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

Welcome, everyone. I'm Ana Goshko with Bank of America, and I cover technology and telecom credits on the fixed income side, and this is our 2023 Leverage Finance Conference. Thank you, everyone, for joining us. And I'm thrilled to have CommScope with us. We have Kyle Lorentzen, the company's Executive Vice President and Chief Financial Officer. So without further ado, Kyle, thanks so much for being with us. I don't know if you have any opening comments you'd like to make or get right into questions?

No, we get right to questions, but thanks for everyone joining. Probably should have sold tickets to this one with standing room only. But I appreciate you guys spending some time with us today.

Okay. Great. Okay. So let's start with -- this is a credit-focused conference. So let's open with the debt-related topics, and then we'll move on to the business, operational, financial performance, strategic things. So everyone here, I think is aware that CommScope debt is trading at deep discounts. And I think that's both in response to the financial performance in this sort of industry cyclical downturn, but also concern about upcoming debt maturities and the high leverage right now, with the business in this kind of down cycle. So on your recent earnings call, you highlighted the numerous alternatives to address the upcoming maturities. But beyond that, as you work on your plan, you didn't want to get into, I think, the ins and outs of the debt structure options. And instead, said you wanted to focus your time with investors, analysts talking about the business and the opportunity. Is there anything you can add to that to kind of head off this question upfront?

No. I mean, I think as we've talked about, I think we feel like we do have some levers. We have some secured capacity. We have some cash on the balance sheet, we have ABL availability. And I think we've now brought up the topic of asset sales. I think those are all levers that we're looking to figure out how they play a role in our strategy. On a daily basis, we are very focused on the capital structure. And I think over time, we'll get more clarity to that and continue to communicate as things become available. But at this point in time, that's sort of all we would say about it.

Okay. And then just on the topic of asset sales. So on your -- you just mentioned it now, but on your 3Q earnings call, I think it was the first time that you mentioned the potential for asset sales. Was that like a deliberate disclosure? Is there anything to read into that with regard to there being any kind of process in play?

No, I don't think there's anything to read into it, other than the fact that we've brought that to the table as an option for us to deal with our capital structure. I think as anyone would expect, I think that is a lever that we have the opportunity to pull. Clearly, it needs to be the right thing to do for the company. But I think that was -- that disclosure was just around the fact that we are thinking about that as part of the solution.

Okay. You prereleased the third quarter results, and that included kind of revision to the guidance for 2023. And -- but that hasn't been the company's practice to prerelease in the past. Why the change in approach on that prerelease?

Yes. I mean simply put, the reason that we prereleased was the fact that we were going to miss our number and we were going to revise the guidepost. And I think as soon as we got visibility to that, we felt that, we felt that was the right thing to do was to disclose that. Since Chuck and I have been here, we haven't had that type of adjustment, and that was significant enough that we felt that it was the right thing to do was to get out in front of it.

Okay. So with regard to the lower-than-expected '23 financial performance. So you've highlighted that customers, especially your telco and your cable customers have been walking down their purchase outlooks this year, as they aggressively reduce inventory, and that's really sort of after order pull forwards that they had when lead times were extended, during the supply chain challenges, especially last year. So a number of sort of questions around that topic. So one, are you getting better visibility into customer inventory levels, to get a better handle on how much destocking is left to go?

Yes. I think the answer to that is, as we've been going through the last few quarters and trying to get better visibility, I think we are getting better visibility, but it continues not to be at the level that we would like it to be. In many cases, we can see inventory levels that our customers have of our product, that's helpful in us gauging where we are in the cycle. But what we -- we have a harder time trying to understand is what really is the true demand. What's going into the inventory, what's coming out of the inventory. But what we can say with the visibility that we have is that the inventory levels at our customers are definitely coming down. They're continuing to come down. And I think we feel, at some point in time, it's got to get back to that equilibrium position and flip back once that inventory gets depleted.

Okay. And then does your visibility differ for the distributors versus your end user customers?

It does, to a certain extent, I would say, and it also depends on the segment that we're in, I think. I'll make a general statement that our visibility with our distributors is better than the service providers. Not to say that we don't have some visibility to the service providers. But I think just generally, our visibility at the channel partners is better than what we see at the service providers.

Okay. And then are your lead times now back to normalized levels?

Yes, I would say generally, our lead times are back to where we were sort of pre-supply chain constraint challenges that we had in '21 and '22. When we think about lead times and, I would say, essentially, all of our businesses with the exception maybe of ANS a little bit, these are businesses that operate off of weeks of lead time, days and weeks, not quarters like we were seeing the last couple of years. So I would say, for the most part, our businesses are back to normalized lead times, where -- were days and weeks of lead time. The only thing I would just mention is that, that's how this business operates, right? This is not -- it's not troubling to us that we're there because if we go back to those pre-supply chain constraint issues, that's how the business is operated. We operate with days and weeks of lead time, and we're back there now.

Okay. And I think over the course of this year, you've talked about having constant conversations with customers, but obviously, those indications of what their demand and kind of purchase requirements were going to be changed a lot over the course of this year. Are you changing anything? Or is there anything that you can do with regard to the communication process with customers to get a better view going forward?

I mean, we're in daily dialogues with customers about what their demand forecast look like. I think that there were starts and stops as we went through '23. And I think that that's just a continual dialogue that we have with our customers and some of our customers are better at it than others. And it's just something that as we talk to them, one of the things that we're pretty focused on is just being careful of the whipsaw, right? We don't want them to get caught in a position where when the markets come back, that we sort of get back in that position, that we were in last time with lead times. And then we start the cycle all over again. So we've really tried to focus on sort of what does it look like going forward. Now I think with that said, visibility is still not where we would like it to be. I mean -- I mean that's one of the bigger challenges that we have in the business, is just sort of the lack of visibility. And I don't think we're alone in that, right? I mean, I think a lot of our competitors in these -- in our segments are having the same challenges that we have. Clearly, our situation's a little bit more highlighted because of the capital structure. But in many of the segments that we're in, our competitors are at the point that they're not even providing guidance because of the lack of visibility. I don't think we're substantially different than that. That doesn't mean that we're not continuing to talk to our customers. We don't -- we're working with them on getting better information. But it's still an area that we would love to have more visibility.

Okay. sometimes, what you'll see in the fourth quarter and even like in December, is sort of budget flushes from customers where they have use it or lose it. Is there anything like that that's potentially happening this year? Or is that kind of fully baked into the guidance that you provided?

I mean, I don't think we're seeing anything through sort of the first half of the fourth quarter, that would tell us that there's going to be some type of flush. I mean, I think we sort of talked about Q4 being a little bit down from Q3. And I think that's -- that continues to be our view. I don't think we're going to see anything dramatic at the end of the year that would drive it either way, they're up or down.

Okay. And then -- so you haven't really given any '24 guidance, but you gave some kind of indicative comments, I'd say. So given the lack of visibility, you talked about similar performance in '24, that's financial performance versus '23. And I think that really meant like if you take kind of the fourth quarter run rate, does that mean that you expect first and second quarter sort of to be kind of sideways from that? And then if there's any sort of kind of uptick that's going to be more in the second half?

Yes. So in our comments around '24 looking like '23. I think there's a couple of things. In order for us to do that, I think we said this in our earnings call, in order for us to get that, we would have to see a recovery, which we believe is second half of '24. The reason why our teams, I think, feel that there is some recovery in the second half, is, although not perfect, we do have some visibility to inventories at our customers. And those inventories are working down, and we're going to get to a point where it's going to flip the other way and that they're going to have to start ordering. Again, the visibility to that is, is that second half? Is that second quarter? Is that later in '24? Eventually, we're going to get there. So when we talk about '24 looking like '23, we would need to see some recovery in those order rates, which we think will be primarily driven by the inventory being worked down and the customers having to order back at more normalized levels. The one thing that I would also say, just as we think about the business in general, the last couple of years hasn't been normal from a seasonality standpoint. Our business on a historical take out the last couple of years where we had all these crazy supply chain constraints and challenges. Clearly, Q1 seasonally for us is a little bit lower. And I think we're going to go back to more of that seasonal approach, as we go into '24, as the supply chain situation has normalized. And we've worked through our backlog and we're back to normalized lead times.

Okay. Okay. So the devil is I think, in the details, which is in the segments. So starting with what you call, what we all call CCS, but that's your cabling and connectivity, so that's really where you hit sort of the telcos and it's the kind of core fiber copper connectivity segment. So I would say some investors in the debt market are kind of always glass half empty in some cases and are worried that 3Q '23 to 4Q '23 performance of CCS is really the new normal. So really looking at it potentially as kind of a secular pressure versus the cyclical, could you kind of make the argument for why that's not the case?

Yes. I mean I think currently right now, as we've been talking about, there's a lot of inventory that had to work its way out of the system. That is going to normalize. I think that in itself provides a lift for that business. I think the other thing that we've talked about, is just federal funding, right? So the federal funding, it is going to happen. We can -- again, visibility, does it start in the second half of '24? Does it roll into '25? But there will be tailwinds that come from just the federal funding and not just the BEAD program, but there's other programs that are out there to fuel the spend. I think the other thing on the CCS side of the business is we've been continuing to manage the cost structure. So we've talked about $150 million that we took out, sort of first half of this year. We're looking at another $100 million. A fair amount of that comes from CCS. So I think when we get back to more normalized levels of revenue, I think our profitability will be enhanced by those actions that we took.

Okay. So on that topic then, so, in the last 4 quarters, the EBITDA margin in CCS has ranged from 11% to 20%, I think. Kind of mid-cycle, what's your target EBITDA margin for CCS? Clearly, there's an element of fixed cost and scale, but how does mix impact it quarter-to-quarter as well?

I mean as we think about just CCS and there's a leverage component of it on the cost side. We have manufacturing facilities that are not -- I mean they're being underutilized now. So as the markets recover and we get more revenue through there, we'll see a lot less under absorption in the facilities. I think the other thing, I'd just make a comment on in CCS is the fact that the profile of product mix that we have in CCS, the difference between our connectivity solutions in our cable business. Our cable businesses are lower margins. As we've gone through the last few quarters, our cable business has declined less than our connectivity business. And we think when we get back to a more normalized level, we should see some margin improvement just from a mix standpoint. We'll see connectivity pick back up to be more in line with cable and that should just help our margins in general. I'm not going to give a specific number, but I think it's probably somewhere in the middle of those 2 numbers is where we would see a normalized level.

Okay. Is there any reason that the connectivity side was weaker? Was there just more inventory buildup?

I think that's the -- when we went through the supply chain constraints and lead times got pushed out, the connectivity side of the business, lead times got much longer in the connectivity side of the business. And I think that's where we saw a little bit more overbuying and more inventory and a lot of the inventory destocking is coming from the connectivity side versus the cable side.

Okay. Okay. So you raised the BEAD topic. So on the telco side, telco still are in a multiyear industry fiber build-out. So other than destocking, is there anything else that's been driving the pause in orders? So one thing that comes up is just the interest rate environment, carriers potentially reassessing ROIs of their fiber build. The other thing is actually with BEAD coming up, are -- do you believe carriers are taking a pause so they can get a better handle on what the BEAD availability is going to be before they move forward with deployment plans?

So, a lot to that question. I think as we look at clearly being impacted by inventory, I think in some cases, we've seen a pullback on spend as well, as people are trying to manage the new interest rate environment. Plus we're also -- they're trying to manage their cash as well. So I think that is definitely a driver. It's not just an inventory issue. I think we've seen some pullback in spend, as people are managing their own balance sheets. Yes. So I think it's a little bit of both. I mean I think we feel, it's probably a little bit more weighted toward the inventory issue than the demand side. But I mean, I think there is some demand pullback. I think the second half of your question is, again, I just -- we talk to them. I think there's more sentiment out there from some of our customers around waiting for the BEAD money to build their networks out. I won't go into specifics, but I think there's been some comments made lately about people wanting to build their networks out using some of that federal funding versus on their own dime.

Okay, have -- we haven't heard you basically provide a TAM or kind of size the BEAD opportunity for CommScope. I don't know if you can have any comments on that front. And then I've got a second question.

Yes. I think -- I mean, I think we would be in line with -- some of our competitors have come out and talked about the TAM that comes with the BEAD program, I think we would be in line with those -- the numbers that they have quoted, which is, I think, plus or minus $4 billion worth of TAM.

Okay. And then so given the Buy America component of BEAD, how many competitors really are there?

I mean I think all of the competitors are watching the rules as they get developed and come out and coming up with their own manufacturing strategies to deal with the Build America. I think that the Build America is still sort of being developed. But just like we are, everybody, I think, is looking at how they meet those standards and personally, I don't think we'll see a dramatic change in the competitive landscape, as people work through those things. I mean people will come up with ways to be compliant with Build America, just like we're working on that.

Okay. I mean, I know you've built a new facility in North Carolina recently. I think a part of that strategy was to prepare yourself for these upcoming federal kind of programs? I mean, how are you preparing yourself for that opportunity?

I think we would -- we feel like we're well positioned, not to say that there's not work to be done. A lot of our connectivity products are not done in North Carolina, they're done elsewhere. So we're working on that. But we clearly feel like with our presence in North Carolina, on the cable side that we're well positioned, relative to the requirements that are coming from Build America.

Okay. And then final question just on CCS since it's one of your biggest segments. So I think you've said that more of the weakness obviously, has been in the network connectivity and cabling, rather in the building and data center side. If you could just give us a sense of what your exposure is to the building and data center side, specifically with regard to hyperscale? And if there's any sort of momentum you're seeing from sort of cloud and AI kind of coming back?

Yes. So just as we think about '23, as it relates to the broadband side of CCS and the inside part of CCS. The broadband side is definitely down more than the inside part of our business. With that said, if we go back to '22, the broadband side was up substantially more than the inside part of our business. I think, as we think about data centers, I think data centers is a really attractive space for us. And quite honestly, we've got what we believe to be a pretty competitive product range, and we're working with all the large data center companies. So I mean, I think we're enthusiastic about their growth, which, quite honestly, we've seen a fair amount of growth in that segment. What I would say, though, is the data center business is not, when we think of the total CCS business, it's a relatively sort of small part of the business. So I think we feel like a lot of growth, but coming off of a base that, let's say it's 10% or 15% of our total CCS revenue, is in data centers. So it's great growth, but I would also caution it just comes off of a smaller base.

Okay. So shifting to the Outdoor Wireless. So OWN, as it's called, it has been weak, but I think you've been telling us to expect that in the post 5G deployment slowdown. So what should we think of as the new normal for OWN? If you look at '23, is that a good proxy?

I mean I think -- I think just like we saw in CCS, I think there was some overbuying on the OWN side, not just -- not at the levels that we saw in CCS, but there's definitely some overbuying and inventory destocking, that the large service providers are doing in that business. I think as we think about OWN, it's probably somewhere in between, what we saw in '23 and what the historical level of the business is at. We're continuing to develop new products. Our MOSAIC product, which we think with the active and passive technologies that we can put on one antenna, we think that, that has legs and will help us, as we think about more normalized rates and dealing with some of the technology changes that we're seeing in that business.

Okay. And then so shifting to Access Networks, which is really cable focused. So there's an ongoing evolution in cable architecture from centralized to distributed architecture, you guys are part of that. There is a DOCSIS 4.0 opportunity, which is still pending. Nonetheless, like you did see, obviously, weakness. It came in weaker in the second half than you were expecting. If you put it all together, do you consider ANS a core business? And is there any kind of industrial logic to combine it with another strategic player in the market?

Yes. I wouldn't comment on that. But I mean, I think we're focused, just like we are in all the other businesses, to figure out what we can do to grow the business and enhance the profitability of the business. We're clearly in very early innings of a DOCSIS 4.0 upgrade. We think that is a multiyear cycle. And I think as we talk about, we are the supplier that can supply all the products that are required to do those upgrades. So we now have a virtual CMTS solution. We do our modules, we do our nodes, and we do amplifiers. And we're the only player that can do that. We think that gives us a competitive advantage. I think we're playing as we're pretty open about, playing a little bit of catch-up on the virtual CMTS side. But I think we're well positioned. I mean the team has done a really good job of developing a lot of new products to deal with the DOCSIS 4.0 upgrade cycle, over the last 24 to 36 months. And I think we made a lot of headway and feel like we're well positioned to take advantage of the upgrade cycle.

Okay. So then we're moving to your network business, known as NICS. So obviously, many investors are concerned that NICS's '23 performance is abnormally high, due to the pent-up demand from the backlog from last year's trip shortage. Is this an accurate view?

No, I think we feel we've transformed that business. I mean, I think clearly, the last couple of quarters have been helped because if you go back and think about, we built up a significant amount of backlog in that business. As a result of a lot of chip constraint challenges that we've had. Over the last couple of quarters, we flushed out a lot of that backlog, our channel partners are sort of dealing with the fact that we pushed a lot of inventory on them, I think that may have an impact on that business, over the next couple of quarters, as people normalize inventory. But when we look at that business, we're a small market share player in that segment. I think we feel like we have a product that is strong from a technology standpoint. And I think we also, with our channel partner relationships, and our vertical market strategy, I think we feel like that's a business that we can continue to grow. The other -- I think we mentioned this in our call, that business does a pretty good job of managing forward-looking metrics. So we have lots of visibility to funnel and what we call Closed One, which is tracking projects that we're winning that may not ship for 1 quarter or 2 as projects get deployed. All of those metrics continue to point toward strength in that business. So although we may see a little bit of adjustment here over the next couple of quarters, I think we feel good about how we've positioned the RUCKUS business and the fact that we feel like we can take a little bit of share as we focus on our specific verticals with technology, for -- we're one of the first to deploy a Wi-Fi 7 product, for example. So I think we feel like on the RUCKUS side of that business, we're well positioned.

Okay. So I'm going to try this question again. But -- so you have highlighted that RUCKUS is a very small player in the market. So do you consider it core? Or is there industrial logic to combine it with another strategic player?

I'm not going to comment, I mean at the end of the day, we're going to run the businesses, kind of try to maximize revenue and try to maximize profitability. And I think as we think about sort of all of our businesses, going to your -- one of your first questions is, hey, asset sales are an option for us to deal with a challenging capital structure. And if something makes sense, then I don't think we would -- I don't think sort of anything is off the table, if it makes sense for us to enhance the position of the company.

Okay. Great. So I have like 3 pages of questions. I've gotten to like 1 page of them, but we're running out of time. So Kyle, thank you so much for being with us. I don't know if there's any like closing statements, you'd like to kind of end on.

No, I obviously appreciate the -- everyone having interest in the company. I think we understand some of the challenges that we have, and we're working through those, and we'll continue to dialogue with everybody, as those strategies become more real, and we start implementing them. But we appreciate the interest and thank you.

Okay.