CommScope Holding Company, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• CCS: Strong demand from hyperscale/cloud data centers; approved additional capacity expansion for 2025; launched SYSTIMAX GigaShield X10 platform; licensing partnership with AFL for Prodigy Universal Connectivity Solutions; achieved manufacturer self-certification for BEAD products.
• Core NICS: RUCKUS initiatives like RUCKUS Edge and Wi-Fi 7 solutions; normalized channel inventory; focus on vertical markets (manufacturing, higher education, Pro-AV).
• ANS: Showcased DOCSIS solutions at SCTE Tech Expo; FDX nodes shipped to Comcast in Q4; unified DOCSIS 4.0 solution in development; expected revenue/EBITDA increase in Q4 versus Q3.
• Divestiture: Sale of OWN and DAS businesses to Amphenol expected to close in Q1 2025, providing flexibility in capital structure.

Segment Performance

• CCS: Net sales were $737 million, a 17% year-over-year increase. Adjusted EBITDA was $174 million, up 115% year-over-year. Adjusted EBITDA as a percentage of revenue was 23.6%. Driven by strength in the enterprise business, particularly hyperscale and cloud data centers.
• Core NICS: Net sales were $157 million, a 22% year-over-year decrease. Adjusted EBITDA was $28 million, a 29% year-over-year decrease. Sequentially, revenue increased 19% and EBITDA increased $31 million due to normalized inventory and RUCKUS initiatives.
• ANS: Net sales were $188 million, a 15% year-over-year decrease. Adjusted EBITDA was $19 million, a 67% year-over-year decrease. Challenges included customer inventory adjustments and delayed upgrade cycles, but expected improvement in Q4.

Guidance

• Core adjusted EBITDA guide post for 2024 is between $700 million to $750 million with breakeven free cash flow.
• No 2025 guidepost provided yet, but expects strong improvement as markets recover and customer inventory normalizes.
• CCS adjusted EBITDA margin expected to moderate in Q4 but remain strong long-term.

Risks

• Market uncertainty affecting upgrade timing and magnitude in core businesses.
• Inventory issues in Core NICS and ANS persisted into 2024, though normalized in Q3.
• Delays in customer upgrade cycles, such as impact from Charter's network upgrade timeline.
• Uncertainty around the timing and magnitude of BEAD and other federal funding programs' impact on broadband builds.

Q: Maybe a question on the capacity expansion that you're doing for kind of the data center opportunity, just you know is that, do you think that there is an ability to gain share in that market? Is that to take advantage of more data center interconnect opportunities, just kind of expanding upon where that expansion is and where you think share gains are possible.

A: Sure. Thank you, Meta, that investment gets us about another $300 million of revenue, and as we talk to customers, we're really bullish on the demand over the next several years. We're hearing, you know this growth is 20% to 25% range, year over year, continuing going forward. And we're one of the major players in this space, and it's a key growth area for CommScope that we're investing in, and we're not really seeing anything that would indicate a change in this demand trajectory.

Q: I'm a little bit confused around what you're describing happening within the ANS segment. I guess if I got my notes down, you talked about meaningful shipments of FDX into Comcast but then I thought you said small shipments of FDX amplifiers will begin in the fourth quarter, with substantial increases in 2025. I wasn't sure sort of where we stand on the FDX roll out and then also, further on, kind of the amplifiers are there operators awaiting unified amplifiers supporting both FDX and EFD, and if so, what do you see as the timing for volume shipments of the Unified versions?

A: Yep, I'll start with the ANS related to the FDX nodes and amplifiers. So we're starting to ship more. We're starting to ship more nodes, FDX nodes, in the fourth quarter, and amplifiers are going to as well start. It's just going to be a slower amount in the fourth quarter, but we're going to see a significant ramp up of the FDX amplifiers, starting in 2025. At the beginning of the year, we have orders for that already, and they're expecting to receive those. Related for unified is anybody waiting on that we don't believe so. We haven't seen it in our conversations with customers. Unified is one of many options, and we'll have that available when customers need it but right now we're not seeing that slow down anything.

Q: You folks are like having 3% revenue growth year over year on the core basis this quarter, and then EBITDA dollars are up like 25% so just wondering, can you just talk about how much of the EBITDA dollar or margin expansion you think is from sales leverage, especially in CCS, versus some of the benefits from CommScope next? And then, if you just maybe help us understand what's left of CommScope next from a savings perspective, as you think about the next couple of quarters would be really helpful.

A: Okay, I'll take that one. So I think as we think about the CCS, EBITDA margins in particular I think it's a combination of you know, we're definitely getting some favorable mix, as we grow the business and products that have a little bit higher margin that I think that there is cost that we've taken out of the business. And then I think there's also just the component of, we get cost leverage as the business grows, and I don't want to put a number on that, but I think each of, each one of those is contributing a fair amount to the EBITDA margins that we're seeing in CCS. I think as we step back and think about CommScope next our GM model that was implemented a couple of years ago, clearly identified over the last 18 months, opportunities for us to continue to take cost out. And I think the teams have done a nice job on doing that, and I think that's reflective in the EBITDA margins that we're posting now. I think when we think about moving forward with CommScope Next, and particularly on the cost side that is a continuous improvement program so I think we feel like there's more cost to come out, probably not as much as what we've seen already. But I do think that there's some opportunity for us as we think about continually improve the business, to continue to manage costs out of the business.

Q: You folks are like having 3% revenue growth year over year on the core basis this quarter, and then EBITDA dollars are up like 25% so just wondering, can you just talk about how much of the EBITDA dollar or margin expansion you think is from sales leverage, especially in CCS, versus some of the benefits from CommScope next? And then, if you just maybe help us understand what's left of CommScope next from a savings perspective, as you think about the next couple of quarters would be really helpful.

A: Okay, I'll take that one. So I think as we think about the CCS, EBITDA margins in particular I think it's a combination of you know, we're definitely getting some favorable mix, as we grow the business and products that have a little bit higher margin that I think that there is cost that we've taken out of the business. And then I think there's also just the component of, we get cost leverage as the business grows, and I don't want to put a number on that, but I think each of, each one of those is contributing a fair amount to the EBITDA margins that we're seeing in CCS. I think as we step back and think about CommScope next our GM model that was implemented a couple of years ago, clearly identified over the last 18 months, opportunities for us to continue to take cost out. And I think the teams have done a nice job on doing that, and I think that's reflective in the EBITDA margins that we're posting now. I think when we think about moving forward with CommScope Next, and particularly on the cost side that is a continuous improvement program so I think we feel like there's more cost to come out, probably not as much as what we've seen already. But I do think that there's some opportunity for us as we think about continually improve the business, to continue to manage costs out of the business.

Q: Thanks for taking the questions, and maybe I'll stick to the first one on CCS as well, you had 17% revenue growth year over year in the quarter itself. Maybe if you can sort of give us a bit more details in terms of between, sort of carriers versus data center customers, what are you seeing in terms of growth rates? How much of a divergence should we think there is in terms of the revenue growth rate between the two. And when you talk about the 800 million of capacity you're adding, how are you thinking about the sort of when you're fully filled out? How does that allocation look between data center versus carriers?

A: Yes. So I you know, we're not, we're not going to provide all the detailed numbers within the CCS business, but you know, what I would say on year to year growth is, I think, as we said in our prepared remarks a lot of the growth that we're seeing, that 17% in CCS, is coming from data centers. On the broadband side of the business, we've seen the market stabilize a little with inventory, and we're starting to see sequential growth. But we haven't yet, on a year over year basis, seen a lot of growth in the broadband business yet. And then on the other part of our business. You know, outside of the data center business we do have an enterprise copper business and that business has been up year over year as inventories have normalized in the channel in that business as well. So I think the way to think about it is, we have very strong growth year over year in the data center business, we've got some growth in the copper business and the broadband business continues to be relatively flat in CCS.

Q: Had a couple questions. First off, I was wondering if you could help reset us on EBITDA margins a little bit. Just looking at the sequential trends on the core business, the planned divestures it's kind of all over the map, or in the case of CCS at very high levels versus historicals. Can you give us a sense for where you are versus potential? Sort of either normalized opportunity for expansion to help us, maybe right size the models. Thanks and then I have a follow up.

A: Yeah, I'll sort of take it by business, I think on the CCS business we've seen a lot of growth there clearly. And I think we talked a little bit about some moderation in the fourth quarter. Some of that is more mix driven. I think as we move forward into '25 and beyond I think there's an ability for us to continue to improve EBITDA margins there, but I don't think we're going to see step function change like changes like we've seen from '23 to '24 so I think we will see more modest improvement there. I think both in the NICS and ANS business, just because the revenues are down we would expect to see pretty strong improvement as we move into '25 and the businesses recover and grow. I think we'd expect much stronger growth on EBITDA margins in those two businesses.

Q: I wanted to a question and a follow up first, in terms of what you're seeing on the carrier side, from a demand standpoint what we're hearing out of some of the big U.S. carriers, in particular, about fiber builds is pretty positive. And I think you made some comments about that stabilizing last quarter, but maybe less so this quarter. So if we can get an update on whether you might expect to see growth on the carrier side in CCS next year, and I'll just throw my follow up in there, which is any headwinds from what we saw coming out of charter in terms of the delays in their network upgrade, and that's it for me.

A: Yep. Look, I would say our customers in the markets are projecting that homes passed and homes connected is going to grow over the next three years, and we're obviously going to benefit from that growth. And we sell fiber and connectivity into that market. And we continue to invest in technology to drive differentiation and that's where we talked about this prodigy connector technology that keeps put in the best place. And so we are seeing a pickup there but obviously, it's, a lot. We're not at the '22 levels, but we have seen improvement quarter over quarter in that space. Your second question was?

A: Yes. We won't comment on specific customers, but we do have a position at charter, and specifically with the ANS segment, and we are seeing delays there.