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

Well, good morning, everyone, and welcome to the Bank of America Leveraged Finance Conference and to our session with CommScope. I'm Ana Goshko, Bank of America's credit analyst covering technology and telecom. Been moderating the discussion today. And we're very pleased to have with us Alex Pease, the company's Chief Financial Officer. A quick note to the audience, you have a tool through which you can submit questions. So feel free to do that throughout our discussion. And with that, let's get started. Alex, welcome. Thank you so much for being with us. If you'd like to make any introductory comments, please feel free.

Yes. Thanks, Ana. I appreciate, first of all, everybody making time for the conference in particular for this session. Looking forward to answering whatever questions you have. It's obviously been quite a year for all of us. And I think our business, in particular, has been positioned fairly favorably as all of the investment that's going into the networks become increasingly critical. So happy to talk about that or anything else that's on your mind.

Okay. Great. So let's maybe start on that topic. So if you look back to pre-pandemic 2020 outlook. So let's say, the February time frame with regard to what the business outlook was for the year, where does end market demand and the company's sales performance stand today? And how is that different from what you would have expected?

Yes, sure. So I'll just go kind of down by the segments. If you start with Broadband Networks, we had anticipated that 2020 would be a growth here, coming off the trough that we saw in 2019. That is, in fact, the way the year has materialized. Some of our large customers, Comcast and Charter, in particular, have really resumed a lot of the node splitting activity. The strain that's -- and on the networks is -- has become increasingly clear. The criticality of the infrastructure is obviously increasingly clear. A lot of the things that were really bottlenecks around technology uncertainty, standards uncertainty, a lot of those bottlenecks have sort of gone in the rearview mirror as there's a requirement for the operators to just maintain network performance to enable things like this conference and all the work-from-home dynamics. So that business is basically on plan. Venue and Campus, we initially expected in the ZIP Code of mid-single-digit growth year-over-year, really powered by hyperscale and Wi-Fi. So I would say the good news is both hyperscale and Wi-Fi are continuing to deliver at/or above our expectations. Particularly on the hyperscale side, we're now active really in all of the accounts. 4 of the 5 hyperscalers, we have a lot of investment going into the strategic cloud customers as things are moving closer and closer to the edge. That's really benefiting our business, and we're really starting to see the flywheel pick up. Wi-Fi, same thing. We're seeing operated Wi-Fi and in-building wireless both licensed and unlicensed. We're seeing venue operators taking advantage of lower foot traffic to really invest in upgrading their Wi-Fi. You're on a technology cycle. So Wi-Fi 6 is now being introduced. We're in the market with a cloud-native option with our Ruckus product line. So all of those things, I would say, are performing in line with expectations. You've obviously got a couple of pretty big headwinds that have offset that. So you've got the obvious weakness in hospitality, which has been a challenge, and then the obvious weakness in commercial real estate driving some fairly significant declines in the structured cabling business. So now this year, that business will be off plan, largely driven by COVID. Outdoor Wireless, I would say, is really more or less in line with expectations. So we've split that business into the macro cell tower and that metro cell. On the macro layer, we knew that AT&T was going to be lapping some tough comps with FirstNet spending coming to a close. We knew that both AT&T and Verizon were likely to go into a capital preservation mode as the C-Band auction comes up in December, and they really need to get that 5G spectrum. We knew that T-Mobile and Sprint were going to ramp, which, in fact, they are, but that just didn't start happening until Q3. And then it's accelerating in Q4, and it will accelerate into 2021. So that portion of the business, by the way, which is the majority of the business, is performing in line with expectations. But that's being offset by the metro cell side of the business. So this is the smart holes and everything that goes into the densification of the network. That business has been hindered by basically permitting delays and crew delays, which are COVID related. So net-net, we do see a year-over-year decline in that business. And it's performing, I would say, towards the lower end of our original expectations. And then Home Networks, we did anticipate decline in this business year-over-year in the ZIP code of 20%. We all know about the cord cutting and the cord saving trends. We know that that's severely impacting the video segment, which is 50% of the business. What we didn't know in that business actually performing a bit worse than that this year because what COVID has done is it's really limited the ability of the operators to drive in-home deployments. And so that's limited their ability to sign up to subscribers, so that's been the impact there. So that's kind of it in a nutshell.

Okay. Great. So that was a great introduction, touched on all the end markets. So it's -- I'll dive a little deeper into some of them. So starting with broadband, so you did characterize the current carrier spending environment is pretty good. To what degree do you think that there was a pandemic-related pull forward of spend from 2021?

Yes. This is a common question. And I'm sure it will be one that we're debating for the next 18 months as we come through the pandemic. Yes. I think to answer the question, you have to go back to 2017, 2018 time frame, when the networks were really being invested in -- at a disproportionately high rate. And the reason that was is largely because of a competitive response to Google Fiber and cable MSOs really wanting to basically get out in front, push fiber deep, really be able to compete with Google as they were pushing their fiber out. What happened when Google backed away from that, is that the cable operators realized that they were sitting on a bunch of capacity, honestly, they didn't necessarily need. And so typically, bandwidth demand grows in the order of 20% to 30% a year. As they were sitting on top of that capacity, they essentially didn't need to invest in their network for a period of years as that capacity got consumed. A couple of other dynamics that were going on was there the mix of a transition for what the next-generation process is going to look like. Is it going to be expended spectrum, is it going to be full duplex. And Comcast was kind of head in 1 direction and other operators were headed in another direction, which really hadn't happened in the industry's history before. Typically, CableLabs would force consensus and then that would drive up standard. So there was a lot of uncertainty and nobody really wanted to invest in their networks in the face of that level of uncertainty. And then the third dynamic that was at play was this push towards virtualization, which is something that's been out there really for years, but there was an idea that was sort of ready for prime time, and there was no need to invest in traditional architectures because the next-generation architectures could be fully virtualized. What COVID did was really break through all of those logjams. So it highlighted the fact that the networks were under increasing stress as they've been under-invested in. It highlighted the fact that a lot of the virtualized architectures aren't quite ready for prime time and introduce a level of instability into the network that's not acceptable for where we are today and also forced the sort of full duplex versus extended spectrum debate off the table for now. And so you're seeing more traditional investments in node splitting activity. So in my view, this has been a -- more of a return to normalcy than it has been sort of a pull forward of investments. And if you come back to my original thesis that bandwidth demand will continue to grow 20% to 30%, now we're just more on a normal track of a mix of node splitting, pushing fiber deeper, sweating the hybrid fiber network as much as we can. And I think we'll get to a much healthier level of capital deployment in the products that we provide.

Okay. Great. So that was efficient because you actually touched on a couple of my additional questions. So on the topic of virtualization, you addressed kind of the first couple of questions I had. But as we look forward, so -- and fingers crossed with the vaccine rollout, hopefully, we'll be in a post-pandemic normal environment. So how is CommScope positioned for virtualization? And what does it mean or what carriers will spend on CommScope products?

Yes. So I think we're uniquely well positioned in a virtualized world. And what we -- where we should start the conversation is sort of acknowledging that there's literally millions of nodes out there, right? And so we're not talking about a -- with the switch thing. You're talking about really a generational change in what the architecture is likely to look like. And it's also not a winner-take-all evolution. There are certain operators that will move directly to a fully virtualized architecture. There's some that will use a hybrid architecture, and then there's some that will use a more traditional architecture. And it will all depend on what the economics are and the sophistication of the network and those sorts of things. So in that context, I think we are uniquely positioned because we actually have all 3 options. We have the traditional E6000, which would be the proprietary server that fits in the head end, you upgrade that through line cards and license revenue, deploys content through the network to basically a dumb node in the field, which then translates the optical signal into the electric signal and then the electric signal goes through the coaxial and to the home. We have a hybrid solution, which is vCore, which basically takes a portion of that functionality and moves it from the node into the -- I'm sorry, from the head end from the chassis into the node. And the way our architecture works is that you literally just then open the node as a clamshell drop in, either the PHY or the MAC or the both and all of that increased sophistication now resides in the node, which we own the majority of that. And then the other functionality resides in the cloud. And operators will choose any one of those sort of 3 models. The benefit that we have, which is unique, is all of our architectures are built on 25, 30 years of code that we've developed and we've debugged and all of the feature-rich functionality that we have in terms of how our product performs better. So really, when you invest in a CommScope virtualized architecture or traditional architecture, it's a much more seamless investment than some of these newer technologies that are still very, very much unproven.

Okay. So let's move to Outdoor Wireless. So if I look back a year from where we are, I think we were hoping for a better Outdoor Wireless growth. So year-to-date, if my math is right, I think the Outdoor Wireless revenue is down 20% year-over-year. You touched on many of the reasons in your kind of initial answer. But looking forward, so 5G. So how the drivers, key ones are -- T-Mobile is 2.5 gigahertz deployment, then you've got CBRS, then you've got C-band. So what is the timing for these build outs? When do these converge to actually drive meaningful growth for CommScope?

Yes. So the CBRS deployments are live now. So that is very much a catalyst that we're looking at. And what CBRS allows cable operators to do is basically compete with the traditional telco mobile operators. So the CBRS is very much a good thing. It also enables a traditional enterprise customers to ramp up private networks. Which is also sort of a 5G use case. If you think about something that need super high reliability, super low latency, think about an automated factory, CBRS would enable an enterprise customer to do that. And we have that functionality built into our products today, and we're actively deploying that, small numbers still, but I think that will be a catalyst. C-band, it's clearly exciting. C-band is the first real 5G spectrum beyond what T-Mobile and Sprint are already deploying. And so part of the reason why the year has been a little bit softer than our initial expectations was because our expectation is that Verizon and AT&T are both conserving capital in advance of the C-band auction because this is their opportunity to basically get new 5G spectrum. What does that mean in terms of deployments in 2020? It will likely take them some time to configure their network architectures, figure out how they're going to deploy that spectrum once they have it. But they're in a rush to do that because TMO/Sprint has been ramping significantly. And so TMO/Sprint is on pace to have really the pull position in terms of deployment of 5G because they already have that 5G spectrum. And so AT&T and Verizon are likely to rush to try to get back in the play with through 5G functionality. The other thing, which I mentioned in my first response is, as it relates to this year, we have seen some softness. COVID has driven some challenges with some of the emerging markets. So take the Middle East as an example. They obviously are pretty highly dependent on commodity prices. And as oil was facing some pretty severe price shocks, we did see that impacting demand negatively. And then probably most importantly, on the Metro Cell side of the business, I mentioned the permitting. So these smart poles get deployed through municipalities as part of densifying the network. Those -- that permitting process got bottlenecked as people went from work from home, things like wet signatures. You didn't have even had town clerks working. So a lot of that got bottlenecked. And so the metro cell has been soft, which is we look -- as we look forward, we know that densifying the networks is going to be a critical part of 5G deployment. So we expect for that to accelerate as we look out into 2021.

So to wrap that all up, I know you guys are in a mode right now where you're not really providing guidance, but should it be a growth year for Outdoor Wireless?

We would certainly anticipate that there are a number of catalysts for 2021 that did not exist in 2020. You're not going to get -- I don't think we would say that you're going to be in the full pros of kind of a 5G super cycle, if you will. But we certainly -- I think it's reasonable to expect that a lot of these headwinds that I'm mentioning aren't present in 2021.

Okay. Okay, great. So then moving to Venue and Campus. And again, I think you touched on kind of the puts and takes in this segment. I think maybe more of an existential question here. Do you believe that the move to remote working, which sounds like maybe a permanent shift for many, is that curtailing or slowing enterprise technology decisions impacting refresh cycles? And does that concern you with regard to the outlook for CommScope?

A couple of things going on. And it really -- you almost have to look vertical-by-vertical to really understand what's going on. If you think about the cabling side of the business versus the traditional kind of enterprise copper business, there's no question that, that business has been negatively impacted. Obviously, there are some secular headwinds as there's just fewer ports per workstation, more and more is going wireless, the cables going from the walls into the ceiling. We were battling that to begin with. But now when office spaces are populated at a 50% of density or 20% of density, that has further implications on cabling. And we've also seen some projects being delayed. Just you could get crews into the offices. That being said, you're seeing a number of tailwinds as well. So the need for lower and lower latency is pushing data centers to the edge. So you're seeing hyperscale and cloud data centers continue to get built at a pretty substantial cliff. You're seeing because of the lower foot traffic in venues, you're seeing operators upgrade their venues to 5G capable. So we just announced in Q2, the largest ever 5G DAS deployment and Dallas Stadium. So you're seeing a lot of those positive implications. So overall, I think we feel very good about where Venue and Campus is headed. I think a lot of the trends around the need for Wi-Fi, the need for Wi-Fi 6, the migration of access point management to the cloud and need for an in-building LTE solution, a lot of those macro trends really, really benefit this business and again, I think a lot of the COVID impact is more just transitory in nature.