Yahoo Finance CommScope Holding Company, Inc. (NASDAQ:COMM) Q3 2023 Earnings Call Transcript
CommScope Holding Company, Inc. (NASDAQ:COMM) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Good day and thank you for standing by. Welcome to the CommScope Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Massimo DiSabato, Vice President of Investor Relations. Please go ahead.
Massimo DiSabato: Good morning and thank you for joining us today to discuss CommScope’s 2023 third quarter results. I am Massimo DiSabato, Vice President of Investor Relations for CommScope. And with me on today’s call are Chuck Treadway, President and CEO; and Kyle Lorentzen, Executive Vice President and CFO. You can find the slides that accompany this report on our Investor Relations website. Please note that some of our comments today will contain forward-looking statements based on our current view of our business, and actual 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, I have 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. All quarterly growth rates are 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 Treadway: Thank you, Massimo and good morning everyone. I will begin on Slide 2. CommScope delivered core net sales of $1.35 billion and core adjusted EBITDA of $245 million for the third quarter of 2023. Our third quarter continues to be impacted by lower customer orders, driven by larger-than-expected customer inventory corrections, customer CapEx reductions and the macroeconomic uncertainty. The consolidated CommScope, which includes our Home Networks business, we reported net sales of $1.6 billion, down 33% year-over-year and adjusted EBITDA of $249 million down 28% year-over-year. As discussed previously, our CCS and OWN businesses have been experiencing lower order rates since the beginning of the year and we have seen no meaningful recovery in the third quarter.
In addition to the challenges we have been experiencing in CCS and OWN, in the third quarter, we were approached by our A&S customers that they are seeing project timing slipping into next year and have more inventory than required. The result is going to be a softer-than-expected rest of the year and first half of 2024 in our A&S segment. Based on our current order rates and visibility into the fourth quarter, we are revising our 2023 core adjusted EBITDA guidepost to $1 billion to $1.05 billion. Clearly, this is a disappointing development as we look over the next few quarters. However, we continue to be bullish on our long-term growth, including general market recovery, government funding for connectivity, and cable upgrades. We are well-positioned to take advantage of the recovery as we are a leader in each of these businesses and have invested in capacity and product development.
While we are in constant dialogue with customers about business projections and inventory levels, we continue to work with our customers to better understand true demand and the impact on our business. As we discussed on our second quarter earnings call, we continue to manage what we can control. We have aggressively been managing our costs and have implemented approximately $150 million of cost reduction activities in 2023. Although we have been aggressive on cost, we still feel there is an opportunity for further cost reduction. These actions include direct material savings, automation and further efficiency projects. We are working on defining these actions and are targeting an incremental $100 million of cost reduction to be implemented by the end of the first quarter 2024.
I am proud of our team’s focus on what we can control. Despite the decline in core revenue of 32% year-over-year, our core adjusted EBITDA as a percentage of revenue has improved by approximately 50 basis points. Now I’d like to give you an update on each of our businesses. As we indicated in previous calls, CCS has strong long-term market tailwinds, including significant spending commitments to improve United States broadband infrastructure, in addition to other country programs around the world. We are well positioned to take advantage of the recovery as we have invested in capacity and have the full suite of products in place. We have also positioned the business to meet the build America requirements for the United States government funding.
Outside of the broadband investments, we are also encouraged by developments in our building and data center portion of the CCS business as significant momentum is occurring on the cloud and AI side of the data centers. Also, in CCS, we have been aggressive with our cost structure. We are looking at additional cost opportunities to drive efficiency. We believe that there is still a substantial value that we can drive on the cost side. However, these projects are a bit more time intensive. An example of an area that we are focusing on is automation. Investment in new equipment, processes and systems can drive further efficiency and lower costs in this segment. We remain bullish on CCS as a result of the longer-term market tailwinds and our strong position in this market.
CCS will recover. It is just a matter of timing of this recovery. The recovery, coupled with our more efficient cost structure will drive substantial financial performance. Turning to mix. The business continues to perform very well. Our year-to-date EBITDA of $196 million is up $200 million over prior year. The mix segment LTM adjusted EBITDA is $252 million. We are very proud of the mix transformation. Our ability to grow the business and leverage our cost base has created strong value in this segment. It is a game changer for our company. We are well positioned for continued growth as we announced two major new product offerings in the third quarter with our RUCKUS One suite and Wi-Fi 7 enterprise class access point product. As we discussed previously, RUCKUS One is an AI-driven cloud-native platform, delivering network assurance service delivery and business intelligence in a unified dashboard.
It simplifies converged network management across multi-access public and private networks. Also, we have officially launched our Wi-Fi 7 products. As one of the first to launch Wi-Fi 7 products, we are well positioned as the first mover in the market to gain share by taking advantage of the functionality and enhancements of Wi-Fi 7. Finally, in mix, we continue to invest in our go-to-market strategy. We believe that as a result of our channel network and knowledge of certain market segments, we can continue to increase market share by investing in products, systems and resources dedicated to those market segments. We have developed a plan and are now in the implementation phase. In OWN, as we mentioned in previous calls, we fully contemplated a decline in U.S. carrier capital spend.
However, these declines are much more severe than what we had expected, and I don’t think we are alone in these sentiments. Although carriers indicated some recovery in the second half, this has not materialized. There will be a recovery. However, at this time, there is limited visibility into the timing of the recovery. Based on the lack of visibility in this segment, at this moment, we would expect that 2024 will look similar to what we see in 2023. Again, in the OWN segment, we continue to focus on what we can control. We have been aggressive in cost in this segment. The results of our cost management have resulted in year-over-year flat EBITDA margins despite a 45% decline in revenue. In addition to cost management, we continue to develop and commercialize new products.
We have discussed the Mosaic antenna in previous calls. However, we are also developing new products in the power and steel space. We will continue to develop new products supplement our existing base business. Again, similar to where we are in CCS, we are well positioned in the market and feel like we will benefit from a market recovery. Finishing with ANS, as we have discussed, the segment has made a very successful transition to a leading supplier of edge-related products, including nodes, amplifiers and RPD RMD modules. Although we remain a strong supplier of our legacy CMTS technology, we continue to grow our edge business as we are in the early phases of the DOCSIS 4.0 upgrades. We are well positioned to be a major player in the DOCSIS 4.0 upgrade cycle as we are the only supplier with all of the products and believe our products are the best performing.
During the recent SCTE Cable-Tec Expo, we were able to demonstrate our wide product range. This show just reconfirmed the momentum behind the DOCSIS 4.0 upgrade commitment and our strong position in this market. Many of the demonstrations by cable companies showing best-in-class fees were achieved with our product backlog. In the last 90 days, we announced our FDX product range, including collaboration with Comcast on a FDX amplifier and the launch of our virtual CMTS product that is now in customer labs. Although we are very bullish on the 4.0 upgrade in the third quarter, we saw two major short-term developments that will impact near-term performance. The first is inventory adjustments by our customers. Several customers informed us that they are holding too much inventory and need to make short-term adjustments to orders to rightsize their inventory.
In addition, some of our customers are experiencing slower-than-expected ramps on their 4.0 upgrade projects. As a result of these two issues, order rates and revenues will be negatively impacted in the next few quarters. In summary, the markets will return. We are well positioned when the markets do return, and we are focusing on what we can control. This work will put us in a stronger financial position when the markets come back. And with that, I’d like to turn things over to Kyle to talk more about our third quarter results.
Kyle Lorentzen: Thank you, Chuck, and good morning, everyone. I’ll start with an overview of our third quarter 2023 results on Slide 3. For the third quarter, consolidated CommScope reported net sales of $1.6 billion, a decrease of 33% from the prior year, driven by declines in CCS, OWN, ANS and Home, but partially offset by strong mix growth. Adjusted EBITDA of $249 million decreased by 28%. Adjusted EPS was $0.13 per share, decreasing 74% from prior year. We experienced lower demand in our CCS, OWN and ANS segments as customers more aggressively normalized inventory levels and manage their capital spending. For core CommScope, net sales of $1.35 billion declined 32% from the prior year and adjusted EBITDA of $245 million decreased 30%.
The adjusted EBITDA held up a bit better than our revenue as we continue to drive our cost reduction plan, and we have driven favorable mix. As we have experienced lower orders particularly in CCS, OWN and ANS. Core CommScope backlog continued to decrease and ended the quarter at $1.556 billion, a decrease of 19% versus the end of Q2. In essentially all of our businesses, we are back to normalized backlog levels. As a result of the normalized backlogs, order rates are going to be the direct driver of revenue. Turning now to our segment highlights on Slide 4. Starting with CCS, net sales of $633 million decreased 37% from the prior year. CCS adjusted EBITDA of $79 million was a decrease of 58% from the prior year, driven primarily by the drop in revenue.
The decline is more attributable to our network connectivity and cabling business than our building and data center business. We have seen no meaningful pickup in our order rates despite indications from customers that they expected to see a stronger second half. In addition to the weak third quarter order rates, we have seen limited pickup in order rates in October. Although CCS customer conversations remain bullish on medium and long-term growth, the short-term demand profile remains very uncertain as customers continue to manage inventory and cash. We are also seeing some project delays as customers wait for government funding to ramp spend. Based on current visibility, we expect to see lower revenues and EBITDA in the fourth quarter. Mix net sales of $289 million increased by 12%.
From a business unit perspective, ICN increased 26%. Mix adjusted EBITDA of $63 million increased 155% from the prior year, a $38 million change primarily driven by stronger demand and operational improvements. The NIC segment, LTM adjusted EBITDA, was $252 million, an improvement of $250 million versus LTM a year ago. In RUCKUS, as we have worked these supply chain constraints and release product out of backlog and order rates have declined. This is a temporary situation as customers digest their inventory. All of our other leading indicators point to continued strong demand for our products. We are excited about our continued product development, particularly our RUCKUS One and Wi-Fi 7 products. We feel that we are well positioned to continue to take share in the medium and long-term.
OWN net sales of $210 million decreased 45% from the prior year and across most business units. Similar to CCS, customers indicated a strong second half that has not materialized. Demand in this segment remains soft with very limited visibility. Customers continue to limit new builds and our working down inflated inventories. Although we have aggressively managed costs, OWN adjusted EBITDA of $45 million declined 45% from the prior year. The cost actions have allowed us to maintain adjusted EBITDA as a percent of sales year-over-year at approximately 21.6%. The near-term outlook remains uncertain. However, we would expect that fourth quarter revenue and adjusted EBITDA would be lower than third quarter. Based on current visibility, which is very limited as mentioned, we would expect 2024 to look similar to 2023 in this segment.
A&S net sales of $218 million decreased 36% from the prior year due to inventory adjustment and project delays. A&S adjusted EBITDA of $58 million was essentially flat from the prior year, driven by lower revenue offset by cost reductions and product mix. During the quarter, several of our large customers approached us about pulling back order rates as they dealt with higher inventory levels and project delays. This had an impact on our third quarter revenues. Also, we expect the adjustments to impact the fourth quarter and early 2024. Despite the short-term challenges, A&S continues to position itself to take advantage of the DOCSIS 4.0 upgrade cycle. We are the only supplier that can supply all the products from amplifiers, nodes, modules and CMTS, including virtual CMTS.
As mentioned, our new VCMTS product is in the lab trials with several customers. During the recent SCTE show, our products were part of major service provider demonstrations on industry-leading speeds. We continue to win new DOCSIS 4.0 business at major customers and are well positioned for future growth. Finally, during the quarter, we announced the divestiture of our home business to Vantiva. We feel this combination positions the business for success in a challenging market. We feel this is the best outcome for our customers and shareholders. Our ownership position in Vantiva will allow us to take advantage of the combined scale of the two businesses as well as the substantial synergies the combination will deliver. We look forward to working with Vantiva management to close the transaction in late 2023 or early 2024.
Home net sales were $249 million, declining 36% from the prior year essentially across all business units, driven by customer inventory adjustments and lower demand. Home adjusted EBITDA of $3 million improved from negative $5 million versus prior year as a result of cost saving efforts. Turning to Slide 5 for an update on cash flow. During the quarter, we generated cash from operations of $139 million. We continue to reduce inventory driven by a decline in revenue as well as improved management of inventory. As previously discussed, we are still holding excess inventory driven by the supply chain constraints in 2021 and 2022. We are just beginning to unlock some of this value. As revenue declines, it will delay our ability to monetize. Despite the revenue and EBITDA challenges, we are revising our range for 2023, adjusted free cash flow to $300 million to $350 million.
Turning to Slide 6 for an update on our liquidity and capital structure. During the third quarter, our cash and liquidity remained strong. We ended the quarter with $519 million in global cash and total available cash and liquidity of over $1.29 billion. During the quarter, we increased our cash balance by $101 million. We did not draw on our ABL revolver during the third quarter and therefore, ended the quarter with no outstanding balance. In the third quarter, we continued to execute our debt buyback program and repurchased $26 million of our long-term debt for cash consideration of $17 million. To add more detail, we repurchased $25 million of the 8.25% senior notes due 2027 and $1 million of the 7.125% senior notes due 2028. Since the beginning of the year, we have repurchased $111 million of debt.
During the quarter, we also paid the required $8 million of term loan amortization. The company ended the quarter with net leverage ratio of 6.7x. Going forward, we intend to use cash opportunistically to buy back securities across the breadth of our capital structure. I’m now turning to Slide 7, where I will conclude my prepared remarks with some commentary around our expectations for the remainder of 2023. As discussed, the external environment remains very uncertain as evidenced by our downward guide post revision. Let me remind you of our positioning of our guideposts over the last few quarters. As you can recall, in our Q1 earnings, we indicated customers signaled to a strong recovery in the second half. On our second quarter call, our guidepost assumed a modest recovery in the second half orders.
Fast forward to now, our customers are indicating no rebound in orders for Q4. Although customers were indicating a recovery in the second half, this has not materialized. In addition, we have experienced a large unforeseen short-term adjustment with A&S customers. As evidenced across most of our markets and competitors, we are in a passive telecom, cable and hardware recession. The challenge with the current position is the lack of visibility. Even despite some visibility into customer inventories, customer short-term build plans remain uncertain. We are still very bullish on medium and long-term growth However, short-term challenges are significant. We have reduced our 2023 core adjusted EBITDA guidance to $1 billion to $1.05 billion. Although we are not giving specifics our current view on 2024 is that it looks similar to 2023.
However, this would indicate some recovery from current demand levels. As Jeff mentioned, we continue to evaluate our cost structure including accelerating certain CommScope NEXT efficiency initiatives. Although we have implemented approximately $150 million on operating expense reduction since the beginning of the year, we are still evaluating additional actions. As we have gone through this exercise, we are excited with the opportunities we have found and implemented. Upon recovery of the demand, we should be well positioned to drive strong profitable performance. Finally, I’d like to address our capital structure and specifically our upcoming maturities. We currently have several alternatives that could potentially be used to address the upcoming maturities including, but not limited to, cash on hand, ABL availability, our senior secured debt incurrence basket and proceeds from asset sales.
For today’s call, we will not be making further comments with respect to our capital structure. However, we will provide updates as appropriate as we continue to evaluate these alternatives. And with that, I’d like to give the floor back to Chuck for some closing remarks.
Chuck Treadway: Thank you, Kyle. We are faced with some significant challenges as many of our markets have not cooperated and the visibility to the timing of the recovery is limited. The recovery in the second half has not materialized. We are not alone as this industry is facing similar challenges. Although we continue to manage what we can control and aggressively manage costs, it is not enough to offset a 32% decline in core revenue. We do remain bullish on the recovery. It is just a matter of timing. We are well positioned for the expected recovery as we are a leader in most of our segments and have invested in future growth with capacity and new products. Based on the actions we are taking in the current environment to drive efficiency, when the markets do recover, we are well positioned to drive significantly improved financial performance.
In addition, we will continue to work on near-term capital structure, including asset sales and opportunistic transactions. And with that, we’ll now open the line for questions.
See also 25 Best US Cities Where You Can Retire on $2,000 a Month and 15 Biggest Drug Cartels in the World.
To continue reading the Q&A session, please click here.
