling. Product lines and the acceleration of a large PMTS license deal into the third quarter, which we spoke to on our last call. Order rates and backlog in the business were both extremely strong as cable operators continue to invest in their networks.

Adjusted EBITDA of $213,000,000 grew nearly 49%, driven primarily by higher volume and strong expense control. During the quarter, our broadband network segment benefited from a continuing trend of network investments as cable operators seek to reduce the pressure on the uplink portions of their network created by the new normal of work from home, video conferencing, and virtual learning. The existing networks were not designed to sustain the uplink demand in the home alongside continued video demand. To address this, we continue to see more node splitting, BOMs, and docsis three dot 1 investment. Turning to slide nine for our Venue and Campus Network segment.

Net sales of $477,000,000 declined 7%, primarily driven by softness across all regions except China and The Caribbean and Latin America region. The structured copper cable product line was down significantly year over year as COVID-nineteen had a substantial impact on the commercial real estate market that this product line serves. We also saw moderate declines in our rugged business that were somewhat offset by growth in our hyperscale and multi tenant data center fiber business as well as our gas and small cell business. On a sequential basis, sales were relatively flat in our inside plant, copper, and fiber businesses, but declined in our DAS and small cell and rocket businesses, in line with normal seasonality pattern in addition to the completion of several large mini projects. Adjusted EBITDA of 48,000,000 declined 19% driven by lower volumes as well as commodity cost inflation, particularly in copper.

Within the Venue and Canvas business, we continue to see extremely strong growth in our hyperscale and multi tenant data center business as we gain share in this highly strategic growth segment of the market. We expect continued future growth as cloud based professional and social collaboration tools, data storage, and streaming media become more mainstream and reduce reliance on legacy on prem data centers. Our DAS and small cell business pipeline remains strong. CommScope's era digital DAS platform continues to be the wireless infrastructure application of choice for some of the world's largest and most demanding public venue applications. As an example, during the quarter, CommScope delivered a suite of solutions to the Grand Hyatt at San Francisco International Airport that integrated our structured cabling, rocket access points and switches, and Era in building cellular into a seamless ecosystem for their customers and staff.

This project also started to trend of owner operators, taking advantage of lower venue occupancies during the COVID pandemic to proceed with major communication upgrade projects and prepare for the coming five g rev revolution and emerge from the pandemic even stronger. We are also optimistic that our OneCell product line will become an integral part of providing future ready indoor mobile connectivity for enterprise customers in a five g world. Looking out on the product line details. As indicated previously, we have experienced significant headwinds in those products, having exposure to verticals negatively impacted by COVID, particularly in structured copper cabling and rocket given the linkage to commercial real estate and hospitality. This has been offset somewhat by gains in the federal education and health care verticals where stimulus dollars are continuing to drive spend.

Turning to slide 10 for our outdoor wireless segment network segment. Net sales of $295,000,000 increased modestly at just over 1%, driven primarily by the Asia Pacific, European and North America regions. North American sales increased slightly despite two of the three major operators indicating a redirection of capital spending priorities towards the recently completed C band auction. From a product line standpoint, the bulk

Speaker 1

of the growth occurred at

Speaker 2

the macro layer, particularly in base station antennas and offset by weakness in metro cell deployments, which was created by COVID related permitting and crew delays. Adjusted EBITDA of $50,000,000 grew nearly 24%, primarily driven by the higher sales volume, favorable mix, and ongoing strong cost control. From customer standpoint, T Mobile has begun an ingress an aggressive investment cycle to build out their five g networks with their two and a half gigahertz spectrum, and our vacation antenna and cable businesses saw solid benefits from our long and very constructive relationship with T Mobile during the fourth fourth quarter. Given the very active role taken by the other two carriers in the recently concluded C band auction, we expect the required investments to build out this newly acquired and advanced spectrum will create significant new opportunities for CommScope in 2021 and beyond. However, the timing associated with the five g ramp relevant to our product line is likely to be weighted towards the latter portion of 2021 and beyond as operators shift focus to building out nationwide coverage.

Internationally, the momentum for our active passive radio solutions in collaboration with Nokia is growing in various global trials and other optimistic stages of evaluation. During the quarter, we had some large wins with European operators and advanced discussions around several additional opportunities. In other areas of our international portfolio, we've seen positive momentum in key Asia Pacific markets also driving future growth. Lastly, while the Metro Cell business growth was slower than expected during 2020 due primarily to COVID nineteen related municipal office closures and associated zoning and permitting delays, We're optimistic that if COVID recedes and the country begins to reopen, this business can return to its prior growth trajectory. As major US carriers proceed with five g related build out of the new mid mid band spectrum, an absolutely critical component will be the densification of coverage within the metro layer using Comsco's products.

Turning to slide 11 for our home network segment. Net sales of $571,000,000 declined 31% and across all regions. While we saw strong growth in our broadband gateway business, this was more than offset by declines in video. Adjusted EBITDA of more than $40,000,000 declined 44%, primarily driven by the volume declines in video. During the quarter, home networks saw strong and consistent demand for broadband gateways through both the service provider and retail channels, which serve as a positive catalyst for growth in this segment, offsetting continued weakness in the video market.

New platform wins like the x p seven provide additional tailwinds for broadband gateways going forward. Broadband products also benefited from international growth trends as illustrated by Vodafone Germany's recent passing of a million subscribers using CommScope's stock as three One gateway. Lastly, like many other global industries, our home network business is experiencing silicon supply constraints. This region recent development has extended lead times across the home network ecosystem that may persist throughout 2021 and that likely accelerated revenue from certain key customers in q four in advance of anticipated shortages in 2021. Turning to Slide 12 for an update on our cash flow.

For the full year, cash from operations was $436,000,000 and adjusted free cash flow was $415,000,000 For the fourth quarter, cash from operations and adjusted free cash flow were $98,000,000 and $55,000,000 respectively. While 2019 cash flow significantly benefited from working capital as we integrate Sierra's services, we experienced a more normalized usage and increased capital investments in 2020. We continue to make progress on extending our terms with our supply base and remain focused on collecting timely from our customers. For the quarter, working capital was the net use of cash driven by accounts payable and the timing of certain payments. Looking forward, through the annual improvement targets set within the organization as well as the efforts of CommScope Next, we continue to evaluate opportunities to optimize working capital and unlock excess cash, particularly on the inventory front.

Turning to slide 13 for an overview of our liquidity and capital structure. During the fourth quarter, our cash and liquidity remained strong as it had throughout the prior quarters in 2020. We ended the quarter with $522,000,000 in cash and no outstanding draws under our ABL revolver. Our total available liquidity of nearly $1,300,000,000 was relatively flat to the prior period. We also repaid a $108,000,000 of debt as and as a result, net leverage declined modestly as compared to the third quarter.

CommScope has now repaid over $800,000,000 of debt since the close of the ARRIS acquisition in 2019, which speaks not only to our ability to generate cash flow even when facing challenging market conditions, but also to our continuing commitment to reduce leverage as quickly as possible while maintaining ample financial flexibility in uncertain times. Before we open the line for q and a, I'd like to end my with my view on how we see the market developing throughout 2021 on slide 14. Before going market by market, I'd like to remind everyone of our normal seasonality patterns. For all of

Speaker 1

our businesses, q one is typically the weakest quarter of

Speaker 2

the year driven by a combination of weather related factors as well as a general pause in capital spending as budgets are being finalized. For outdoor wireless networks and the portions of broadband networks tied to construction spending, sales tend to peak in q two and q three as operators take advantage of more favorable weather conditions. For the portions of broadband network and then you can campus network tied to electronics and licenses, such as CMTS and product line, spending tends to ramp towards the back half of the year. Finally, the venue and campus network business can be very lumpy as large portions of that portfolio are tied to individual project awards. Because of this, it is reasonable to expect a weaker q one, especially coming off the strength we saw in q four.

For the individual segments within broadband networks, we are seeing a fundamental change in how networks are being used as a persistent trend. This considerable strain on the uplink will require steady and consistent investment, the pressure on the network is driving more traditional nodes putting activity at a higher pace while deferring some of the next generation of virtualized investments. There's also increased demand for ubiquitous high speed, low latency broadband funded in part by the rural digital opportunity fund or RDoC. This represents another significant opportunity for Comco in the back half of the year as those investments begin to ramp. Within outdoor wireless, the release of the new mid band spectrum through the C band auction is likely to drive the first real wave of five g spending across The US.

While this will also be more back half weighted as operators finalize their strategies for deploying the spectrum nationwide. There is an increasing level of urgency as T Mobile spending continues to ramp. Internationally, we're seeing improved competitive conditions in many of our markets and had several strong wins in both the Europe and Asia Pacific region, which shows a generally favorable trend as five g spending begins to take shape. Within the venue and campus segments markets, we expect a variety of business conditions to contribute to some choppiness throughout 2021. Commercial real estate spending is likely to remain soft, which will negatively impact both the copper structured cabling volume as well as orders from traditional on prem data centers.

Hospitality, a highly strategic and important vertical for Ruckus, is also likely to remain under pressure, creating challenges for those product lines. Additionally, we're seeing some potential headwinds relating to our ability to access silicon used by some of the Ruckus product lines in the beginning of the second quarter. Offsetting these headwinds will be continued growth in the hyperscale and multi tenant data center market as well as increasing opportunities and growth in the federal education and health care verticals. Lastly, we expect our next generation EraDAS platform as well as our industry leading one cell in building LTE solution begin ramping meaningfully in 2021. Finally, on our home network segment, work from home, virtual learning, and increased media consumption continue to fuel the need for higher performing broadband gateway devices, and we see continued growth in this important area.

While we have achieved several wins in video streamers offsetting the declines in traditional video set top boxes, we see continued pressure on the video product line as cord cutting and cord shaving momentum continues to create a meaningful headwind. We also recognize that the global silicon shortages mentioned earlier will create a significant headwind to revenue and adjusted EBITDA, particularly in the first half of twenty twenty one as lead times are pushed out and pricing pressures emerge. Before turning the call back over to Chuck for q and a, I'll close with a few words on our cost structure in 2021. While Chuck mentioned Oncove next and the actions we will be driving aggressively in 2021 around both cost and growth, there will be some inflationary effects we need to contend with as well as some onetime cost savings we experienced in 2020 that are likely to come back as COVID evade and business activity starts to return to normal. Annually, we realized approximately 70,000,000 in travel and marketing related savings directly attributable to COVID, $20,000,000 of which we expect to come back into the business in 2021.

In addition, we expect approximately $20,000,000 of additional incentive compensation expense in the first quarter of twenty twenty one as compared to the fourth quarter of twenty twenty. We're also seeing inflationary effects in many areas, most notably in copper, steel, and resin. Finally, we will need to reinvest in core strategic markets and technology to achieve the growth aspirations that Chuck laid out. With that, I'll turn the call back over to Chuck for q and a. Chuck?

Speaker 1

Thank you, Alex. And before turning the call over to q and a, I wanna close with some final thoughts regard regarding CommScope Next. While we initially indicated an intention to preserve formal commentary of my plan until q three, I'm encouraged by what I'm seeing and become increasingly comfortable that we can share certain aspects of the plan in advance of this initial timeline. We started the process today at a very high level. I anticipate it will begin to communicate certain directional targets when we report earnings in q one with more detail to follow in q two, culminating with an investor day featuring the extended management team later this year.

Thank you very much for your attention. And with that, I'll turn the call over for Q and A. Operator?

Speaker 0

Your first response is from Meta Marshall with Morgan Stanley. Please go ahead.

Speaker 3

Great. Thanks and congrats on the quarter. Just a couple of questions just as you start formulating next. You had noted international opportunities as an area that you were potentially evaluating. In the past, there's been some volatility there with kind of what the margin opportunity is there.

So just kind of how you're thinking about that. And then additionally, just how you're thinking about, you know, the strategic makeup of the business and whether there's anything that can be separated. Thanks.

Speaker 1

In terms of international market expansion, I mean, when you think about Europe, The Middle East, some parts of Asia, Japan, Korea, there there are actually some pretty price pretty good price levels we can get there very similar in what we would expect to see in The United States. So we're targeting areas there. However, we also were looking at, you know, across the board, what can we do in in India? We just have to think about completely different design concepts. It's gonna take a little more time there, but we have to think about, you know, bare bones things, in that particular market.

With that, you know, with your question about what what businesses could we disconnect or whatever, we're gonna just hold our comments on that till we consider you know, finish our analysis of all the different businesses and portfolio products that we're gonna be reviewing. Obviously, we're still in the middle of that, so I'll hold my

Speaker 2

comments there. Meta, let me just, potpile on a little bit on the international because you're probably remembering, couple years ago, we talked about exiting, certain regions that were extremely, margin sensitive, and we felt like we just couldn't compete. I think there's been a bit of a pivot, a strategic pivot, which Chuck alluded to since that time around how do we design our products that are much, much lower cost for those markets where the market where the the price is just is just so depressed. And so that's a bit of a shift from what we've communicated previously, but we're pretty excited about the work the team's done to really innovate and drive cost down for those cost and functionality down for those more challenging markets.

Speaker 3

Great. Thanks.

Speaker 0

Thank you. Your next response is from George Notter of Jefferies. Please go ahead.

Speaker 4

Hi, guys. Thanks very much. I guess I wanted to try to dig into the CommScope NEXT program a little bit more. Chuck, you said a lot about the different aspects of the program, including reallocating capital, removal of redundant costs, systems issues you can kind of hash through. But could you give us some more tangible examples of things you found as you've dug into the company and realize these opportunities to take cost out?

I guess, the company has been restructuring costs for a long time now, and it feels like a lot of the low hanging fruit may have been picked. But is that a view you agree with? Walk us through the picture at this point on cost restructuring.

Speaker 1

When you think about duplicative systems, I mean, just think about the acquisition of Erics. So you brought two very large companies together, $25,000,000,000 plus companies. And when you put those together, you find a lot of duplicates. So great example is what we have in the IT side. I mean, you know, once one company runs Oracle, one company runs SAP, as we move to one strip one system, you know, we're gonna have significant savings from that.

We've really dug it. We're starting to do a pretty big deep dive with all of the business units to understand, you know, where are we spending money, what are we investing in. And we're finding things that we can frankly get from the outside without developing it on our own so that we can take that money and then double down on things that are really critical and core for us. That's just a couple of examples. I would also say that when we think about discretionary spend, whether that's indirect or well, let's just start with discretionary indirect indirect discretionary spend.

There's an opportunity when we move to a general management strategy where the general managers are gonna be able to look at all those expenses with an eye that of of a business leader that's saying, I don't wanna get allocated. Know, now they don't have to. They can really make decisions on their own, and we're gonna be really giving them a lot of opportunity there. We're gonna also be providing oversight there in more details when we think of those types of expenses. And then if you think about direct procurement, I mean, we doubled what we buy.

Right? So there should be some opportunities depending on what commodities are that we can do more there. So, you know, this I have to say there's a lot, and I think as we really start to talk to the team, we got some general managers really getting excited about looking deeper, and we're getting into the details there and we're trying out.

Speaker 5

Great. Thank you.

Speaker 0

Thank you. Your next response is from Sami Badri of Credit Suisse. Please go ahead.

Speaker 5

Great. Thank you. I just wanted to flip back to the broadband network slide where you talked about the MTS licensing being strong. And we've seen the same exact bullet point or at least this comment come up a couple of times over the last year and a half. Could you just elaborate on what your customers are doing with the CMTS license sales versus actually buying the equipment, itself, which was the historic case?

Can you just kind of unpack this for us, what's going on at each of your customers?

Speaker 2

Let let me start, and then it's actually, fortunate Morgan's in here because he runs that portion of business. I'll let him pile on. But so effectively, what we saw at the early part of COVID was there was a desire by the network operators to not physically intervene in the network because there

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was so much

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pressure on the network. So the the easiest way to do that would be to add capacity virtually, basically, by by adding licenses to the existing e 6,000 infrastructure that they had in the head end. As we've gotten towards the latter part of the year, what we're seeing is there is some license activity with some of the operators, but a number of the operators having basically exhausted the capacity of the adopted three dot one investments in their head end. And so rather than invest in the head end infrastructure, they're pushing the investments into the nodes. So there's a mix shift from the CMTS piece of the business to the to the node piece of the business, which is where where we were talking about the more physical interventions in the network as we look out sort of this part of the year and then into '20, '21.

So that's kind of the the dynamic that's been going on, but I'll I'll let Morgan talk at a more technical level.

Speaker 6

Yep. Alex is exactly correct. So the network spend moves between hardware and software depending on what you have in your network and what your needs are. The COVID has driven us to the point of breaking, particularly in the uplink. There's so much less spectrum allocated to the uplink at this point that our operator customers have had to split nodes and make smaller user groups that are sharing that uplink capacity.

That's node splitting and that's largely hardware. And and and as such, more of the capital has been has been pushed toward that physical equipment. In addition, there's a gap that goes on between adding more more licenses, adding additional capacity to hardware that you have, and buying new hardware in the head end. And so that goes on, and you'll see this going back and forth over the years as they continue to invest in the network. One of the things that they're doing to invest in network now is they're going to what's called a high split.

They're allocating more spectrum to the uplink to try to solve this problem. And, of course, once they've upgraded the hardware, there will be software upgrades as well.

Speaker 5

Okay. And then maybe just so we understand some of the dynamics here is there is almost like a built in expectation at CommScope that these same customers are gonna probably come back to you guys a few times with CNCS related licenses, right, just as they continue to densify and, harmonize their infrastructure. Is that is that a safe assumption from an industry outlook perspective?

Speaker 6

So they come back to us when they need more capacity in their network. So they they they buy physical cards, and then they add additional capacity to those cards. In effect, it's it's a software related capacity add over time. And they do that until they exhaust the amount of bandwidth that's available to them. So it is an opportunity to continue to sell additional licenses to them until they reach a certain point.

And then they go back to buying hardware to increase that available capacity again. That's the depth that's going on. Of course, there is also the upgrade to the network, whether it is to go to DOCSIS four point zero, which expands the amount of spectrum available and thus the amount of both hardware and software that they can buy from us. And also the change in architecture from the centralized CCAP to distributed access architecture, whether it's remote MAC or remote PHY, which puts more of this equipment out toward the edge of the network to reduce some costs on the head ends and to increase the capacity of the backhaul network and to reduce latency. So all of those things will be going on for the next decade.

Speaker 5

Got it. Thank you.

Speaker 0

Thank you. Your next response is from Simon Leopold with Raymond James. Please go ahead.

Speaker 7

Thanks for taking the question. Just want to see first if you could offer us just a quick metric of headcount where it was this quarter versus last. Then the longer term question, I wanted to see if you could maybe unpack Steven's comments a little bit. I appreciate the indication around the second half weighting. What I wanted to ask about was how you see the trajectory and timing and scope.

As you mentioned, spending on macro towers this year, I assume we see that expand off the towers in 'twenty two. So if we could get some idea how to size this opportunity beyond second half 'twenty one and maybe help us understand how it gets funded given the amount they're paying spectrum? Thank you.

Speaker 2

Yeah. So I'll I'll, take a swing at that, and then I'll ask, Morgan to to chime in as well. So in terms of and I think you're asking about headcount. So it's a bit of a tough question to answer. In general, we have in in the order of 30,000 employees globally.

The vast majority of those are in our manufacturing facilities, and it's one of the ways we manage our our cost structure is by is by eliminating essentially labor when demand is soft. And so that number can move between, you know, call it, 28, 29,000, and 32,000. I I think, really, what you're asking is what have we done on period over it? And, you know, I think we we mentioned we've we've achieved our $150,000,000 synergy target more than a year ahead of schedule. A a significant piece of that was headcount related cost.

In addition, in the home network segment, we took out significant cost, particularly in the video side and the video r and d side. A large portion of that was was headcount related as well. So a significant piece of the improvement you've seen in period overhead is is headcount related. I think the total number year over year is something like a 100,000,000 a $100,000,000. So I think that's what you were getting.

And not, you know, happy to clarify either in a follow-up question or or after the call. As it relates to C band, we mentioned there, you know, two large operators did substantially higher than at least our original expectation. I think the total award was $80,000,000 versus the original expectation, something like $50,000,000. They will be using the first part of the year to, the first part of the year to, basically design their networks. And there's some choices that they have to make around what type of antenna configuration, they want to use.

And so, you know, that will carry with it implications for wind loading and shear on the towers. It will carry with it implications for power going up the tower. All that will will benefit us. But that will take through likely the first part of the year before they're ready to move into actual physical power climbs, which begins in the latter part of the year and then will ramp will ramp as we get into 2022. The other piece which you mentioned, which is absolutely right, is the importance of identifying the network.

So we talked about in the prepared remarks that the integrated solutions piece of that business, the Metro Cell piece of that business, has been weak in 2020 largely related to permitting delays and crew delays, you know, largely COVID related. So as those densification investments return, we expect to see that business return to its its normal growth trajectory. So, you know, I I think, you know, to bring all that together, you know, 2021 feels like, you know, a modest growth, opportunity, with the end of the real opportunity as we get out into 2022 when some of these competitive dynamics begin to unfold. What what did I miss?

Speaker 6

Yeah. So, Alex, you you you only missed one thing, which was that it was billion dollars that they they they spent. You said millions. And if they if they only spent $80,000,000 I think all of our carrier customers would be a lot happier. But clearly, the reason that the carriers have bought this large amount of spectrum is because it is going to make their networks a lot more efficient.

So they're going to want to put this into play as quickly as they can. They have a competitive dynamic where one of the operators is already putting mid band spectrum into play. But this takes time. It takes time to do the planning, and it takes time with new technologies like massive MIMO. It takes planning because, it really is a big network upgrade.

One of our customers that has been dealing with this in Europe said this is as big an upgrade as we've seen since two gs, which is a massive upgrade. It's an upgrade to power on the tower. It's an upgrade to potentially architecture in some places. And so it takes time to do it. But we expect because there is this competitive dynamic and because this will make the network so much more efficient, that the build as it starts to ramp up will be positive for us.

But it will take a little bit longer to ramp up than immediate, which is what everybody would like.

Speaker 7

Thank you very much.

Speaker 0

Thank you. Your next response is from Rod Hall of Goldman Sachs. Please go ahead.

Speaker 8

Yes, hi. Thanks for taking the question. I guess I wanted to come back to the cost structure and the R and D reduction that we saw in the quarter. And I know you had alluded to maybe reduce outsourcing things and so on. But I wonder if you could dig a little bit more into how you've reduced that R and D number so much.

I guess the color on this is typically when we see R and D reductions like that, it's not always a good thing. But admittedly, there could be a lot of inefficiency in there we're unaware of. So just wonder if you could dig into that a little bit more. And then I've got a follow-up.

Speaker 2

Yeah. Sure. So so, you know, there's been a lot of action on cost and period overhead. A lot of that's just natural synergy capture, which is, you know, elimination of redundancies. And then a lot of that is, I would say, moving to a next generation operating model.

And then the third part of that is is r and d optimization. So I think the elimination of redundancies is an obvious one. I won't spend any time on that. In terms of moving to a next generation operating model, we've been looking very aggressively at how we leverage low cost country sourcing across both the, you know, the back office as well as the r and d functions. So we recently completed a large system conversion.

We've ramped our our shared service activities in Goa and Goa India, as well as in Taiwan and Ireland and Mexico. A lot of that has allowed us to just, you know, run the finance and IT and HR functions more efficiently. So there's been substantial activity going there, and Chuck talked about CommScope Next. That that will be a big unlock for us as well as we drive farther system consolidation. On the r and d side, this has been a pool of money, call it $700,000,000 or so, that historically has not been very, very actively managed.

It's been sort of a very bespoke management style. And I think as we've gotten into it, what we found is is really two things. One, we're making investments in air in essentially, low ROI or no ROI, areas. So there's an opportunity to to harvest those investments that aren't yielding the returns that we want and redirect those funds to areas areas like cloud and analytics and virtual virtualization technologies that we really think are the the tickets to the future. We've also found that historically, just by nature of the way these two companies have grown up, a substantial amount of the r and d spending happens in very high cost regions.

And so we've been deploying a a playbook that really the the Costco team had developed over years of how do we build up r and d capability in lower cost regions like, again, like like China, like India, like Ireland, places like that where we can just get a lot more bang for our buck. And that work is has only really just begun. So, again, if we start talking about CommScope next, you know, that's one big area of opportunity for us to begin.

Speaker 1

I I'll just add one more thing. I wanna be crystal clear that we will not be cutting anything that will hurt our future. I'm working very close with the segment leaders in Morgan to look at every single thing we're working on in the company and anything that's critical to our future. We're either keeping as it is or doubling down on that. So I don't want you to get any impression that we are any way, looking at this in the short term.

This is a long term play. This is gonna be about investing where we see it making sense. This is getting closer to our customers and understanding what they need, getting that information back to our r and d teams, and developing exactly what we need to take us to the next level. So I don't want you to take anything away from this that we're challenged. We're we're gonna be cutting anything that we don't need.

We will be doing everything we can to protect our future.

Speaker 2

And and just one one last point. I'm sorry. I keep piling on, but it's an important one. When you look at the year over year decline in r d, that is driven by home video. And so, really, that was the actions that Joe Chow and the team took to scale the R and D appropriate with the size of that business, which I think everybody could understand given how dramatic the top line declines were.

So there to a tough point, there was not R and D spending harvested from the growth areas.

Speaker 8

Could you repeat that last part? You broke up when you said what drove that R and D reduction.

Speaker 2

It came out of the home network segment, and in particular, the video piece of that business, which is down 30% year over year. Does that sound right?

Speaker 9

Okay.

Speaker 8

That's helpful. And then my follow-up was on C band again. Maybe, Morgan, I guess, one's aimed at you. But do you know I mean, I know they're in the process of replanning spectrum now. But do you know how confident are you that that spectrum is going to be allocated to macro towers where you guys would benefit more versus smaller cells in metro densification kind of projects?

And is that a wrong perception? If you go into densification and smaller cell sort of deployments for that spectrum, do you guys benefit just as much there? Or maybe just talk us through that a little bit.

Speaker 6

Sure. So I am very confident that this will be used on the macro layer. It is an enormous both capacity add to the network and also an efficiency play. And the output power and the technology is certainly available to blanket your network from the macro tower. It will be the most efficient way or for the operator.

So they're certainly going to do this. I believe they're also going to do a metro layer to add additional capacity in cities because just doubling your amount of available spectrum, which is roughly what C band does to the operators, is probably not enough to last through more than a first couple of years. So I expect them to do a metro layer as well, and we do benefit from both. There are a lot more metro cells than there would be macro cells per square kilometer. So our benefit per area would likely remain very, very similar.

Although the types of products that we sell are different, the costs of the products are different, the margin profile would be similar regardless of where it is in the network.

Speaker 8

Great. Okay, thank you.

Speaker 0

Thank you. Your next response is from Samik Shatterjee with JPMorgan. Please go ahead.

Speaker 9

Great. Thanks for taking the question. I had a couple. Chuck, I just wanted to ask you one more on the strategic direction here. I think if we rewind to the time of the Aris acquisition, there was an argument made for a broader portfolio and more end to end solutions, particularly for cable and broadband customers.

How are you thinking about the value in terms of that strategic direction? Do you see value in having a end to end solution for certain customers? That was really the argument behind the Arris acquisition. And I have a follow-up.

Speaker 1

I think I think we absolutely are seeing the value of having end to end solutions. And and what we're gonna be doing as we, you know, as we think about our portfolio, there could be some things that we we remove, but there could be also opportunities for us to make acquisitions that are lined up with exactly where we wanna play. So I I I'd just say that we do feel there's a end to end play here, and we also think that that there's opportunities to to add on where we need, and and we're gonna be diligent on what we think is really not creating value.

Speaker 6

So I'll I'll add in here an example just so that everybody can make it real. One of the real network challenges that will go on in this next decade, one of the ways you measure measure the quality of a network will be based latency and jitter. In other words, how snappy your network feels and how reliable it is in that snappiness. And by providing a complete end to end solution all the way through the network from, let's say, the core of the network all the way through that access layer and even through and into the home, through the Wi Fi access point, all the way to the edge is one of the ways that an integrated CommScope can really add value beyond that, which somebody who just makes a point source could do. And we think these are the types of areas where it really benefits by having this tight integration.

Speaker 9

Okay. A follow-up for Alex, if I may. Alex, I think you mentioned weaker 1Q. Just wanted to clarify, you mean weaker year over year? Because I think seasonally, we all understand 1Q is weaker.

And then just in terms of where consensus expectations are, it looks like consensus expects you to grow top line for most part of the year. I know you're not guiding here, but just based on visibility and the constraints that you talked about, do you think that's realistic?

Speaker 2

Yeah. You kind of answered your own question. We're we're not guiding. So it's a tough tough question for me to answer. The the commentary that I did give was was sequential, and I was trying to help help you understand what the sequential kind of velocity looks like as we think about normal seasonality patterns as well as some of the costs that we see coming back into the business in 2021.

And then I tried to give you some commentary, some qualitative commentary on how we see the markets unfolding, particularly with some of these tailwinds related to RDoS spending, P band, and and the like. But I beyond that, I I don't think I can really comment on on consensus numbers or or what our point of view is on those.

Speaker 9

Okay. Yep. Thanks for the clarification there. Thank you.

Speaker 0

Thank you. Your final question is from Jeff Kvaal with Wolfe Research.

Speaker 10

Yes. Thank you, I have a couple. I guess first of all I was hoping that you could add a little bit of color to the leverage reduction story. There hasn't been as much of a theme on the call as it has been in others. What can you tell us about how we should expect leverage to decline, either through 2021 or over

Speaker 7

a broader time frame curve?

Speaker 2

I thought you were going to ask two questions, Jeff. Is that the question you have?

Speaker 10

I'm sorry, Alex?

Speaker 2

I misunderstood. I thought you were going to ask two questions, so I didn't want to cut you off. Oh,

Speaker 10

okay. Ask him at the same time. Okay. That's fine. And I guess my second question would be on the broadband margins.

My sense is that some of that is a little bit onetime. But if you could let us know how much is sustainable improvement and how much you expect to give back to some of

Speaker 1

the factors you mentioned before, I'd appreciate that. Thank you.

Speaker 2

Sure. So let me take the leverage one first. We are absolutely committed aggressively deleveraging the balance sheet. And I think there's obviously two ways to do that. One is by paying down the debt, which we've been doing, and the other is by growing EBITDA, which we aspire to do certainly through CommScope Next.

And really, that that priority hasn't changed. That's it's, again, I'm not at liberty to provide guidance, so I can't I can't give you an outlook for for what 2021 will look like, unfortunately, which is I know what you were you were asking for, but that's sort of not part of our our guidance philosophy at this point. As it relates to broadband margins, I actually would say that that the margin improvement is absolutely not one time in nature, but it is transitory in nature. And what I mean by that is as mix shift in the issues that Morgan was talking about previously, as mix shift between a software type of solution for adding capacity or upgrading the network to a hardware type of solution with physical no room inter interventions and the high split activity that Morgan described. You will see a negative mixed trend.

And as we look into 2021 and we see more of the activity in the broadband, network segment trending towards physical node splitting activity, you will see the the margin compression. But that's not to say that as the cycle matures and there's a next level of investment in more virtualized solutions that you won't see that kind of reverse. It just there's sort of the differences between whether it's physical activity or software based activity. And, hopefully, that helps you get a sense for what we see in 2021 as it relates to broadband margins.

Speaker 10

Okay. Thank you, Alex. Thank

Speaker 0

you. I would now like to turn the call back over to Chuck Treadway.

Speaker 1

Well, we appreciate your support of Comsco, and we hope you have a great day. Thank you very much.

Speaker 0

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