Welcome, everyone. I'm Ana Goshko with Bank of America, and I cover technology and telecom credits on the fixed income side. This is our 2023 Leveraged Finance Conference. Thank you, everyone, for joining us, and I'm thrilled to have CommScope with us. We have Kyle Lorentzen, the company's Executive Vice President and Chief Financial Officer. So, without further ado, Kyle, thanks so much for being with us. I don't know if you have any opening comments you'd like to make or get right into questions?
No, we get right to questions, but thanks for everyone joining. Probably should have sold tickets to this one with standing room only, but appreciate, you guys spending some time with us today.
Okay, great. Okay, so let's start with, this is a credit-focused conference, so let's open with the debt-related topics, and then we'll move on to the business, operational, financial performance, strategic things. So, everyone here, I think, is aware that CommScope debt is trading at deep discounts. And I think that's both in response to the financial performance, in this sort of industry, cyclical downturn, but also concerned about upcoming debt maturities, and the high leverage right now, with the business in this, kind of down cycle. So on your recent earnings call, you highlighted the numerous alternatives to address the upcoming maturities. But beyond that, as you work on your plan, you didn't want to get into, I think the ins and outs of the debt structure options.
And instead, you know, said you wanted to focus your time with investors, analysts, talking about the business and the opportunity. Is there anything you can add to that, to kind of head off this question upfront?
No, I mean, I think, you know, as we, as we've talked about, I think we feel like, you know, we do have some levers. We have, you know, some secured capacity. You know, we have, you know, some cash on the balance sheet. We have ABL availability, and I think we've, you know, now, you know, brought up the topic of asset sales. I think those are all, you know, levers that, you know, we're looking to figure out how they play a role in our strategy. You know, on a daily basis, we are, you know, very focused on the capital structure. And, you know, I think, you know, over time, you know, we'll get more clarity to that and continue to communicate as things become available.
At this point in time, that's, you know, that's sort of all we would say about it.
Okay. And then, you know, just on the topic of asset sales, so on your 3Q earnings call, I think it was the first time that you mentioned the potential for asset sales. Was that, like, a deliberate disclosure? Is there anything to read into that with regard to there being any kind of process in play?
No, I don't think there's anything to read into it other than the fact that we've, you know, brought that to the table as, you know, an option for us to deal with our capital structure. You know, I think, you know, as anyone would expect, you know, I think that is a lever that, you know, we have the opportunity to pull. Clearly, it needs to be, you know, the right thing to do for the company. But I think, you know, that disclosure was just around the fact that, you know, we are thinking about that as part of the solution.
Okay. You pre-released the third quarter results, and that included a kind of revision to the guidance for 2023. But that hasn't been the company's practice to pre-release in the past. Why the change in approach on that, on that pre-release?
Yeah, I mean, simply put, the reason that we pre-released was the fact that we were gonna miss our number, and we were gonna revise the guideposts. I think as soon as we got visibility to that, you know, we felt that, you know, we felt that that was the right thing to do, was to disclose that. You know, since Chuck and I have been here, we haven't had, you know, that type of a, of adjustment, and that was significant enough that we felt that it was the right thing to do, was to, to get out in front of it.
Okay. So with regard to the lower-than-expected 2023 financial performance, you've highlighted the customers, especially your telco and your cable customers, have been walking down their purchase outlooks this year as they aggressively reduce inventory, and that's really sort of after order pull forwards that they had when lead times were extended during the supply chain challenges, especially last year. So a number of sort of questions around that topic. So one, are you getting better visibility into customer inventory levels to get a better handle on how much destocking is left to go?
Yeah, I think the answer to that is, as we've been going through the last few quarters and trying to get better visibility, I think we are getting better visibility, but it continues not to be at the level that we would like it to be. You know, in many cases, you know, we can see inventory levels that our customers have of our product. You know, that's helpful in us gauging, you know, where we are in the cycle. But what we, you know, we have a harder time, you know, trying to understand is what really is the true demand, you know, what's going into the inventory, what's coming out of the inventory. You know, but what we can say, with the visibility that we have, is that the inventory levels at our customers are definitely coming down.
They're continuing to come down, and I think we feel at some point in time, it's got to get back to that equilibrium position and flip back, once that inventory gets depleted.
Okay, and then does your visibility differ for the distributors versus your end-user customers?
... It does to a certain extent, I would say, you know, and it also depends on the segment that we're in. I think I'll make a general statement that our visibility with our distributors is better than the service providers. Not to say that we don't have some visibility to the service providers, but I think, you know, just generally, our visibility at the channel partners is better than what we see at the service providers.
Okay. And then, are your lead times now back to normalized levels?
Yeah, I would say generally our lead times are back to where we were, sort of, you know, pre-supply chain constraint challenges that we had in 2021 and 2022. You know, when we think about lead times, you know, and I would say essentially all of our businesses, with the exception maybe of ANS a little bit, you know, these are businesses that operate off of weeks of lead time, days and weeks, not quarters like we were seeing, you know, the last couple of years. So I would say, you know, for the most part, our businesses are back to normalized lead times where, you know, you know, we're, you know, days and weeks of lead time. You know, the only thing I would just mention is that that's how this business operates, right?
This is not. It's not troubling to us that we're there, because if we go back to those pre-supply chain constraint issues, that's how the business is operated. We operated with days and weeks of lead time, and we're back there now.
Okay. I think over the course of this year, you know, you've talked about having constant conversations with customers, but obviously those indications of, you know, what their demand and kind of purchase requirements were gonna be changed a lot over the course of this year. Are you changing anything, or is there anything that you can do with regard to the communication process with customers to get a better view going forward?
I mean, I think, I mean, we're in daily dialogues with customers about, you know, what their, you know, their demand, you know, forecasts look like. You know, I think that there were you know, starts and stops as we went through 2023. You know, and I think that that's just the continual dialogue that we have, you know, with our customers, and some of our customers are, you know, are better at it than others. And it's just something that, you know, as we talk to them, one of the things that we're pretty focused on is just being careful of the whipsaw, right?
We don't want them to get caught in a position where, you know, when the markets come back, that we sort of get back in that position, you know, that we were in last time with lead times, and then we start the cycle all over again. So, you know, we've really tried to focus on, you know, sort of what does it look like going forward. Now, I think with that said, visibility is still not where we would like it to be. I mean, that's one of the bigger challenges that we have in the business, is just, you know, sort of the lack of visibility. And, you know, I don't think we're alone in that, right?
I mean, I think a lot of our, you know, competitors in these, in our segments are having the same challenges that we have. Clearly, you know, our situation a little bit more highlighted because of the capital structure. You know, but in many of the segments that we're in, our competitors are, you know, at the point that they, you know, that they're not even providing guidance because of the lack of visibility. I don't think we're substantially different than that. That doesn't mean that we're not continuing to talk to our customers. You know, we're working with them on getting better information, but it's, it's still an area that we would love to have more visibility.
Okay. Sometimes what you'll see in the fourth quarter and even in, like, December is sort of budget flushes from customers where they have use it or lose it. Is there anything like that that's, you know, potentially happening this year, or is that kind of fully baked into the guidance that you provided?
I mean, I don't think we're seeing anything, you know, through sort of the first half of the fourth quarter that would tell us that, you know, there's gonna be some type of, you know, flush. I mean, I think, you know, we sort of talked about, you know, Q4 being, you know, a little bit down from Q3. And I think, you know, that's that continues to be our view. You know, I don't think we're gonna, you know, see anything dramatic at the end of the year that would drive it, you know, either way, either up or down.
Okay. And then, so you haven't really given any 2024 guidance, but you gave some kind of indicative comments, I'd say. So, you know, given the lack of visibility, you talked about similar performance in 2024, that's financial performance, versus 2023. And I think that really meant, like, if you take kind of the fourth quarter run rate, does that mean that you expect first and second quarter sort of to be kind of sideways from that? And then if there's any sort of kind of uptick, that's gonna be more in the second half?
Yeah. So I, in our comments around, you know, 2024 looking like 2023, I think there's a couple things. You know, in order for us to do that, I think we said this in our, in our earnings call. In order for us to get that, we would have to see a recovery, which we believe is second half of 2024. The reason why our teams, I think, you know, feel that there is some recovery in the second half is, although not perfect, we do have some visibility to inventories, at our customers, and those inventories are working down. And we're gonna get to a point where it's gonna flip the other way, and that they're gonna have to start ordering. You know, again, the visibility to that is, is that second half? Is that second quarter? Is that, you know, later in 2024?
Eventually, we're gonna get there. So when we talk about 2024 looking like 2023, we would, you know, we would need to see, you know, some recovery in those order rates, which we think will be primarily driven, you know, by the inventory being worked down and the customers having to order, you know, back at more normalized levels. You know, the one thing that I would also say, just as we think about the business in general, you know, the last couple of years hasn't been normal from a seasonality standpoint. You know, our business, you know, on a historical, you know, take out the last couple of years where we had all these crazy supply chain constraints and challenges, you know, clearly Q1 seasonally for us is a little bit lower.
I think we're gonna go back to more of that seasonal approach as we go into 2024, as the supply chain situation has normalized and, you know, we've worked through our backlog and we're back to normalized lead times.
Okay. Okay, so the devil's, I think, in the details, which is in the segments. So, starting with what you call-- what we all call CCS, but that's your cabling and connectivity. So that's really where you sort of the telcos, and it's the kind of core fiber, copper connectivity segment. So I would say some investors in the debt market are kind of always glass half empty, so in some cases, and are worried that 3Q2023-4Q2023 performance of CCS is really the new normal. So really are looking at it potentially as kind of a secular pressure versus the cyclical. Could you kind of make the argument for why that's not the case?
Yeah, I mean, I think currently right now, as we've been talking about, you know, there's a lot of inventory, you know, that's had to work its way out of the system. That is gonna normalize. I think, you know, that in itself, you know, provides a lift for that business. I think the other thing, you know, that we've talked about, is just, you know, federal funding, right? So the federal funding, it is gonna happen. You know, we can again, visibility, is it, does it start in the second half of 2024? Does it roll into 2025? You know, but there, there will be tailwinds that come from, you know, just the, you know, the, the federal funding and, and not just the BEAD program, but there's other programs that are out there to, to fuel the spend.
You know, I think the other, you know, thing on the CCS side of the business is, you know, we've been, we've been continuing to manage the cost structure. So, you know, we've talked about $150 million that we took out, you know, sort of first half of this year. You know, we're looking at another $100 million, you know, a fair amount of that, of that comes from CCS. So I think when we get back to, you know, more normalized levels of revenue, you know, I think our, our profitability will be enhanced by those actions that we took.
Okay, so you know, on that topic then, in the last four quarters, the EBITDA margin in CCS has ranged from 11%- 20%, I think. Kind of mid-cycle, what's your target EBITDA margin for CCS? You know, clearly there's an element of fixed costs and scale, but you know, how does mix impact it, you know, quarter to quarter as well?
I mean, as we think about just CCS and, you know, there's a leverage component of it on the cost side. You know, we have manufacturing facilities that, you know, are not... I mean, they're being underutilized now. So as the markets recover and we get more revenue through there, you know, we'll see a lot less under absorption in the facilities. I think the other thing that I'd just make a comment on in CCS is the fact that, you know, the profile of product mix that we have in CCS, you know, the difference between our connectivity solutions and our cable business. Our cable businesses are lower margins. As we've gone through the last few quarters, our cable business has declined less than our connectivity business.
We think when we get back to a more normalized level, you know, we should see some margin improvement just from a mix standpoint. We'll see connectivity pick back up to be more in line with, with cable, and that should just help our margins in general. I'm not gonna give a specific number, but I think, you know, you know, you know, it's probably somewhere in the middle of those two numbers is where we would, you know, see a normalized level.
Okay. Is there any reason that the connectivity side was weaker? Was there just more inventory buildup?
I think that's when we went through the supply chain constraints and lead times got pushed out, the connectivity side of the business, lead times got much longer in the connectivity side of the business. And I think that's where we saw, you know, a little bit more overbuying and more inventory, and a lot of the inventory destocking is coming from the connectivity side versus the cable side.
Okay. Okay, so you raised the BEAD topic. So, you know, on the telco side, you know, telcos still are in a multi-year industry fiber build-out. So other than destocking, is there anything else that's been driving the pause in order? So, you know, one thing that comes up is just the interest rate environment, carriers potentially reassessing ROIs of their fiber build. The other thing is actually, you know, with BEAD coming up, do you believe carriers are taking a pause so they can, you know, get a better handle on what the BEAD availability is gonna be before they move forward with deployment plans?
Yeah. So lot, lot to that question.
Right.
I think as we look at, you know, clearly being impacted by inventory. I think in some cases, we've seen a pullback on spend as well, as people are trying to manage the new interest rate environment. Plus, we're also, you know, they're trying to manage their cash as well. You know, so, you know, I think that, you know, that is definitely, you know, a driver. It's not just an inventory issue. I think we've, you know, seen some pullback in spend as people are, you know, managing their own balance sheets. Yeah, so I think it's a little bit of both. I mean, I think we feel it's probably a little bit more weighted toward the inventory issue than the demand side. But I mean, I think there is some demand pullback.
I think the second half of your question is, again, I just, you know, we talked to them. I think there's more sentiment out there from some of our customers around waiting for the BEAD money to build their networks out. You know, I won't go into specifics, but I think, you know, there's been some comments made lately about, you know, people wanting to build their networks out using, you know, some of that federal funding, you know, versus on their own dime.
Okay, we haven't heard you basically provide a TAM or kind of size the BEAD opportunity for CommScope. I don't know if you can have any comments on that front, and then I've got a second question.
Yeah, I think, I mean, I think we would be in line with, you know, some of our competitors have come out and talked about, you know, the TAM that comes with the BEAD program. I think, you know, we would be in line with those, the numbers that they've quoted, which is, I think, you know, ± $4 billion worth of TAM.
Okay. And then, so given the Buy America component of BEAD, how many competitors really are there?
I mean, I think all of the competitors are, you know, watching the rules as they get developed and come out, and coming up with, you know, their own manufacturing strategies to deal with the Build America. I think that, you know, the Build America is still sort of being developed. You know, but just like we are, everybody, I think, is looking at, you know, how they meet those standards. And, you know, personally, I, you know, I don't think we'll see a dramatic change in the competitive landscape as people work through those things. I mean, people will come up with ways to be compliant with Build America, just like we're working on that.
Okay. I mean, you know, I know you've, you know, built a new facility in North Carolina recently. I think a part of that strategy was to prepare yourself for these upcoming federal kind of programs. I mean, how are you preparing yourself for-
Yeah, I think we-
for that opportunity?
I think we would, you know, we feel like we're well-positioned. Not to say that there's not work to be done. You know, a lot of our connectivity products are, you know, not done in North Carolina, they're done elsewhere. You know, so we're, you know, we're working on that. But, you know, we clearly feel like with our presence in North Carolina on the cable side, that we're well-positioned relative to the requirements that are coming from Build America.
Okay, and then final question, just on CCS, since it's one of your biggest segments. So I think you've said that, you know, more of the weakness obviously has been in the network connectivity and cabling rather in the building and data center side. If you could just give us a sense of, you know, what your exposure is to the building and data center side, you know, and specifically with regard to hyperscale, and if, you know, there's any sort of momentum you're seeing from sort of cloud and AI kind of coming back.
Yeah. So just as we think about 2023 as it relates to, you know, the broadband side of CCS and the inside part of CCS, you know, the broadband side is definitely down more than the inside part of our business. You know, with that said, if we go back to 2022, the broadband side was up substantially more than the inside, part of our business. I think as we think about data centers, I think data centers is a really attractive space for us and, you know, quite honestly, we've got what we believe to be a pretty competitive product range and, you know, we're working with all the large, data center companies. So I mean, I think we're enthusiastic about the growth, which, you know, quite honestly, we've seen a fair amount of growth in that segment.
You know, what I would say, though, is, you know, the data center business is not, when we think of the total CCS business, it's a relatively sort of small part of the business. So I think we feel like a lot of growth, but coming off of a base that, you know, let's say it's 10% or 15% of our total CCS revenue is in data centers. So it's, you know, great growth, but I would also caution it just comes off of a smaller base.
Okay, so shifting to the outdoor wireless, so you know, OWN, as it's called, you know, it's been weak, but I think you've been telling us to expect that in the post-5G deployment slowdown. So what should we think of as the new normal for OWN? If you look at 2023, is that a good proxy?
I think just like we saw in CCS, I think there was, you know, some overbuying on the OWN side, not, not just, you know, not at the levels that we saw in CCS, but there's definitely some, you know, overbuying and inventory destocking that, you know, the large service providers are doing in that business. You know, I think, you know, as we think about OWN, you know, it's probably somewhere in between, you know, what we saw in 2023 and, you know, what the historical level of the business is at. You know, we're continuing to develop new products. Our Mosaic product.
You know, which we think, you know, with the active and passive technologies that we can put on one antenna, we think that that, you know, has legs and, you know, will help us as we think about, you know, more normalized rates and, you know, dealing with some of the technology changes that we're seeing in that business.
Okay. So shifting to access networks, which is really cable-focused. So, you know, there's an ongoing evolution in cable architecture from centralized to distributed architecture. You guys are part of that. There is a DOCSIS 4.0 opportunity, which is, you know, still pending. Nonetheless, like, you did see obviously weakness. It came in weaker in this second half than you were expecting. If you put it all together, do you consider ANS a core business, and is there any kind of industrial logic to combine it with another strategic player in the market?
Yeah, no, I wouldn't comment on that. But, I mean, I think we're focused, just like we are in all the other businesses, to figure out what we can do to grow the business and enhance the profitability of the business. You know, we're clearly in very early innings of a DOCSIS 4.0 upgrade. You know, we think that is, you know, a multiyear cycle. And I think as we talk about, you know, we are the supplier that can supply all the products that are required to do those upgrades. So we're, you know, we now have a virtual CMTS solution. You know, we, you know, do our modules, we do our nodes, and we do amplifiers, and we're the only player that can do that. We think that gives us a competitive advantage.
You know, I think we're playing, as we're, you know, pretty open about playing a little bit of catch-up on the virtual CMTS side. But I think we're, you know, well-positioned. I mean, the team's done a really good job of, you know, developing a lot of new products to deal with the DOCSIS 4.0 upgrade cycle, you know, over the last, you know, 24-36 months. And I think we've made a lot of, a lot of headway and feel like, you know, we're well positioned to take advantage of the upgrade cycle.
Okay. So then we're moving to your network business, known as NICS. So obviously many investors are concerned that NICS 2023 performance is abnormally high, due to the pent-up demand from the backlog, from last year's chip shortage. Is this an accurate view?
No, I think we feel, you know, we've transformed that business. I mean, I think clearly, you know, the last couple of quarters have been helped because if you go back and think about, you know, we built up a significant amount of backlog in that business as a result of a lot of chip constraint challenges that we've had. Over the last couple of quarters, you know, we flushed out a lot of that backlog. Our channel partners are sort of dealing with, you know, the fact that we pushed a lot of inventory on them. I think, you know, that, you know, that may have a, an impact on that business over the next couple of quarters as people normalize the inventory.
But, you know, when we look at that business, you know, we're a small market share player in that segment. I think we feel like we have a product that, you know, is strong from a technology standpoint. And I think we also, with our channel partner relationships and our vertical market strategy, I think we feel like that's a business that we can continue to grow. The other... I think we mentioned this in our call, you know, that business does a pretty good job of managing forward-looking metrics. So, we have lots of visibility to funnel in what we call closed won, which is, you know, tracking projects that we're winning that may not ship for a quarter or two as projects get deployed.
You know, all of those metrics continue to point toward, you know, strength in that business. So, although we may see a little bit of adjustment here over the next couple of quarters, I think we feel good about how we've positioned the RUCKUS business and, you know, the fact that, you know, we feel like we can take a little bit of share as we focus on, our specific verticals with, you know, technology. For example, you know, we're one of the first to deploy a Wi-Fi 7 product. So I think we feel like, you know, on the RUCKUS side of that business, we're well positioned.
Okay, so I'm going to try this question again. But, so you have highlighted that that RUCKUS is a very small player in the market. So do you consider it core, or is there industrial logic to combine it with another strategic player?
Yeah, I'm-
Yeah, I get it.
I'm not gonna-
Okay.
I'm not gonna comment on it. I mean, at the end of the day, we're going to run the businesses, gonna try to maximize revenue and try to maximize profitability. You know, I think as we think about, you know, sort of all of our businesses, going to one of your first questions is, hey, asset sales are an option for us to deal with a challenging capital structure. If something makes sense, then, you know, I don't think, you know, sort of anything is off the table, if it makes sense for us to enhance the position of the company.
Okay, great. So, I have, like, three pages of questions. I've gotten to, like, one page of them, but we're running out of time. So, Kyle, thank you so much for being with us. I don't know if there's any, like, closing statements you'd like to kind of end on?
No, I obviously appreciate the, you know, everyone having interest in the company. I think we understand some of the challenges that we have, and we're working through those. And, you know, we'll continue to dialogue with everybody as those strategies become, you know, more real and we start implementing them. But we appreciate the interest, and then, and thank you.
Okay.