CommScope Holding Company, Inc. (NASDAQ:COMM) Q1 2024 Earnings Call Transcript May 9, 2024
CommScope Holding Company, Inc. misses on earnings expectations. Reported EPS is $-1.76731 EPS, expectations were $-0.23. COMM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the CommScope First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first 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 2024 first quarter results. I’m 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 returns. 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 described during today’s presentation are on a year-over-year basis, unless otherwise noted. I’ll now turn the call over to our President and CEO, Chuck Treadway.
Chuck Treadway: Thank you, Massimo. Good morning, everyone. I’ll begin on Slide 2. We continue to see uncertainty in our business. In the first quarter, we saw a recovery in our CCS and OWN order rates as service providers have worked down inventories and demand appears to be rebounding. This is a positive sign and one that we have been waiting for. Unfortunately, with the early signs of recovery in CCS and OWN, our ANS and NICS segments realized further deterioration in the quarter. In ANS and NICS, we experienced lower sequential quarterly revenues driven by delayed upgrades, customer inventory and lower demand. Visibility remains limited across all segments as customers continue to manage through macroeconomic conditions and upgrade plans.
Based on current visibility, we expect the second quarter revenue and adjusted EBITDA to be higher than the first quarter. Turning to the first quarter results. CommScope delivered net sales of $1.168 billion and adjusted EBITDA of $153 million for the first quarter of 2024. Our first quarter continued to be negatively impacted by lower market demand and larger-than-expected customer and channel inventory buildup. As I’ve mentioned in past calls, we continue to control what we can and navigate macroeconomic challenges that impact our businesses. We are the market leader in most of our businesses with a comprehensive strategy and capacity in place to meet expected future demand. In addition, as referenced in our fourth quarter call, we are managing our cost structure and are on track with our plan to take out $100 million of annual cost.
Now I’d like to give you an update on each of our businesses. In the quarter, CCS saw stronger ordering patterns than we saw in late 2023. As mentioned, we believe that this is due to our service providers continuing to digest their inventories they had on hand as well as stronger enterprise sales from data center and building and campus. Starting with our enterprise side of the business. We continue to find success with our launch of our SYSTIMAX 2.0 structured cabling solution. The introduction of innovative offerings such as GigaREACH and XL5 cable enable greater distances and increased bandwidth capabilities. These new cables support both building and campus solutions for the next wave of applications like security and multi-gig Wi-Fi 7 access points.
In addition to our building and campus market, the cloud and hyperscale portion of the business saw additional project momentum and build-outs of Gen AI data centers. We are working with several of the large players in this arena as our products and services are well positioned for these builds. To supplement strong demand in this business, we’re in the process of expanding our connector capacity with the capacity to be implemented by midyear. Turning our attention to our broadband business. We are encouraged to not only see ordering patterns stabilize but growth in order rates throughout the quarter as service providers work through high inventory levels over the past few quarters. Much of our research suggests that fiber-to-the-home passings in the United States remained at historic levels, thus the need to refresh inventory.
As we look forward to the government BEAD funding initiatives, we have launched hundreds of Build America Buy America qualified products. I would encourage you to visit commscope.com to see the breadth of our BABA compliant products. These products and solutions are positioned to capture the long-term market tailwinds supporting broadband infrastructure projects that are expected to start late in 2024 and into 2025. All of these factors and the recent order trends evidence of a potentially stronger second half of 2024 and return to growth for the CCS segment. Turning to NICS. As we have discussed on the Q4 earnings call, the business is seeing weaker than predicted sales primarily driven by our RUCKUS business impacted by higher-than-average inventory levels in the channel.
As we work with our partners to bring their inventory down to an acceptable level, this will continue to affect our NICS segment performance. In addition to the inventory build, we are also seeing a rather significant reduction in demand. We have a number of initiatives underway to help the business but we do not expect that these initiatives will fully offset the lower demand we expect to see over the next few quarters. It is also important to note that this is not just impacting RUCKUS, other competitors in this space are citing similar issues. A bright spot in the RUCKUS business is that we are seeing continued momentum towards our RUCKUS One and RUCKUS AI solutions. As our customers are looking for more ways to optimize their networks, they are turning to our software solutions for help.
As we reinforce our CommScope NEXT initiatives, we expect to continue to improve this business as we believe it has significant long-term growth potential. We are not done as we continue to evaluate every aspect of this business for incremental opportunities, including investing in the next generation of product solutions and SaaS. Our NICS business was positively supported by ICN performance, led by the DAS business, providing in-building 5G connectivity. This positions us nicely to grow with operators and enterprises as well as in public and private networks. With that said, our NICS segment and specifically RUCKUS remains under substantial short-term pressure as demand significantly declined in the last quarter, driven by too much inventory in the system and slower overall market demand.
In the first quarter, we saw a drop in the RUCKUS sales funnel with purchasing decisions being pushed to future periods. We expect that the lower demand will continue at least throughout the next few quarters as inventory is digested and the demand drivers reset. In OWN, as mentioned in previous calls, 2023 saw a decline in US carrier capital spend as well as pressure from US carriers digesting inventory. During the first quarter, we have seen some continued recovery in order rates, largely supported by increased base station antenna sales. We expect that 2024 revenues will look similar to what we saw in 2023 but with a stronger second half of the year. Again, as previously stated, we continue to focus on what we can control, and we are ready to support our customers when they are ready.
In addition, we continue to develop and commercialize new products to help our customers build reliable and efficient wireless infrastructures. Last quarter, we introduced our new SEED base station antenna solution aimed at delivering 15% greater efficiency at a fixed power level. And this quarter, we are happy to report that it has gained multiple operator design wins. Again, like we are in CCS, we are well positioned in the market and feel like we have the right solutions to support the market as recovery continues. Finishing with ANS, first half of 2024 will be historically weak due to our customers being faced with larger-than-expected inventory and navigating the choices for next-generation HSC architecture. As mentioned previously, the ANS segment has made a successful transition to a leading supplier of edge-related products, including nodes, amplifiers, RPD and R&D modules and remote OLTs for node PON.
We will have a significant role in helping our customers build out their next generation of multi-gigabit networks while continuing to support our large installed base of CMTS products. We also recently launched DOCSIS 3.1 enhanced solution, enabling operators to turn on services between 5 and 8 gigabits per second, largely through existing infrastructure and a software upgrade. As we move closer to the second half of the year, we are on track to start delivering products supporting DOCSIS 4.0 upgrades, and we will likely see increased momentum towards the latter part of 2024. We will continue to invest in our virtual CMTS solution that will be fully DOCSIS 4.0 compliant as major MS cells determine which path to take. Whether it be the extended spectrum DOCSIS variant or full duplex DOCSIS, we will have the right product to support them in their journey.
With that said, as we suggested would be the case in our fourth quarter comments, our customers were faced with larger-than-expected inventory and adjusted shipments to rightsize their inventory. As a result of these two issues, we anticipate that order rates and revenues will be negatively impacted in the next few quarters. We’re continuing to navigate our businesses through varying market conditions. But as we stated in the past, we are well positioned for market recovery. And while we remain confident that a recovery will occur, the timing and intensity of that recovery continues to be uncertain. We have been in regular dialogue with our customers and evaluate market data and projections for each of our business segments. Understanding demand drivers has been difficult for us as well as our competitors.
We will continue to control what we can and will support our customers in the process. And with that, I’d like to turn things over to Kyle to talk more about our first quarter results.
Kyle Lorentzen: Thank you, Chuck, and good morning, everyone. I’ll start with an overview of our first quarter 2024 results on Slide 3. For the first quarter, consolidated CommScope reported net sales of $1.168 billion, a decrease of 30% from the prior year, driven by declines in all segments. Adjusted EBITDA of $153 million decreased by 51%. Adjusted EPS was negative $0.08 per share. We experienced lower revenue driven by continued delays in upgrades, customer inventory levels and overall lower market demand. The sequential trend of quarterly revenue and adjusted EBITDA decline continued in the first quarter of 2024. CommScope backlog ended the quarter at $1.162 million, up slightly versus the end of the fourth quarter. As mentioned previously, in all of our businesses, we are back to normalized backlog levels.
Order rates are going to be the direct driver of revenues over the next few quarters. As Chuck mentioned earlier, we saw an increase in order rates from the fourth quarter of 2023 to the first quarter of 2024, particularly in CCS and OWN. Although this is a positive sign, we continue to lag well behind historical revenue levels. Turning now to our first quarter segment highlights on Slide 4. Starting with CCS, net sales of $605 million decreased 26% from the prior year. CCS adjusted EBITDA of $95 million decreased 37% from the prior year, driven primarily by the drop in revenue. The decline is being driven by the broadband business. We continue to see increases in order rates during the quarter. On a sequential basis, revenue was up 9%. Despite the pickup in order rates, these order rates still remain low relative to historical levels in 2021 and 2022.
Although CCS order rates improved and customer conversations remain bullish, on medium- and long-term growth, the short-term demand profile remains uncertain. However, based on current visibility, we expect higher CCS revenue and adjusted EBITDA in the second quarter of 2024 versus the first quarter. NICS net sales of $180 million, decreased by 37% versus the first quarter of 2023. From a business unit perspective, RUCKUS decreased 46% and ICM decreased 17%. NICS adjusted EBITDA of negative $1 million decreased $59 million from the prior year primarily driven by the decline in RUCKUS revenue. In RUCKUS, as we have worked through supply chain constraints and released product out of backlog, order rates have declined as channel partners digest inventory.
It should also be noted that with RUCKUS’ backlog at historical levels, seasonality is also impacting RUCKUS revenue. Historically, the first quarter is the lowest revenue quarter for RUCKUS. In addition to channel inventory and seasonality, overall demand is lower in the market. During the quarter, we also saw our near-term funnel decline as customers push projects and upgrades to later periods. Based on latest third-party forecast, the RUCKUS market will decline in 2024. We expect RUCKUS to have a challenging year relative to 2023. Despite these challenging short-term market conditions, we are excited about our continued product development, specifically our RUCKUS One and Wi-Fi 7 products. We feel that we are well positioned to continue to take market share in the medium and long term.
OWN net sales of $196 million decreased 24% from the prior year and across the majority of the business units. Despite limited visibility to a recovery, order rates in this segment started to increase in the first quarter. We continue to aggressively manage costs in this segment to offset the revenue decline. OWN adjusted EBITDA of $44 million declined only 26% from the prior year. Our continued investment in new product development positions us for continued leadership in this segment. We expect second quarter OWN revenue and adjusted EBITDA to increase compared to the first quarter. ANS net sales of $187 million decreased 38% from the prior year due to customer inventory adjustments and upgrade delays. ANS adjusted EBITDA of $15 million was down $32 million or 68% from the prior year driven by lower revenue.
As mentioned on our previous call, several of our large customers approached us about lowering order rates as they dealt with higher inventory levels and delayed timing on upgrades. This had an impact on our first quarter revenues. Also, we expect these adjustments to have a significant impact throughout 2024. Despite the short-term challenges, ANS continues to position itself to take advantage of the DOCSIS 4.0 upgrade cycle. We’re the only supplier that can supply all the products from amplifiers, nodes, modules and CMTS, including virtual CMTS. Turning to Slide 5 for update on cash flow. As indicated on our prior call, we expected the first quarter to be a use of cash because of the lower EBITDA, higher cash interest paying quarter and timing of our annual cash incentive payout.
That said, for the first quarter, cash flow from operations was a use of $178 million and adjusted free cash flow was a use of $154 million. 2024 first quarter cash flow from operations declined from the prior year as a result of the lower EBITDA. We continued to reduce inventory in the quarter. As previously discussed, we’re still holding excess inventory driven by the supply chain constraints in 2021 and 2022. As revenue declines, it delays our ability to monetize this excess inventory. Turning to Slide 6 for an update on our liquidity and capital structure. During the first quarter, our cash and liquidity remained strong. We ended the quarter with $357 million in global cash and total available cash and liquidity of over $900 million. As expected during the quarter, our cash balance decreased by $187 million.
We did not draw on our ABL revolver during the first quarter and therefore, ended the quarter with no outstanding balance. As previously mentioned, our ABL availability was negatively impacted by the Home divestiture in early 2024. During the quarter, we paid the required $8 million of term loan amortization. We purchased no debt on the open market. Going forward, we intend to continue to use cash opportunistically the buyback securities across the breadth of our capital structure. The company ended the quarter with a net leverage ratio of 9.9 times. I’m now turning to Slide 7, where I’ll conclude my prepared remarks with some commentary around our expectations for 2024. Despite some pickup in CCS and OWN order rates in the first quarter, our current order rates remain low as we are dealing with lower market demand.
The magnitude of demand drop-off in NICS and ANS is concerning. The lower order rates had a significant impact on our revenue and adjusted EBITDA. As we have said throughout the downturn, we remain bullish on medium- and long-term growth in all of our segments. However, visibility to the timing and magnitude of the recovery remains unclear. The recovery in CCS and OWN order rates is definitely a positive sign. Based on current visibility, we expect the first quarter to be the lowest revenue and adjusted EBITDA quarter of the year. We continue to control what we can control, including implementing the $100 million of our annual cost reductions we have referenced on previous calls. We are encouraged by our ability to manage cost during the downturn and are well positioned to drive profitability when revenues return.
We’ve been able to achieve these cost reductions while continuing to invest in all of our segments with new product development and enhanced customer support. Finally, I’d like to address our capital structure. Not much has changed since last quarter. We continue to evaluate alternatives, including asset sales to address the 2025 maturity and beyond. We have proposals from certain credit groups to deal with essentially all of our nearer-term maturities. However, we do not believe that proposals we have received to date align with our strategic goals or optimize our capital structure. As mentioned in our last call, our credit documents are very flexible. We intend to use this flexibility to optimize our capital structure, including dealing with the 2025 maturity.
For today’s call, we will not be making further comments with respect to our capital structure. However, we will provide updates as appropriate. And with that, I’d like to give the floor back to Chuck for some closing remarks.
Chuck Treadway: Thank you, Kyle. As predicted, the first quarter was a very challenging quarter. We’re in the middle of a hardware recession and our revenues reflect that recession. Although there were some bright spots in the quarter with CCS and OWN order rates, visibility to a pending recovery remains uncertain. The falloff in demand in the NICS and ANS businesses were sharper than we predicted as customers manage inventory and push out projects and upgrades. I’m confident we’re doing the right things with the levers we control like customer interface, costs, new product development and capital. We’re very focused on supporting our customers, and we appreciate their support. When market conditions improve, we are well positioned to capture the recovery in all segments.
In addition to managing the businesses, we’re extremely aware of our capital structure and liquidity. We will continue to work on managing these aggressively for the benefit of our shareholders. We appreciate your continued support and patience. And with that, we’ll now open the line for questions.
See also 20 Most Air Polluted Cities in Asia and The 25 Best Sportswear Brands in the World.
Q&A Session
Follow Commscope Holding Company Inc.
Follow Commscope Holding Company Inc.
Operator: [Operator Instructions] Our first question comes from the line of George Notter of Jefferies LLC. Your line is now open.
George Notter: Hi guys, thanks very much. I wanted to ask about potential asset sales. I think last quarter, you guys made a comment to the effect of you won’t be selling assets in the near or medium term. I think from the press release and some of your comments, it sounds like maybe that’s on the table a bit more. I’m just wondering if there’s been any change in the outlook there?
Kyle Lorentzen: Yeah. Hi, George, I’ll just — I’ll refer to the prepared remarks. I mean, it continues to be an alternative for us. We’re continuing to look at those and have dialogue. And I think what we said last time is we’re not going to go sell those assets at any value. So I mean I think the dialogues continue, and it is an alternative.
George Notter: Okay. Got it. And then on CCS, I was very interested in the comments about order rates improving. Are there specific pieces of the business where you’re really seeing order rates improve? And I guess as I think about CCS, I mean, there’s parts of the business that are more asset intensive, I’m thinking about fiber cabling manufacturing, for example and then areas of business that are less capital intensive, I guess I’m thinking here about fiber connectivity. And I assume that as fiber cabling gets better, it’s a better lever for you in terms of EBITDA improvement as you utilize those assets. But I’m wondering if there’s kind of a chain of events here in terms of really getting that business back to reasonable looking profitability.
Chuck Treadway: Well, thanks for the question, George. I think what we said in the remarks is that we’re starting to see stronger order rates, but I’d say that we’re still well below our ’22 levels, but we are seeing pickup. And I would say we’re seeing pickup both in the broadband or the NCC portion of our business as well as the building and data center part of our business. We’re seeing actually probably more of a pickup in the building and data center side than the NCC side right now. But to your point, I mean, we made the capacity investments prior to the last ramp-up, and we need more connectivity, which we talked about in our remarks, which we’re adding by midyear. But we’re going to have capacity to support us even above the levels we had in ’22 going forward.
George Notter: Okay. Thanks very much. Appreciate it.
Chuck Treadway: Thanks.
Operator: One moment for our next question. Thank you. Our next question comes from the line of Meta Marshall of Morgan Stanley. Your line is now open.
Meta Marshall: Great. Thank you. Maybe I wanted to ask two questions. First, on the CCS business, you spoke about kind of some of your enterprise traction, but is there anything to note with kind of data center customers or cloud customers that you might have? And then maybe second, just some commentary on gross margins. Clearly, EBITDA was a highlight. Is that all utilization that led to kind of gross margins being a hair short of expectations? Or just any commentary on how we should look at gross margins throughout the year. Thanks.
Chuck Treadway: Thanks, Meta. I’ll take the first part, and Kyle can hit the gross margins. But I would say on the data center side, that’s where we’re seeing our biggest lift in the building and data center part of our business, hyperscalers as well as cloud. And I would say it’s linked to the Gen AI and the press there. What’s going on. There’s just a lot of interest, plus we have some really nice products with Propel with — and then our structural cable SYSTIMAX 2.0 stuff that help support that. So we feel good about where we are in that business.
Kyle Lorentzen: Yeah. I’ll get to the gross margin. So I think on the gross margin side, clearly, the level of revenue and the absorption of our fixed cost has an impact on the margin side. I think also when we think about the businesses and just level of gross margins, our ANS and NICS business tend to be a little bit higher on the gross margin basis. So there’s a mix component that’s impacting the margins in Q1, just as well as the fixed cost leverage.
Meta Marshall: Great. Thank you.
Operator: One moment for our next question. Thank you. Our next question comes from the line of Simon Leopold of Raymond James. Your line is now open.
Simon Leopold: Thanks for taking the question. Yeah. I want to follow up on that gross margin commentary and see if you could help us maybe build a little bit of a bridge to the December quarter versus the March quarter in terms of the changes. What I’m really trying to understand was, was it that on the lower volumes, things like NICS and ANS were down materially relative to the prior quarter? Or anything you can help to sort of bridge the two quarters? And then, I’ve got a follow-up. I’ll let you answer that one first, please.
Kyle Lorentzen: Yeah. On a sequential basis from Q4 to Q1, the ANS business and the NICS business were down relative to what we saw in CCS and OWN, where we saw a little bit of growth. And as I answered in the previous question, the mix of those businesses does have an impact on just the margin profile as just ANS and RUCKUS, in particular, have a little bit higher margin profile than the CCS and OWN business.
Simon Leopold: Yeah. What I’m trying to clarify here is that it’s not just the mix of segments, but the gross margin within ANS and within the RUCKUS’ business were down materially versus the prior quarter themselves. Is that correct?
Kyle Lorentzen: Yes, because the revenues are down and you’re not getting the coverage on the fixed costs in those two businesses.
Simon Leopold: Yeah, perfect. That’s why I want to make sure I understood. So what I wanted to ask about was sort of the trajectory of the ANS recovery and some of the key drivers. I guess what I’m wondering about is the availability of the key components and chips for the DOCSIS 4 products. What’s your expectation on the availability or timing of when you expect those amplifiers would ramp and how are you thinking about the possibility of products that would essentially be a single amplifier that could be dual function, either a full duplex or extended spectrum. Is that something you’d be offering? And if so, what’s the timing of that?
