Vistance Networks, Inc. (VISN) Earnings Call Transcript & Summary

Great. Good afternoon. Thank you very much for joining us. The next call is an interesting call because I was waiting for this call. At the high level, we hosted a call recently about our topics in security. And one of the things we discussed was that all the security names had gone up to levels above the pre-COVID-19 levels. And what I said, I said that the opportunity now in the market is in 5G because we know it's a big cycle. We know it's going to be multiple years. We know who are the leaders. And CommScope is in a very unique position because it is a market leader. It does deal with some issues. But if you look through it and you wait for revenues to start growing because of 5G, it is well positioned. So with that kind of introduction, I would like to present Alex Pease, CFO and EVP of CommScope. Thanks, Alex, for joining us today. And I want to...

Thanks, Tal.

Thank you. I want to start with your 5G position, kind of high level discussion. In 2011, 2012, you had a great cycle with 4G rollout. The growth rates in -- you used to report then wireless, I used to cover you back then, you reported wireless segment. And the wireless segment growth rates were unreal, 25%, 1 year. I mean -- and the question is, what's the difference for you between 4G and 5G? Is the opportunity smaller? Is the opportunity similar? I'm not referring to the growth -- the level of growth rates. I just want to understand conceptually what's your relative position in the 5G market versus the 4G market?

Sure. So I guess, first of all, I'd say there's a couple of similarities between the 4G cycle and the 5G cycle, namely, this issue of site acquisition, backhaul power are significant drivers, and scale matters. So the fact that we have, by far, the largest -- the strongest position in North America matters, the fact that we're already present on most of the towers in North America matters. The fact that we've solved some of the site acquisition, backhaul and power issues through our Metro Cell product line to allow operators to densify the networks beyond the macro sites, really matters. So from that standpoint, those similarities are all here, and I think we're very well positioned to build upon those. From a frequency standpoint, 4G had dedicated frequencies for all the operators, which drove a substantial level of new investment on the towers. And that was very good for CommScope, as you point out. So far, that's not been the case with 5G. So the only new frequencies are T-Mobile's 2.5 gigahertz band, which obviously is one of the reasons why we're very excited about the T-Mo-Sprint merger, by the way. Once the C-Band auction takes place, then there's a couple of other large operators that are going to use this as a dedicated 5G frequency, which means more antenna deployment which will be good. So both the 2.5g and the C-Band auction are both really, really good for us. I'd say the last element of distinction between 4G and 5G is, in the 5G cycle, I think you'll see a new level of competition between the wire -- the traditional wireline players and then the mobility players. And so you'll see the rise in importance of in-building solutions, as an example, private networks enabling factories of the future. The trying to own the connected home and the consumer. And whether it's a fixed wireless play to go around the cable operator or it's a cable operator integrating a Wi-Fi solution for a wireless backhaul, some of those different alternatives. I think that's an area that will be another interesting competitive dynamic in 5G. And of course, for us, as part of the recent acquisition, that gives us a very unique position because we serve both those segments of the market with a really comprehensive set of products and technologies.

You spoke about competition and you referred to carrier competition. I want to ask you about your own competition. Do you see different market dynamics in 5G versus 4G, meaning different types of players, different purchasing behaviors of customers, anything that works to your benefit or against you?

Well, so I guess a couple of things on the competitive dynamics. I think one of the elements of 5G will be the creation of -- or the importance of active antennas, particularly as you get to shorter and shorter wavelengths. And so there will be a level of integration between the radio and the passive antenna. That's obviously one of the reasons why Ericsson completed its acquisition of Kathrein. We're in a unique position here because we do have a number of options to explore active antennas. We have our own proprietary ORAN solutions, which we've rolled out through our OneCell product line and are continuing to invest in. And then we also have a very deep relationship with one of the other OEMs to partner and figure out how we develop an integrated antenna solution for an active world. We do think that as the national security importance of telecommunications networks has risen to the forefront, some very strong Chinese competitors are under pressure or at least network operators are more interested to introduce competition to some of the Chinese competitors. And so that's helping us in the international markets, in particular. So those would probably be the 2 primary areas that I would point to on the antenna or the mobility side. On the other side of the business, again, part of the thesis behind the ARRIS deal is scale matters. And we're actually seeing that through a number of the cable operators. So there's a very large set-top box manufacturer that's in substantial financial stress. And I think that creates an opportunity for us to gain share. There's some of the other component manufacturers that just don't have the level of R&D. We have $700 million-or-so of annualized R&D spend. And we're taking a through-cycle mindset to continue to invest in these evolving technologies so that when we come through this cycle and begin to see meaningful 5G build-out, we're actually going to have the industry-leading technology position. And I think some of these smaller players just won't be able to do that given the stress of the immediate pandemic environment.

So if we keep kind of the discussion still at the high level, growth for you is just a matter of spending, meaning carrier spending? Or do you see other factors in the picture?

Well, I clearly think there's opportunities for us to take share. And I think that comes in a number of different ways. So one opportunity I just mentioned, it's to the extent there's other players, whether it's in the structured cabling space, the connected home space that are under financial stress, I think we can take share. I think there's opportunities as we get into technology refresh cycles. So one of the areas that we've talked about a lot is the virtualization of the networks. We're now in market with a fully virtualized CMTS platform. One of the silver linings of this COVID crisis has been that it's really equalized the playing field in 2 ways: One is people that were aggressively pursuing a virtualized solution have recognized that that may not be the appropriate level of maturity, given the urgency to invest in the network now. So we're seeing an increased level of investment in our traditional architectures. The other is that because people haven't been in the labs qualifying new technologies, our product has actually gained more of a level playing field where we might have been considered slightly behind about a quarter or 2 ago. So I think on virtualization, this is going to be a real opportunity. And there's other technology refresh cycles, but that's one. And then I'd say the last big growth driver is going to be the introduction of new spectrum. And so I mentioned the C-Band auction. That's a big deal because any time you have new spectrum introduced, that drives investment on the tower.

What kind of products are going to be in demand -- from your portfolio are going to be in demand when new spectrum is being launched? Is it just the antennas or other solutions as well?

Yes. So I think there's a couple of things. One, in 5G, you're going to see an increase in the power requirements on the tower. So we have a product that basically takes the power up the tower. And so obviously, the operators will need to upgrade all of that infrastructure. You are going to see, to the extent you're getting into millimeter wave, you're going to see massive MIMO antennas and fully integrated antennas, that will be an opportunity for us with new products. And then one of the areas that CommScope is really uniquely positioned is basically optimizing the form factor of the antenna to get more and more frequency bands embedded in the same form factor. The reason that matters is because space on the tower is at a premium. And so to the extent you can light up more spectrum with the same form factor, you reduce your lease expenses, you reduce your maintenance expenses, all of that. And we're one of the only players in the market that can introduce these new spectrums, all within the same form factor of our prior antennas. So these are all very favorable things happening at the macro layer in terms of new products and new opportunities. On the metro layer, we've talked a lot about densification and how important densification is going to be. And we have a product, a solution set that's second-to-none. It's really solved all of the site access, power, backhaul challenges that network operators deal with, and it's in a very aesthetically pleasing form factor. It looks like a smart telephone pole or a lamp or a street furniture sort of thing. And so we're gaining significant traction in that business on the metro layer. And then if you think about in-building and how complicated the in-building and in-venue problem is to solve in a 5G world where there's more and more demand for bandwidth. We've got a number of really interesting offerings that have gained substantial traction in the market. The first being our digital DAS platform, which enables operators to light up -- multiple operators to light up multiple spectrum bands all through one baseband unit. So you're using much less power, much lower footprint on the site, much lower cooling requirements. So it's a much, much more cost-effective distributed antenna system player through this digital DAS technology that's now basically refreshed our entire DAS product offering. The other area that's really exciting is in our OneCell product line, which is already in market with one of the very large operators and is currently in discussion with one of the other large operators is also active in Europe. So this, for the enterprise space, is critical because the in-building propagation is a substantial challenge as you go to higher and higher frequencies. And our OneCell offering basically solves that issue. And so we're actually very excited about that and think there's no other player in the market that has that and what it brings. And then the other area on the enterprise space is obviously how we play in the unlicensed spectrum through our Ruckus brand, where we're serving hospitality, governments, education system, anywhere you have a highly complicated unlicensed campus Wi-Fi solution, that's an area that we play.

Got it. I want to go back to antennas. I got a question from the audience, which is exactly what I was about to ask you. Is densification in active antennas, are these trends very significant TAM-enhancing solutions? Meaning do you think revenues -- or do you think you are going to grow the addressable market versus the historical levels substantially through that? And what is the -- what are the margin implications?

Yes. So I think there are 2 questions embedded that I'll try to take in sequence. One was around the metro layer and then the other was around active antennas. And so if you take a bit of a look back in history, there was also a push for active antennas in 3G and 4G. But it really didn't go anywhere, basically because you had challenges on the tower with the size of the antennas, and then you also had power issues that were difficult to resolve. In 5G because of the introduction of millimeter wave, our view is you will have some portion of the market that goes to active antennas, unknown yet, what it will be, but it's unlikely to be 100% because at the millimeter wave lengths, you don't -- you run into propagation challenges that are hard to address. So it is -- some of the TAM will shift from passive to active antennas, but likely not all and also likely not a substantial portion of it. We do, as I mentioned, have an active antenna partnership that we're developing with Nokia. We're also looking at what we can do organically. We have a massive MIMO solution that's actually in pilot. So this is an area that we've got our eye on and that we're investing behind. But I think it's probably safe to say that the passive antenna will continue to be a large portion of the workhorse of the macro layer. On the metro layer, this is clearly a rapidly growing market, and this is likely to be an increase in the TAM for us or the PAM for us. This is a space where you're going to have to intensify -- you're going to have to solve the access and power and backhaul issues. You're going to need an aesthetically pleasing, easy-to-deploy solution for that. That's what we have, and that's what we're offering. Another interesting area that we've been looking at deeply is Open RAN. And in particular, how the Open RAN interface would play between in-building and then the metro layer and then from the metro layer to the macro layer so that you have a seamless interface there. Obviously, there's 2 large OEMs that are fairly dominant at the macro layer, but the in-building and the metro is still a fertile ground for all of us to play.

Got it. All the major radio vendors have -- or most have antenna assets in-house. What are the benefits of using you for antenna versus an Ericsson or a Nokia or someone that has it in-house?

Yes. It really comes down to the horsepower of our solution versus some of the competitive ones that you mentioned. So ours basically work under a range of frequency bands and performance characteristics that exceeds the OEMs. Particularly ours, both the antennas and the cables, work over gigahertz of spectrum versus a remote radio head, which would be megahertz. And where that -- why that matters is because megahertz will only carry for a few hundred -- for much shorter propagation. The other thing that we have is the size and the performance characteristics that I mentioned, our ability to integrate multiple spectrum under a single form factor is significant, and that's not something that our competitors have. So it is true that the OEMs have some competitive products to ours. But in many cases, the OEMs are actually customers of ours as well because they recognize for a large portion of the applications, our products simply work better. And in many cases, our customers actually demand that the OEMs use our products.

Got it. I want to switch gear to indoor and DAS solutions. And same thing here, same question here. First of all, it's a -- I'm going to give you the entire question, which is a long question. But first, can you discuss the scope and the opportunity for indoor and DAS solutions? And second, same question I asked you before, why should I use -- or why should a carrier use your solution versus a solution that is provided by the outdoor providers?

Yes. So let's take the OneCell product line and the DAS product line separately because they're slightly different applications. So the DAS product line, I think, I mentioned -- well, let me take a step back. First of all, the indoor opportunity is huge as you get into a 5G world. You run into propagation issues because these higher frequencies don't go through glass and don't go through drywall. You run into density issues because you have much more -- much higher bandwidth-intense applications, people in much more congested spaces. So solving the in-building problem is sort of a quintessential 5G issue. And one of the reasons why we're so excited about the intelligent enterprise space. So if you now take you sort of break down DAS and OneCell, the DAS application is largely for a large venue. You think airports, shopping malls, train stations, Super Bowl stadiums, those sorts of things. And with the introduction of our fully digital DAS offering, which is actually was used in the most recent Super Bowl and is currently being deployed down in Dallas at a significant scale, this is just a much, much more cost-effective answer. The reason is because you can put basically more operators, more bands into a single baseband unit. And that allows you to significantly reduce your power requirements, significantly reduce the space that you need in the building. So it gives you a significantly more cost-effective answer with a much higher level of capability. And so we found that this has been a real competitive differentiator. And even in the COVID environment, we're seeing facility owners go ahead and upgrade their facilities. And so we're entering this rip and replace cycle because of the advantages of this new next-generation technology. The OneCell product is a slightly different application. So this is in more of the carpeted enterprise space. And this is, again, an in-building solution. It basically allows you to manage your LTE signal inside the office building, if you will. And again, the reason you would use this is, first of all, the performance is much better. So you don't run into dropped calls and performance issues as you cross cell barriers in a traditional kind of DAS architecture or radio head architecture. But you also have a much more cost-effective offering because you can put one of these processing units in the building and then connect the access points through cabling as opposed to having multiple radio heads. And so this is, again, a much more cost-effective answer, and it's also a much higher performance area.

And why -- going back to the question I asked you before, why you and not buying it from the outdoor providers?

Well, it's just a different application. And so it's basically different technology. You wouldn't use in terms of a like a -- one of our competitors who's strong in the outdoor space, they have an indoor product, but it's more of an analog product. Ours is a digital product. Ours is more cost-effective than theirs, performs better than theirs, and so that's really what it boils down to.

Got it. Okay. ARRIS acquisition, I want to start from the angle of 5G. Discuss the opportunity, the connected home opportunity that you see with ARRIS asset as it pertains to Wi-Fi and 5G convergence?

Yes. And so the connected home, in particular, is one of the areas that we talked a lot about when we talked about doing one of the rationales for the deal. We believe that the consumer is going to become a battleground between the MSOs and the telcos is -- as all of these connected devices in the home begin to explode. We feel as though having a gateway to the connected home is something that's very important because that gives you a level of ownership over the consumer that's going to matter. And so one of the areas of investment that we're making in the broadband side of our CPE business, which is about 40% of that segment, is really adding functionality to the broadband gateway. So taking the broadband gateway from basically just sort of a dumb box that sits in the closet to having much more integrated feature functionality, whether it's Wi-Fi mesh functionality or integrated sound bars, integrated home control systems, things like Siri technology. And so we're really upgrading the sophistication of the broadband gateway to unlock a lot of what the connected home opportunity looks like. And that's pretty exciting. If you want to get out, you can see our SURFBOARD product line in the retail space, and this would be a really good example of some of the innovations that we're making. There's obviously a big headwind on the connected home and the Home Networks segment, and that's the video business. And so the video has been plagued by the over-the-top trends as things move more to an IP streaming architecture. It's been further -- the problems -- the challenges have been further challenged by operator or service technicians not being allowed in the home to sign up new subscribers, and people not being willing to sign up for new service because they're not getting traditional sports programming, those sorts of things. So we are actively managing the video side of the equation. And I think we talked about in our first quarter call how we have been moving pretty aggressively on cost, taking out, on a run rate basis, about $100 million of cost by the end of the year. So we are managing profitability for that portion of the business pretty dramatically.

Got it. So my next line of questions is about the ARRIS acquisition and integration. But before that, I want to stop for a second and ask you a general question, that CommScope has been struggling for the past few quarters. And I want to understand the timing that you have in mind for recovery. Meaning, what are the things that you're doing on your end? And how the -- what's the outlook for recovery? What are the steps that are going to happen? What are the milestones that are going to happen that will take you from where you are today to an environment where your revenue is growing and you're kind of you put behind the issues you're dealing with?

Yes. So I think before I get into the direct answer to your question, I think you have to understand where the challenges have come. And they've really come from probably 3 things if I had to point to them: The first is a significant pause in capital spending from some of the major network operators. There was a large pre-investment in sort of the 2017, 2018 time frame in network capacity, that they're working through, and typically, they would work through that in a fairly linear way, but because there was this chunk of investment made, that caused a substantial pause in capital spending. And the second are the trends that we've been challenged with in the Home Networks business, which I pointed to. And then the third would be waiting for a catalytic event to really spur 5G spending and spur a new wave of competition. So I think there's still -- again, another silver lining from COVID is, I think, that is actually going to provide that catalytic event to really generate some meaningful network investments. We know a number of the network operators are experiencing strain because people are using the networks differently and the networks have taken on a whole new level of criticality in people's daily lives. I think people are experimenting with new ways of using technology that's much more in line with the 5G world. If you think about the factory of the future, there's no question that as we move to embrace social distancing and manufacturing facilities and meat processing facilities, you're going to need to leverage technology more, and you're going to need private networks to do that, and you're going to need improved network performance. So I think all of that is going to drive a level of investment. And to some extent, we're already seeing some of that investment take shape. I think that's the first thing. I think the second thing is you're seeing us entering a technology refresh cycle that is going to be -- that will be meaningful because, again, people will start to look to networks as taking on a different role in daily lives. So I think those are kind of the secular drivers that creates some real opportunity for us. What are we doing ahead of that? We're obviously moving very aggressively on costs. So we've integrated our Ruckus business under the existing ERP platform, no issues there. We've converted our website from 3 separate websites to 1. We've obviously put in place some new reporting segments. We've implemented shared services in both India and Taiwan for a lot of our back-office processes. I mentioned we've exceeded -- we're on track to exceed our $150 million ARRIS cost synergies. And then we've gone above that with additional cost actions that we've taken in the Home Networks business. And then future cost actions that we're planning that we might need to take if we continue to see softness in our markets. So we're doing everything we possibly can to manage the cost structure of the business to preserve the critical R&D investments that are going to allow us to emerge from this stronger and give us a through-cycle mindset and take share on the back end. And I feel like we're sitting at the front end of what could be a meaningful wave of investment in the networks as we kind of get to a new normal.

Got it. So ARRIS acquisition. I want to start with an update on the integration, the current challenges? How have you been dealing with the challenges? And how do you plan on dealing with them going forward?

Yes. I think I mentioned a couple of these, but just to put a fine point on it, we are making progress on integrating the ERP systems. We are making progress on integrating the website, some of the kind of basic plumbing. We have migrated to shared services in Taiwan and India. We are pretty confident that we will exceed the synergy targets that we laid out there well ahead of schedule. I wouldn't say that there's challenges with the integration itself. Culturally, these 2 companies came together very well. I think our customers have given us very positive feedback in terms of some of the underlying thesis for the deal. I think we do see this idea that having $700 million of combined company R&D and 1,800 patents gives us a level of scale and relevance. That's substantially in advance of the competition. I think we're seeing early opportunities or early indications of revenue synergies where these technologies come together in a very complementary way. So I don't think from a pure acquisition standpoint, there's been too many challenges. There's obviously been challenges in the business as cable operator spending has been soft. We're awaiting a real 5G uptick in spending. And so managing a soft top line environment has been challenging. And I think we've done a nice job in terms of getting ahead of the cost structure and continuing to be very focused on the drivers that we can control while we wait for the top line to improve.

Got it. So right before we finish our time, I want to ask one more question on ARRIS and then a general question. On ARRIS, the most challenging area for ARRIS was the endpoint part of the portfolio. Where are we in the recovery for this segment or the migration path of this segment?

Yes. And I touched on this a bit, I think. So this is -- I think you're talking about CPE.

Yes.

And to understand what's going on in CPE or what's our Home Networks segment, you really have to break it into 2 pieces, a broadband story and a video story. And video is roughly 60%, broadband is roughly 40% of the business. Video has been where 100% of the challenges have existed. And this is driven by the OTT trends, I talked about, as well as the complicating factors of COVID and not being able to get technicians into the home. The broadband part of the story has the potential to be a really positive piece. And so while video is declining, broadband is actually growing as more and more homes need to be upgraded to DOCSIS 3.1 and eventually DOCSIS 4.0. And the importance of the broadband gateway becomes more and more critical to the connected home. So we're making progress on growing broadband. We're adding functionality to improve the value-added elements of that technology and make it less of a plain box commodities that sits in a closet. We've had a number of nice wins with customers where we feel as though we're in a position to take share. So we feel good about the trajectory of broadband. And I think that's an area that we have to really focus on to build out as we look forward and just work to manage the cost structure of the video side of the business, so we can continue to protect margins as we do it.

Got it. Alex, unfortunately, we ran out of time. I feel like we touched on many important issues. We left the financials behind, but that's okay. We'll do it on our next call. That's a reason for you to make another call with me. Thank you very much for your participation. And to the investors, we've written extensively about these topics. Any questions, please don't hesitate to call me or email. Thanks.

Thanks, Tal. Take care.

Thank you. Take care.