Belden Inc. (BDC) Earnings Call Transcript & Summary

Great. Well, thank you, everybody, for joining us. My name is Mark Delaney and I cover Belden for Goldman Sachs. I'm very pleased to be hosting Ashish Chand, the CEO of Belden and Jeremy Parks, the CFO. Thank you both for joining us.

Thank you, Mark.

As many of you know, Belden is a leading global supplier of network infrastructure, connectivity and automation products and reports under 2 segments; Enterprise Solutions and Industrial Solutions. The Enterprise Solutions segment offers enterprise, data center and consumer network connectivity solutions, including copper and fiber broadband and 5G products. The Industrial Solutions segment supports applications, including network infrastructure, secure remote access and analytics. Belden generated more than $2.6 billion of revenue last year with revenue roughly balanced between the Industrial and Enterprise Solutions segments. To get us going, I thought perhaps Ashish could summarize what you think is unique about Belden's product set and what differentiates it from competitors.

Sure, Mark. So, if you think about Belden's history, we've always been in the high-end communication space, and we have a very broad portfolio. So, we make products that are used for data transmission, essentially our wire and cable portfolio. We make products that get used for data acquisition, which is all types of connectors, especially hardened differentiated connectors. We then have products that are used in data orchestration to switching, routing and protocol conversion gateways. And then finally, as you said, we have products that are used in data management, which are more of a software-based -- it's more software portfolio. But essentially, with the launch of Belden Horizon, we brought it all together last year as one data platform. So, in many ways, we are unique because we are the only company in the space that does all 4. We go across data acquisition, transmission, orchestration and management. And this is what has allowed us to reposition Belden increasingly as a solutions provider. And we'll talk more, of course, about that approach. But if you look at our gross margins, you will see that across the board, we are fairly differentiated in our product categories.

Yes. Let's continue on that topic of selling more full solution sales is one of the things you've really emphasized since you've taken on the CEO role a few months ago. Maybe give us a bit more detail, if you could, please, around some of the steps the company plans to take in order to move more in that direction.

Sure. So, if you think about the product portfolio we have, there are OEMs, system integrators and contractors that take those products and go to end users with sub solutions or point solutions. And that's great. We love that business. But increasingly, we've seen end users coming back and saying, well, we are dealing with islands of automation. Are we dealing with islands of networks or connectivity and data, and it will be really helpful if all of this could come together. And about 3, 4 years ago, when we started receiving this kind of feedback from customers, and this is at the point where the pandemic had become a problem for manufacturing companies, labor shortages, supply chains have become more brittle and complicated, and customers were really struggling to bring all their data together in a simple way. So, at that point in time, we launched the solutions offering at Belden. We've been doing solutions more opportunistically, but this is more systemic. And we basically said we would be in a position to integrate the entire network on which these point solutions sit, and we can bring all the data together. Now if somebody only wanted a network solution from us, that's fine. But in many instances, customers upgraded to a network plus the data solution. So, think about a large factory complex. Now you have data coming out in audio, video, vibration, temperature, etc., etc., and all of it needs to come together. It needs to be cleansed, normalized before some application can process it and say something like stop that machine or increase the speed or whatever that insight might be or that instruction might be. And I think that middle space of fetching the data, putting it all in one place and making it usable was vacant. So, we jumped into that space on the Industrial Automation side, it's proven to be very successful. We now feel very confident, and we feel that it's time to take that approach to our enterprise space. And there, we see increasingly verticals like health care, hospitality, higher education, certain federal programs. And we see a number of use cases. So, preventive maintenance, safety, customer experience, all of them need multiple sources of data to come together. So, if I kind of put a ribbon around it, our solution focuses on combining islands of data and allowing our end users to design a more cost-effective way to do that. At this point, it's kind of in the mid- to high single digits in terms of our revenue, but we see it growing 3x, 4x times over the next few years, and we're really excited about this.

You mentioned having some success with this when you were running the Industrial Automation Solutions segment. Can you talk a little bit more about what you had to do in order to support this kind of a solution sale? I mean, were the things like we place more engineers on site at customers, we had to hire different types of sales, support and engineering people. I mean what are some of the things you had to do to enable this?

Yes. No. So, there were 3 areas of focus when we started the program. The first thing was around how do you take these solutions to market. The second focus is in terms of changing our portfolio in terms of filling certain gaps. And the third step, which I think was the most exciting, also the most difficult step, was taking the jump from network to data, So, being able to position data instead of just the network infrastructure, right? But each of those 3 steps came with multiple activities or investments. So, for example, in terms of selling solutions, we really had to go out and upgrade our sales force significantly. And we brought in people to support them, who are now called solutions consultants. So, 3, 4 years ago, we had zero solutions consultants. As we closed Q1 this year, we had 125. These consultants start the engagement of the customer essentially by not talking about Belden. They talk about the workflow and the KPIs that the customers have in mind. Their approach is that a solution is delivered when a KPI that is valuable to our customer can be impacted, right? So, it could be patient waiting time in a hospital. It could be the turnaround time for the hotel room. It could be the scrap in a plant, right? Whatever that KPI is. So, to start with that, they work through establishing a data flow to support that workflow. And at that point, Belden enters the picture in terms of a commercial selling process, right? So, there's a lot of consultative discussion upfront followed by that. So, we had to change our go-to-market approach. We also had to build these technology centers that we now call customer innovation centers. And how that came about was that a lot of our customers work in the mission-critical space, and they can't actually just take a new solution and put it on site. They need to build it, debug it, test it, change it, validate it before they can deploy that solution. So, for example, in a nuclear power plant or in a hospital. And in our customer innovation centers, we allow customers to come in and do exactly that. In many ways, whilst we are not changing the products, we are changing how those products are configured together to form a solution. And it's a very interesting process. I think we spoke about an example in our recent earnings call where we helped the power distribution company. That was at the customer innovation center in Stuttgart, that solution was developed. There are other interesting applications we worked on anti-collision systems in the metro. We worked on safety and security systems in mines and so on and so forth and it's all been done in those customer innovation centers. Third, we really had to plug certain gaps in our product portfolio. So, we had to make sure that we embedded cybersecurity. We had to make sure that we put in more wireless capability, more fiber capability, right? So, that was the second area which is really more product focused. And then finally, we had to go out and hire a lot more software engineers to build data capability. And when we launched Belden Horizon last year, that was kind of after a 3-year investment in middleware and data management. So, really a lot of changes were made, and I think they've all been well received.

I imagine there's better profit opportunity selling more of a full solution sales. But have you seen for customers that have already moved to this buying model, are you seeing any improvement in net promoter scores, retention with customers? I mean are there longer-term benefits beyond the initial opportunity?

Yes. So, I don't have empirical data as yet because it's still early, but we have a lot of anecdotal data. And we see that customers in our new buying process who reach the customer innovation center and do a validation test, typically, the conversion from thereafter is 95%. Anybody who comes in to do a validation becomes a customer? And then the second thing I've noticed is anybody who deploys a solution on one site typically does multiple sites. So, that's a really good indicator of success. And we've also seen people very transparently telling us the value they were able to achieve. So, for example, in the power distribution company's case, right, they were paying approximately $30 million, $35 million of -- they had losses to that extent because of fines as well as lost revenue. And because of that, when we found a solution that [indiscernible] system that reduce the time it takes to find the fault, they were more than willing to give us our fair share of the value. So, we realized a lot more revenue and margin on that transaction than we would normally get.

And maybe you could elaborate a bit on the margins you get for a full solution sale relative to a more traditional point product. I know you shared some details on this on the earnings call, but I think it's helpful. So, maybe you can remind everyone what that looks like.

Yes. Again, it varies a little bit from vertical to vertical and it depends on the use cases we are solving for and how valuable they are. But our average gross margins are in the 36%, 37% range, right? That's where we come in. When you do a solution, it's typically more in the 50% range. So, it's much higher. Again, it can vary a little bit, but that's the kind of value add we see. But I think more importantly, it just makes us a lot more sticky because once you create a solution, customers do come back to you every time they have a problem.

You mentioned the Horizon product a few times, and it was a big focus at the recent Investor Day that you held, anything more you can share in terms of the traction you're having with that in terms of the number of customers that are using it, revenue, or just qualitatively, how is that being received?

Yes. So, when we launched Horizon, the goal was not necessary to sell it as a software product, right? So, we're not selling licenses. The goal was to make sure that Horizon becomes the overlay that combines and integrates all the data that's coming out of our networks, and we use that as the glue, so to speak, right? So, here are some interesting things that Horizon can do. So, first of all, once you launch Horizon, it can discover all the network devices in your infrastructure, and it can map them out and it can find out if they're working as required, etc., etc. And that, I think, is a very basic functionality of Horizon as it stands today. But a lot of people just want that to start with, right? Because they're like we have so many devices on a network, we don't know how they've been used and how can we map them correctly, can we secure them. Second, it can then allow you to take certain applications in containers and then run them on those devices and manage that centrally. That's a very good second step for most people saying, okay, I wanted to do some preventive maintenance in that space and now have that capability. Third, it can take the network data and analyze it for trends and patterns and look for anomalies, etc., and it can say that there is an issue or there is a potential issue in that part of the network. And that's obviously very helpful. But ultimately, and I think this is where the beauty of Horizon lies, it can go beyond the network data, and it can look at the operational data. So, it can bring in, for example, if you were a warehouse doing automated gluing of boxes, it could tell you if a particular box did not have the right amount of glue applied on it, and it's going to be rejected further down. So, you might as well take it out now versus putting something in it and wasting process and so on and So, forth. Or it could reduce the number of truck rolls for repairs by pointing out an anomaly in the operational data. So, really, when you look at all these 4 things, starting from mapping networks to running applications on them to analyzing network data to analyzing operational data, it just becomes a very powerful tool for the user. In my mind, I kind of think of it like -- it's like your smartphone technology in some sense, and you can take a number of apps on your smartphone, and they can use the data from your phone. So, in many ways, this is the data repository that the end user has, and they can run any kind of app on it and feed data into it as long as they're comfortable doing that. And they don't have to have separate plumbing for each application.

That makes a lot of sense. You're sticking on the theme of product evolution, fiber has been a big focus for the company over the last several years. Belden's Fiber product mix has increased and is now in the high 30% range of the broadband solutions market revenue, and that's up from a mid-single-digit percent about 5 years ago. What's driven that mix higher in fiber revenue? And where do you see that trending over time?

Yes. So, we've grown at about 48% overall and about 30% organically right in that business. So, I think it's been both. It's been a series of well-conceived and executed M&A transactions, right? Most recently, we announced the acquisition of Sichert in that same sequence, but it's also been the capability to go out and do a lot more engineering with our OEMs and customers, so they see the value of the packaged fiber solution. We are less on the trunking. We don't do the bulk fiber. We do the access fiber. It's more complicated. It's more engineering dense. And the customers we work with are really benefiting in terms of speed of deployment of connections.

You have a little bit of a data center business, I believe, within your Enterprise Solutions segment. I don't think there's historically been much exposure to hyperscale data centers. Is that an area you may want to target going forward?

I don't think we want to go after the hyperscalers in that sense because we -- they tend to be cyclical in many ways. We believe that in the attractive verticals that have long-term growth drivers, health care, hospitality, education, etc., and certain other kind of hybrid industrial enterprise markets like transportation, where you need a railway station, which is more like a building or a warehouse, sometimes you can argue a warehouse is a building versus an industrial location. So, if you look at these markets, they all need data-centric support. So, we would rather focus on creating network solutions for those data center opportunities versus going after the more cyclical cases. I think we've seen certain companies in a peer group who've done the up and down on the hyperscalers. But those verticals are very long term from our perspective. And what's happening in that market, in those markets also is that, Mark, it's not necessarily about new construction, but about upgrading existing infrastructure, for example, in a hospital, right, making it smarter. And that's where we really excel.

I wanted to cover some of the demand drivers in Jeremy. I did promise you that I would give you the hard question. So, here we go, which is on some of these government programs, right, the rural digital opportunity fund, bipartisan infrastructure bill. There's a lot of funding allocated toward broadband. Maybe help us understand what that might mean for Belden even if it's at a high level because I know there's a lot of adjustments and calculations that could potentially feed into what you may actually realize from that?

Yes. I would say, in general, it's a very good tailwind for our broadband fiber business, obviously. So, there's a couple of big bills. There's the RDOF bill, which is roughly $20 billion in funding to expand broadband networks into rural areas, improve access throughout the country. That money started to be allocated late last year. So, we are already seeing some of that in our numbers. I think that is a helper and that will continue for some time as well. The infrastructure bill is about 3x as large with respect to broadband funding and that really hasn't started yet. So, I think right now, there's still a lot of work being done in Washington, D.C. to work through mechanistically how is that money going to get allocated and the timing. So, I expect that to be a helper for several years. And I think these are great tailwinds. I don't know how to translate that into an exact number as far as what we'll receive, but we sell a lot of broadband fiber. The products that we sell are very important and salient in expanding networks, broadband infrastructure generally. So, I think it's a big helper. In addition to those, you've also got just investments that are being made by cable operators, right? There's a lot of competition between the telcos and the cable operators. And I think all of that together makes us feel really optimistic about the broadband fiber market for several years.

Maybe we think about the business environment more holistically on the 1Q earnings call, you spoke about order trends and your confidence in the backlog despite supply chain normalization contributing to a slowdown in early orders from customers. Can you give us a little more color on what you're seeing in your specific end markets and why you think orders held up pretty well last quarter just by some of the macroeconomic headwinds that are out there.

Yes. I think I'll start and, Ashish, if you have anything you want to add, you can do that. From an order standpoint, orders were roughly flat sequentially from Q4 to Q1, came in exactly as we had anticipated at the beginning of the quarter. So, as you mentioned earlier, we're not really a backlog business, but our backlog had quadrupled over the course of the last 18 months or so. So, some normalization was expected. It's not very surprising. I think the encouraging thing at this point is sell-through data is still pretty good. Our trends in terms of point of sale from distribution to end users and what we're seeing in instances where we're selling directly to end users. We're still seeing growth, good momentum there, even from Q4 to Q1. And Q1 would typically be a little seasonally weaker for us. it was a very solid quarter. We were up sequentially. So, I think from an end demand standpoint, we're not necessarily seeing any slowing at this point. And yes, we'll see the backlog come down a little bit, but that's not surprising.