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

I am Meta Marshall. I cover the networking space at Morgan Stanley. We're pleased to have CommScope here today. We have Kyle Lorentzen, CFO of CommScope. I'm going to start with some research disclosures. For important research disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to Morgan Stanley sales representative.

So Kyle, maybe to start with. You guys, at the end of the last year, laid out at your Analyst Day kind of some of the key components of CommScope NEXT and how it can kind of help you achieve financial targets of $500 million of incremental EBITDA and kind of 4 to 5x leverage levels by 2024. So do you mind just kind of laying out some of the major components of that -- of the CommScope NEXT.

Yes. CommScope NEXT really has 3 pillars to it. There's the growth piece, the organic growth piece, there's our operational efficiency and then there's our portfolio optimization. So probably our biggest area of focus is how do we grow the top line on an organic basis. Put a lot of thought into that. Some of the key components there are making investments in capacity, particularly in our Cable and Connectivity business, trying to grow our business outside of North America, where we probably have been underrepresented. So making investments in our sales force internationally. So a lot of those things, I'd just consider blocking and tackling on the growth side with a little bit more focus. On the operational efficiency side, I mean, it goes everywhere from looking at our procurement and how we procure all the way through our operating expenses. And then looking at manufacturing. I think what I would say, as I've come into the role, as Chuck's come into the role, I think one of the places where we really feel that there's opportunity is in manufacturing. This is a business that's been pretty acquisitive. We think that there's cost opportunities there, improve processes. And then the last piece is just around the portfolio optimization, making sure that we're investing in the businesses that we think have the best value potential. So earlier last year, we talked about home. We put that a little bit on pause here. But really trying to drive a good understanding of our businesses and linking that to how do we create value and spend our money in the places that have the best margins, the best growth opportunities.

Got it. Maybe when it comes to international as an area where you guys think that you can -- are underrepresented today, just some of those markets can be much more price competitive. And so how do you balance kind of the upside opportunity versus the profitability potential from those markets?

I think there's 2 answers to that. I think the first answer is there are some niches that allow us to take existing product range, add existing margins and go in and just be more thoughtful about how we approach those markets. I think the second component of that is there are going to be some places where we have to innovate in order to participate in those markets. In some of the markets, it's clearly thinking about how we manage our business and go to market in a way that's different than you do in North America, where it's just different market dynamics, different competitors. So as we think about it, there is going to be an innovation piece of how we go after some of the international markets.

Got it. And I think another question investors have had is just on the restructuring side. Clearly, you guys have laid out a number of objectives and procurement being one of those areas. Just how has where we are with the supply chain environment delayed or changed kind of some of those objectives?

Yes. The way that I would think about it is when we think about CommScope NEXT, we feel very good about CommScope NEXT. We have our list of initiatives. So we laid all of that out in Investor Day. We have a couple of hundred initiatives. We have a continuous improvement program there, we're adding new projects to that program all the time. We have systems and processes in place to manage it, hold ourselves accountable. And when we think about that plan, we feel pretty good about our ability to deliver against that. It's clearly not a secret that 2021 was an interesting environment from an inflationary perspective. Our numbers reflect the pressure that we saw in '21. We've been pretty clear about being aggressive on pricing. But when we think about the CommScope NEXT balance versus what we saw in inflation and what we're doing to offset that, it's clear that the inflationary environment hurt us last year. So when we think about growing our business 12% organically in our core business, we also -- our inflationary impact on a net basis, something in the order of $300 million. So without that inflationary impact, the good things that we were doing around growing the business and CommScope NEXT, I mean, we presented numbers where we were flat year-over-year on a core basis on the EBITDA line. So you can think about that $300 million that we got hit with inflation, we had to offset that with all of the good actions. So yes, I mean, it's clearly a difficult environment when we think about the CommScope NEXT with balancing inflation. A lot of things going on in the world now that we're continuing to evaluate on a hour-by-hour basis. But yes, that's something that we pay a lot of attention to. So I think we feel good around the transformation side, but we've clearly run into some headwinds, and we've taken a pretty aggressive approach on pricing, which we feel, at least for the things that we've seen up to date on the inflationary side, we think we're in a good position to offset those things.

Got it. I mean maybe just sticking with kind of price increases for a second. You've noted that perhaps you're having more success than I think a lot of investors would have thought you would have had pushing price to kind of some of your Tier 1 customers. Can you just speak to kind of when some of those negotiations should go into place, whether they're complete? Just how you expect kind of the impact of pricing to flow through and...

Yes. So we clearly have 2 sides of our business. We have our service provider business, we have the enterprise business, enterprise businesses. It's a little bit easier to push price through it because even though you're doing it on a quote-by-quote basis, in many cases, you're pushing those through, and that's just the process that you go through on a quote-to-quote basis. On the service provider space, we talked about it on our last 2 calls. We want to aggressively -- approaching service providers about price increases. We spent most of the fourth quarter having those conversations. I would say 95% of those pricing agreements are in place, where we were able to work with the service providers to get agreement on the price increases. So just as you would expect, some of those are more cordial conversations than others. I think we have our relationship with all of our service providers that allow us to have the right conversation. And I think the fact that we've been doing business with these large service providers for a long time, and we're an important supplier to them, I think that's how we approached it. And that's how we got a lot of that over the finish line.

Got it. And then just we should see that towards the tail end of the...

Yes. And I think we talked about our backlog, we have a pretty healthy backlog. In some cases, we were able to reprice backlog. But for the majority of our business, we weren't able to. So we'll see that -- those pricing impacts will -- a little bit Q1, a little bit in Q2, and then we'll see more of that coming full in, in the second half of the year.

Got it. I mean moving more to the segment level. We'll start talking about some of the more positive areas. You're seeing a very robust demand environment within broadband -- most of your segments, so let's just start with kind of Broadband Networks. Can you just touch on whether you're seeing the most strength and how durable some of this demand is?

Yes. So in broadband and even in our VCN business, where we're doing inside cable, those businesses are growing. They grew 20% last year. So a lot of the growth that we're seeing in our Broadband business is coming from our Cable and Connectivity business. And we feel very good about what's on the horizon as you talk about the art of spending, a lot of the government programs helping feed that. So we saw strong demand. Last year, we're trying to invest ahead of that curve. Sometimes it comes at us faster than we can invest, but we have a pipeline of investments that we've either made or are going to make to hold that demand. So I mean our view on what we see on the cable side and the fiber and the connectivity side, we think that there's 5-plus years of runway there. I mean I think we just see the beginning of the spend, and we expect that to continue to be pretty healthy moving forward through the next 5 years or so.

So the deploy -- or I think everybody can say that fiber should be an area of strength for most certainly the next couple of years. Does the trajectory of that change by whether it's some of these smaller ISPs or smaller Tier 2, Tier 3s that get some of the deployment contracts versus a Tier 1? Like I guess I'm just trying to judge does the opportunity change for you based on who the customer is.

No, I don't -- we don't think it changes. We have a relationship with many of the large service providers. We think that supports us well. That demonstrates the ability that we have, the capability and the technology to support not only the large service providers, but maybe some of the smaller players that will play in that market. So I don't really -- we don't really see it as being a big roadblock for us. We feel like across the spectrum of that customer base, we can take advantage of the strength in that market.

I think a question we've had also is just in terms of maybe supply in fiber is the bottleneck today, but is it going to be labor or something else that's kind of the bottleneck down the line. Do you guys see the pacing of these deployments will be in very straight line? Do you see lumpiness? Do you see other bottlenecks kind of developing with some of your customers?

I mean I think we feel like it should be pretty linear as it continues to grow. We have a little bit of seasonality in our business so that will impact it. There may be spots where because of labor constraints with service providers and so forth, it may have some impact, but we don't think that it's going to be very lumpy. I mean you may get a quarter or two that maybe flattens out a little bit, but we feel like what we've seen in that business over the last 4 quarters has been pretty healthy. And even moving into 2022, in the early parts, the business continues to remain pretty strong and pretty consistent.

Got it. Maybe sticking with the segment. You've made some investments in new capacity. Is that capacity that you've invested in enough to give you kind of the $350 million to $400 million organic revenue growth that you think is -- the potential in this business, will there need to be other capital invested?

Yes. To be honest with you, it's -- the market is so strong and the opportunities are abundant enough that we've made some -- as I said before, we've made some investments. Some of that investment came on stream in the second half of last year. There's projects that are coming on in 2022. And we actually have approved capital into '23, and we'd expect to make additional capacity investments. So we're trying to stay ahead. Sometimes it's difficult to do that. But I think we have a pretty good road map from a capacity standpoint to try to stay with the curve.

I mean, clearly, we've spent a while kind of on the fiber opportunity. Just any other investments in broadband networks that you're prioritizing in 2022?

No. I mean I think most of our investment dollars are added in the cable and connectivity side. I mean there's enough there to keep us busy. We're always continuing to invest in R&D and innovate in our other broadband segments. But our primary focus right now is really on the cable and connectivity from an investment -- capital investment standpoint.

Got it. I mean Comcast was here earlier today kind of talking about strong capital intensity still. Can you just touch on kind of some of the impacts of the move to distributed architectures or DOCSIS 4.0 and just how those should drive growth in the broadband business over the next couple of years with CommScope?

Yes. So I think from a DA standpoint, it's still pretty early relative to what everyone is going to go do. What we'll continue to do is we'll continue to innovate and invest. Our R&D's DOCSIS 4.0, we have a huge installed base in that business. We think that positions us well. We understand that there's always technology opportunities for people, but we also are innovating in that space as well. So our view is it's still early. We're watching what's going to happen. That business is still good for us. We're still doing a fair amount of businesses, selling software. And we're also innovating. So I think we feel like we're well positioned for the future in that business as people make decisions on what they're going to do.

Got it. I mean this timing of when you think some of those decisions will be made, is that a 2023, 2024? Just what...

I mean I'm not the expert on that, but I think when we talk to our people, I think the consensus is more that it's going to be a little bit longer term than maybe what people talk about in the near term. We think some of those decisions may not happen next year. They'll get pushed beyond next year. But again, sort of our viewpoint on it, but [ that's ] what we think. .

Got it. Moving to the Outdoor Wireless segment. Can you speak to some of the investments you're seeing from operators around 5G and just what your expectations are for operator spending out of a pretty strong quarter for you guys?

Yes. So we clearly are seeing the wave in 5G. Our product base supports not just the antenna side, but we've got our HELIAX cable. We're doing structures. Yes, so we -- the demand there is strong. I think with that said, there's technology plays that are going on in 5G between the active and passive side. Again, I think that's an area that we're trying to innovate in, coming out with new products that we feel will gain a fair amount of traction in the marketplace, going through trials and working with large service providers on some of that new technology. So yes, we understand that we see a lot of investment there. We play on the structure side. We play on the antenna side. We play on the cabling side. And we're trying to innovate around that to make sure that we're well positioned to take advantage of some of that growth. And clearly, in 2021, we've seen -- we saw, particularly in Q4, a pretty strong push there.

Got it. I mean just on the active, passive antenna opportunity, why is CommScope well positioned there? And just kind of what opportunity do you see?

I think -- I mean I think a big piece of it is that we're well positioned with the customer base. So as we innovate and we come up with new products, it's a little bit easier for us as someone that's in there with big installed bases with them that those service providers rely on us as a key supplier. I think we're able to have those conversations at a different level and doing it faster than maybe some of our competition can do it. Yes. So we're pretty excited about some of the innovation in that segment.

Got it. Maybe a question we get from investors is just as you move to massive MIMO technology in 5G or integrated radios, like how does that change the dollar content for CommScope? And is it a headwind? Or is it an opportunity for you guys?

I mean I think it's -- I mean there's no question about it that with the technology that we have today that it impacts the business. I think we've sort of provided some insight into that in our Investor Day in our market, sort of our market rejections for us there. But I think it also provides us opportunity because we can innovate, and we talk about our new antenna technology. So yes, I think it's a little bit of both. It's in our existing technology. It's a headwind. But when we think about it in relation to some of the technology we can bring to the table, I think we feel like that could be a nice opportunity for us.

Got it. In Venue and Campus, can you just touch on some of the demand environment today? Q4 was an area of strength. We're just trying to get a sense of what is driving kind of some of the strength that you saw and are seeing in that business.

Yes. So in our Venue and Campus business, it's sort of 2 separate businesses. We have our inside cabling business. Our inside cabling business is sort of in line with what we're seeing on a broadband cabling and connectivity side. We're seeing 20% growth in that business in '21. So that business is pretty healthy both on our fiber side but also on the copper side. The other piece of the business is our wireless business. I think on the small cell side, we're still in investment mode there. So we see a lot of great opportunities, and we're investing a lot of money to get future growth there. The DAS business sort of is a very project-oriented business, and we had a pretty strong Q4 from a project standpoint in our DAS business. And then I think in that segment, the RUCKUS business is a business that has had some challenges in '21, but it's also been positioned very well. So that's a business that we've seen a large growth in our backlog. The challenge there is that's a business that for us is pretty heavily impacted by some of the supply constraints on chips. So we saw our backlog from the beginning of '21 to the end of '21. It grew at about 4x what it was at the beginning of the year. So when we think about that business, it's -- the wireless business, a lot of that is growth to come. RUCKUS, I think, we're seeing the growth. How to get the product out the door is a little bit of a challenge for us now. And then I think on the cabling side, that business continues to perform well as investments are made around infrastructure.

Got it. I'm surprised to hear you say that indoor cabling was still 20% growth business out there.

Yes. It was a strong growth for us last year as we probably took some market share. The copper business did well. So that was a good year for us.

Got it. I mean on RUCKUS, having covered RUCKUS in all of its forms, the CBS opportunity -- or CBRS opportunity has been kind of the white whale of RUCKUS for a long time. How do you see that opportunity developing now that more mid-band spectrum has been deployed?

Yes. I mean we -- again, I think we feel positive about those products. I think we feel good about the whole RUCKUS product range. I think we -- that's a business that -- we spend a lot of R&D dollars in that business. We're always trying to innovate in that business. And even with the supply constraints that we had last year, that business was -- we saw good growth in that business, and the profitability of that business on a margin basis is very strong. So I think we feel good about all the investments we're making in RUCKUS, and now it's about solving our supply chain issues there and getting stuff out the door.

Got it. We alluded to at the beginning kind of the home network spend and the delay that you're seeing there. Just kind of what are you looking for in the market or within results to either resume that process or take a different direction with that?

Yes. I don't think it's not a secret. I mean the numbers are all there. When we started to have the conversation about the spin, we were doing about $130 million on a TTM basis in EBITDA. If we take out some of the bad debt issues that we've had, that business did about $50 million this year. That is the business that for us is most heavily impacted by the chip constraint issue. We feel we do an analysis that's not -- it's not perfect, but we feel like we lost about $500 million in revenue in that business in 2021 just as a result of the challenges with chips. And as we evaluated spending that business and doing what was set out to do in the first quarter of '21, we just felt like the timing was not right from a value standpoint. So we've got things that we're doing in that business to grow. I mean just the same CommScope NEXT playbook that we're using in our core business, we're doing the same thing in the home business. So I think we're committed to -- we want to spend the business because the thesis doesn't change. But at the same point in time, we're going to do it when the timing is right from a value standpoint.

Got it. I just want to make sure, are there any questions from the audience?

Have you considered -- have you changed the pricing strategy so that if inflation continues in the next couple of years or rears its ugly head in like 2 years from now, you don't run into the same situation?

Yes. When we -- in our pricing, we didn't make massive changes to our contract structures with service providers. From an enterprise standpoint, we can make the changes sort of pretty readily. On the service provider side, although there's probably some tweaking of the contracts, the majority of our contractual language with our large service providers remain the same, and we would go back and have conversations with them if inflation, depending on what happens from a cost standpoint.

I mean maybe last question for me. You obviously stepped into CommScope at -- probably you would have picked a different tack maybe in retrospect. Can you just outline what -- in stepping in, what your objectives are and kind of what interested you in taking the role of CFO?

Yes. So I'll start with the second half of that. No, I mean it's exciting because it's a big company that has lots of different tentacles, so there's massive amounts of opportunity in our company. We sort of talk about every day, as you sort -- as you peel the onion back, you find really interesting opportunities. And as we look at the business, I mean, it's been an acquisitive business and it's no fault of any one previously, but there are opportunities for us to continue to improve how we operate the business. Clearly, where we sit today, it's pretty challenging times. We went through a pretty difficult time in '21. Lots of things going on in the world today that we're looking at every day to figure out what's going to happen and what we can do. So the way that I think about it is it's an exciting business with lots of levers. And when we think about the path forward, it is about EBITDA growth for us, right? I mean that's how we're going to get out of the box that we're in, and we're committed to do that. I think we have a plan to do that, a plan to hold the organization accountable. It's just sort of maneuvering through the times that we're in right now from an inflationary perspective and a supply constraint perspective to get to that other side, and we're working hard.

Got it. Well, Kyle, it's been a pleasure speaking with you and look forward to speaking with you more.

Okay. Thank you.

Thanks.