Vistance Networks, Inc. Q1 FY2025 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the CommScope First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Massimo Disabato. Sir, please begin.

Good morning, and thank you for joining us today to discuss CommScope's 2025 first quarter results. I'm Massimo Disabato, Vice President of Investor Relations for CommScope, and with me on today's call are Chuck Treadway, President and CEO; and Kyle Lorentzen, Executive Vice President and CFO. You can find the slides that accompany this report on our Investor Relations website. Please note that some of our comments today will contain forward-looking statements based on our current view of our business, and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Chuck, I have a few housekeeping items to review. Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. All references during today's discussion will be to our adjusted results. All quarterly growth rates described during today's presentation are on a year-over-year basis unless otherwise noted. I'll now turn the call over to our President and CEO, Chuck Treadway.

Thank you, Massimo. Good morning, everyone. I'll begin on Slide 2. I'm pleased to announce our first quarter results. In the first quarter, CommScope delivered core net sales of $1.112 billion, a year-over-year increase of 23% and core adjusted EBITDA of $245 million, a year-over-year increase of 159%. The performance in all of our core segments contributed to year-over-year growth for the quarter. I'm extremely pleased with our first quarter performance as we sequentially improved core adjusted EBITDA for the fourth consecutive quarter. Core adjusted EBITDA as a percentage of revenues of 22% remains strong. Our adjusted EBITDA as a percentage of revenues reaffirms our strategy of managing what we can control as we continue to navigate various external market conditions. We are closely monitoring the implementation and impact of the recently announced tariffs and the fluidity of the situation. Assuming tariff rates on April 30, 2025 remain constant, we have developed and are implementing our plan to mitigate the effect of tariffs over the next 90 days with our flexible global manufacturing footprint, our broad supplier base, and commercial strategies. We are very supportive of U.S. manufacturing and produce a large number of products in the United States for the U.S. market. In addition, essentially, all of our products produced in Mexico comply with USMCA guidelines, reducing our overall exposure to tariffs. Although the situation remains fluid, with current visibility, we believe we can manage the uncertainty and maintain our 2025 adjusted EBITDA guidepost of $1 billion to $1.05 billion. With that, I'd like to give you an update on each of our core businesses. In the first quarter, CCS revenue grew 20% year-over-year, while CCS adjusted EBITDA increased 87% as a result of revenue growth, mix, and cost leverage. CCS adjusted EBITDA as a percentage of revenue reached an all-time high at approximately 25.1%. I would like to call out our enterprise fiber business that holds our products that we sell into the data center market. For the first quarter, that business drove revenues of $213 million, an 88% increase year-over-year. The enterprise fiber business represented 29% of first quarter CCS revenue versus 19% in Q1 of 2024. We are very excited about the market projections for the data center business and our products are well positioned among the market leaders in this space. The market demand in our enterprise fiber business is not solely driven by growth in data centers but is amplified by additional demand for CommScope products, a new generative AI-focused data center architecture. As mentioned previously, these AI builds use large language model training clusters and can require upwards of 10x the number of fiber connectivity versus a traditional compute cluster. We have worked hard to launch new products and added incremental capacity to meet the service and quality requirements that our customers have come to expect from us. In addition, we've approved investments in incremental capacity in the first quarter. In the broadband portion of CCS, demand was up compared to Q1 of 2024. We are continuing to see an order trend increase and believe that customers have normalized inventory and are back to demand matching the deployment rates. Recently, our team secured several wins both domestically and internationally for our Prodigy Connector Solution. Prodigy is a universal patented connector technology that allows our customers to deploy fiber-to-the-home solutions in a more efficient and sustainable method than ever before. We still anticipate that funding will have a positive impact on our revenues. However, we don't expect anything meaningful to materialize until 2026. In our CCS structured cable business, we have seen growth driven by customer inventory normalization and new product introductions. We continue to gain traction with our SYSTIMAX 2.0 solutions used in many of our key customer segments. SYSTIMAX 2.0 is the next generation of CommScope's industry-leading SYSTIMAX foundation of quality, service, and technical leadership. Overall, in CCS between market growth, new products, and normalization of customer inventory, we are encouraged as we continue to move forward into 2025. In the first quarter, we grew CCS backlog by $128 million or 37% and would expect to release some of the backlog as we bring on capacity in the second quarter and the remainder of the year. Turning to the core NICS. Revenue was up 51% in the first quarter compared to the prior year. Core NICS adjusted EBITDA was up $42 million versus Q1 of 2024. Historically, Q1 represents a softer quarter but ended up better than expected. In the first quarter, we saw continued improved demand for RUCKUS driven by our new Wi-Fi 7 products and subscription services as well as our vertical market strategy. With the strong year-over-year improvements, we feel that challenges in 2024 with channel inventory are now behind us. We believe the core NICS business is well positioned for strong growth in 2025 driven by normalized channel inventory and growing demand. We continue to benefit from new products in our vertical market strategy. In addition, we are beginning to see the impact of adding incremental selling resources. We recently won a large deal with a higher education customer featuring RUCKUS Edge. RUCKUS Edge extends RUCKUS One in our AI-driven converged network assurance platform. It deploys networking, security, productivity, and industry vertical-specific services. As mentioned, we are still positive about the growth projected through the rest of 2025 and continue to expect the second half of the year will be stronger than the first. Finishing our business updates with ANS, net sales of $225 million was up 20% in the first quarter compared to the prior year, and adjusted EBITDA was up 177% versus Q1 of 2024, primarily driven by our deployment of new DOCSIS 4.0 node and amplifier products as well as higher legacy license sales. As indicated, we expect stronger sales as we move into the second quarter and the second half of the year. As stated before, we believe ANS is well positioned with decades of knowledge of our customers' ecosystems and our breadth of new products for service providers to take advantage of the latest DOCSIS upgrade cycle. Our product range includes all areas of the HFC network, including DOCSIS 4.0 solutions for virtual CMTS, nodes, amplifiers as well as RPD and R&D modules. We have also moved our virtual CCAP program forward again by completing several field trials that have resulted in winning business with major Tier 1 global customers. Overall, we are optimistic about the improved market conditions as all three segments have delivered strong first quarter results and year-over-year growth. Our first quarter performance exceeded our internal expectations. Based on the current view of markets and our CommScope NEXT initiative plan, we expect strong performance for the remainder of 2025 and are reconfirming our 2025 core adjusted EBITDA guidepost. The strategy of focusing on what we can control has helped us improve our quarterly results sequentially since the first quarter of 2025, including delivering core adjusted EBITDA as a percentage of revenue in the first quarter of 22%. We have the right products, solutions, and scale to grow with our customers and win new business. We will continue to control what we can, including supporting our customers and innovating for the ever-increasing demands of future advanced networks. Finally, our Board of Directors has approved the stock buyback program. We feel our equity is undervalued and our shareholders will benefit from the strong value a buyback program will generate as we grow the business and position for deleveraging below 6x debt to adjusted EBITDA by the end of 2026. And with that, I'd like to turn things over to Kyle to talk more about our first quarter results.

Thank you, Chuck and good morning, everyone. I'll start with an overview of our first quarter results on Slide 3. For core CommScope, which excludes the OWN and DAS businesses and general corporate costs that were previously allocated to the OWN, DAS, and home businesses, we reported core adjusted EBITDA of $245 million for the first quarter of 2025, which increased 159% from prior year. First quarter adjusted core EBITDA results were up 2% sequentially versus the fourth quarter of 2024. Our core adjusted EBITDA as a percentage of revenues was 22%, the best that we have seen since the ARRIS acquisition and increased by 11.5 points year-over-year and 1.5 points versus the fourth quarter of 2024. For the first quarter, CommScope reported net sales from continuing operations of $1.112 billion, an increase of 23% from the prior year, driven by an increase in all segments. Adjusted EBITDA from continuing operations of $240 million increased by 186%. Adjusted EPS was $0.14 per share versus a loss of $0.24 in the first quarter of 2024. Order rates were stronger in the first quarter of 2025 than the fourth quarter of 2024. Core CommScope backlog ended the quarter at $1.179 billion, up $202 million versus the end of the fourth quarter 2024. We continue to operate with short lead times and do not expect this to change in the forecast period. Turning now to our first quarter highlights on Slide 4. Starting with CCS, net sales of $724 million increased 20% from the prior year. CCS adjusted EBITDA of $182 million increased 87% from the prior year. CCS adjusted EBITDA as a percentage of revenue for the quarter remained strong at 25.1%, driven by favorable mix and cost leverage. The CCS revenue increase was across all product lines with hyperscale and cloud data centers seeing the strongest growth at 88%. We continue to expect strong growth in the Data Center segment as hyperscale and cloud customers continue to forecast strong capital expenditures to meet growing AI demand. We are excited about the data center market projections and our positioning in the market. Looking towards the second quarter for CCS, we expect both revenue and adjusted EBITDA to increase across all segments. Core NICS net sales of $163 million increased by 51% versus the first quarter of 2024, driven by normalized inventory in the channel. Core NICS adjusted EBITDA of $25 million increased $42 million from the prior year, primarily driven by the increase in RUCKUS revenue. As noted in previous calls, the overhang from channel inventory lasted through the first half of 2024 and started to improve in the third quarter. We are now seeing the benefits of normalized inventory in the channel as well as growing market demand. On a sequential basis, revenue increased 6% and adjusted EBITDA decreased 6%, primarily due to variable incentive compensation. We continue to drive our vertical market strategies and RUCKUS new product initiatives, including RUCKUS Edge. In addition, as Chuck mentioned before, we are beginning to see the impact of adding incremental selling resources. With the additional selling resources, new products, and vertical market focus, we are well positioned to take market share in the medium and long-term. As we continue to add selling resources over the next few quarters, we would expect to see improving benefits of this initiative in the second half of 2025 and into 2026. Second quarter core NICS adjusted EBITDA is expected to decline compared to first quarter results due to an increase in variable compensation and the elimination of the first quarter inventory adjustment benefit. In our ANS segment, net sales of $225 million increased 20% from the prior year as customer inventory levels stabilized and shipments of our DOCSIS 4.0 products have increased. ANS adjusted EBITDA of $38 million was up $24 million or 177% from the prior year driven by higher revenue and more license sales in the quarter. ANS had a very challenging 2024 as customers continued to delay their upgrade cycle and the legacy business continued to decline. We expect to see both revenue and EBITDA up in the second quarter versus the first quarter. We are excited about the rest of 2025 as we ramp production of DOCSIS 4.0 products. We are expecting a strong rebound in revenue and adjusted EBITDA as our investments made over the last three years on product development have positioned us for the pending upgrade cycle. Despite the optimism for 2025, we are still in the early phases of the DOCSIS 4.0 upgrade cycle as customers continue to evaluate the path and timing of upgrades. The business remains well positioned to take advantage of upgrade cycles as we have decades of experience with customer ecosystems, the largest installed base, and the broadest suite of products. Finally, as discussed on our last call, in the first quarter, we completed the divestiture of the OWN and DAS businesses to Amphenol. Note that the P&L activity of these businesses was reported as discontinued operations. Turning to Slide 5 for an update on cash flow. As indicated on our prior call, we expected the first quarter to be a use of cash because of working capital needs, timing of our annual cash incentive payout, and the higher interest payments. That said, for the first quarter, cash flow from operations was a use of $187 million, and free cash flow was a use of $202 million. As we look at cash flow guidance for 2025, we still expect breakeven cash flow. In this guidance, we project an investment in working capital and capital expenditures of over $200 million, driven by growth in the business. Turning to Slide 6 for an update on our liquidity and capital structure. During the first quarter, our cash and liquidity remained strong. We ended the quarter with $493 million in global cash and total available cash and liquidity of $856 million. During the quarter, our cash balance decreased by $170 million. It should be noted that we lost approximately $140 million of our ABL availability with the closing of the OWN and DAS transaction. During the quarter, net proceeds from the previously announced sale of the company's OWN segment as well as its DAS business unit to Amphenol were used to repay all outstanding amounts under the company's asset-backed revolving credit facility, repay in part the company's 4.75% senior secured notes due 2029, repay in full the company's 6% senior secured notes due 2026, and pay fees and expenses associated with the transaction. Our debt deal results in no debt maturities due until 2027. We purchased no debt on the open market; however, going forward, we will continue to use cash opportunistically to buy back securities across the breadth of our capital structure. The company ended the quarter with a net leverage ratio of 7.8x. Finishing up on liquidity and cash, as Chuck mentioned earlier, our Board of Directors has approved a stock buyback program of $50 million. We feel the equity is significantly undervalued and our shareholders will benefit from the exceptional value the buyback program will generate. With our cash on hand and availability on the ABL at the end of the first quarter, of $856 million, we feel we have adequate resources to undertake this program. I'm now turning to Slide 7, where I will conclude my prepared remarks with some commentary around our expectations for the remainder of 2025. In our core business, we have seen four quarters of sequential quarterly adjusted EBITDA improvement. During the first quarter of 2025, we have continued to see strong performance in our CCS business driven by data center GenAI growth. We expect that this trend will continue. The core NICS and ANS segments are beginning to rebound from the challenges in 2024. This is evidenced by improvement in the second half of 2024 and first quarter of 2025 in these businesses. We continue to expect our 2025 adjusted EBITDA to be in the range of $1 billion to $1.05 billion. Similar to what we experienced in 2024, we expect the second half to be better than the first half. We expect second quarter core revenue and adjusted EBITDA to be up from first quarter results. We continue to control what we can control, including managing costs and supporting our customers. Our core adjusted EBITDA as a percentage of revenue improved from 10.5% in the first quarter of 2024 to 22% in the first quarter of 2025. This is a testament to our priority to control what we can and improve long-term profitability. And with that, I'd like to give the floor back to Chuck for some closing remarks.

Thank you, Kyle. I'm pleased with where we are positioned as we move into the second quarter of 2025. This is evidenced by a sequential growth in adjusted EBITDA during 2024 and the first quarter of 2025. The customer inventory challenges are behind us, and demand is growing in all of our segments. We have made significant investments in our product offerings and capacity over the last several years, and we are in a great position to take advantage of the stronger markets. In particular, the data center market tailwinds have allowed us to focus on our scale, technical leadership, and customer focus, making us one of the key suppliers in the data center connectivity and cabling space. I'm very excited about the future of this business. Although we are optimistic about market conditions, the economic environment is fluid. We will continue to monitor and manage the tariff impact not only on costs, but on market conditions. We're using our flexible global manufacturing footprint, our broad supplier base, and commercial strategies to effectively navigate the environment. Across CommScope our teams have done a great job taking advantage of the recovering markets by focusing on what they can control. We will continue to focus on what we control through our CommScope NEXT initiative program. I'm excited about the initiatives that we have in the pipeline, and the first quarter is just another step in our journey. And with that, we'll now open the line for questions.

Our first question or comment comes from Samik Chatterjee from JPMorgan. Your line is open.

Hi, good morning. Thanks for taking my questions and congratulations on the strong margins. Chuck, could you discuss your company's exposure to tariffs? I'm interested in how customer behavior or commentary on purchasing has changed since the tariffs were announced. How much of the conversation has focused on price increases to offset some of the tariff impacts? Have you noticed any changes in purchasing behavior or broader macro discussions from your customers? I have a follow-up.

Thank you, Samik. I want to start by highlighting that we have a highly adaptable global manufacturing setup. We produce our products close to our customers and primarily source our raw materials locally. To provide some figures, about 80% of our U.S. sales in the first quarter were either made in the United States or compliant with USMCA. The only exception to this is our RUCKUS product line. If we exclude RUCKUS from the U.S. sales percentage, we would reach 90%, meaning that nearly all our products would be of U.S. origin or USMCA compliant. RUCKUS sources most of its products from Vietnam or Taiwan, and as you know, many of RUCKUS's items are currently exempt from tariffs. Regarding tariffs, we estimate their growth impact for the second quarter will be around $10 million to $15 million. We plan to mitigate most of this impact in the second quarter and eliminate it by the third quarter. This will be achieved through our flexible global manufacturing capabilities, along with increased U.S. capacity coming online in the second quarter, and enhancements to our supplier base. The second quarter's impact primarily stems from the timing of our ability to implement these mitigation strategies. We remain optimistic about all our segments for the full year, and while we are maintaining our adjusted EBITDA guidance, we are not increasing it at this point due to the early part of the year and the prevailing macroeconomic uncertainties. In response to your question about purchasing behavior, we may have observed a slight amount of pull-in, but we continue to operate with short lead times. This is typical for our business, and our localized manufacturing helps minimize the impact of tariffs, which our customers understand. We did not notice any changes in order patterns during the first or second quarter. In discussions with our customers, we maintain transparency about the situation and any minor impacts we face, and we are collaborating to address these issues. Overall, we have received positive feedback and support, and our customers recognize the steps we are taking to manage these challenges.

Got it. For my follow-up, could you provide insight into the strong margins in CCS, particularly the sustainability of the 25% EBITDA margin? In previous discussions, you've mentioned capacity expansion. Can you update us on that? Additionally, do you see a need to revise your capacity plans, especially considering the increased demand for U.S. manufacturing?

I will address that. We are pleased with the improvements the team has made in margins for CCS, and we believe these margins are sustainable. As the business grows, we will benefit from fixed cost leverage as revenue increases. In terms of growth in CCS, especially regarding data centers, we are continuously investing in capacity. As Chuck noted, we plan to increase capacity in the second quarter, and we are already preparing to add more capacity in the second half of 2025. This is an ongoing effort to stay ahead of demand, which appears to be strong, and we are expanding our internal capacity to meet that demand.

Thank you. Thanks for taking my questions.

Thank you.

Thank you. Our next question or comment comes from the line of Meta Marshall from Morgan Stanley. Your line is open.

Great. Thanks. And congrats on the quarter. A couple of questions. Just one on the visibility that you're getting from kind of data center customers as you kind of increase demand, can you just kind of give a sense of how the visibility on the data center side compares to the service provider side? And then second, if you could just kind of give an update on the ANS business. I know you had a large customer that's going through an upgrade this year, but just how other customers who may have been kind of been holding patterns on architectural decisions, if you're seeing any kind of movement there? Thanks.

Thank you, Meta. To address the data center question, our customers continue to show strong capital expenditure plans to support their AI initiatives, with some even increasing these plans as recently as yesterday. We maintain daily communication with them and have a consistent presence in their data centers. It's important to note that our product revenues are not just a result of data center growth rates; our exponential growth is largely driven by connectivity and cabling. As they transition to GenAI, we are seeing a significant increase in connections, which means more products for us to sell. Bookings in the second quarter are surpassing those of Q1, which aligns with our expectations. The visibility in this area appears to be at least as strong as what we observe in broadband, thanks to our ongoing engagement with customers and their increasing demands. Regarding the ANS business, we are beginning to see the benefits of our investments in developing new products over the past three to four years. While I won't mention specific customers, I can say that there are ongoing investments and ramp-ups with amplifiers and nodes, particularly with some major customers as noted in our prepared remarks. There remains some indecision among customers regarding their architectural choices, but we are achieving notable successes with our Casa acquisition and virtual CMTS. Overall, we are very encouraged by the progress from our Casa acquisition.

Great. Thank you.

Thank you. Our next question or comment comes from the line of Simon Leopold from Raymond James. Mr. Leopold, your line is open.

Thank you for taking the question. First, I just wanted to come back to the tariff topic quickly and understand two things. One is within the headwind you described, $10 million to $15 million in 2Q, is some of this or could you quantify how much of this is related to the steel and aluminum? I'm trying to understand how big a deal those tariffs are for you because I presume those are important materials and your ability to either pass the tariff expenses to customers either through contracts or planned price hikes? Then I've got a very quick follow-up.

Yes. Regarding the tariff situation, the estimated impact of $10 million to $15 million is relatively small compared to the size of our business, and we believe we can manage it. In terms of steel and aluminum, this amount does include some related expenses. However, we are recognizing the complexity of the various rules and exemptions, so we won't specify an exact figure for steel and aluminum. What we can convey is that the $10 million to $15 million is manageable, but it's a complex issue we need to navigate to understand what duties are being charged and what are not.

And your ability to either pass the pricing of hikes or as basically fees, are they pass through in your existing contracts?

Yes. I think Chuck mentioned it, and that's the first point. We're doing several things to offset the tariffs by utilizing our global presence and collaborating with our suppliers. On the pricing side, that's part of the equation. Our different businesses may handle it uniquely, from adjusting distributor pricing to engaging in discussions with some of our major customers about potential price increases. However, when we assess the overall impact of $10 million to $15 million, we feel confident that it's manageable and that amount is small enough for us to address effectively.

Great. And then just as the follow-up, I wanted to clarify, within the deck, you mentioned the unified amplifiers would be available in 2025. I wanted to understand, is that availability, meaning we should expect revenue this year or is this when your customers would get them begin testing and integration? So would the revenue for unified amplifiers be more of a 2026 event, and in the RPD part of ANS, are you currently gaining market share during the first half of this year? Thank you.

Yes. Regarding the unified amplifier, you're right that we anticipate revenue in 2026. For the RPD side, when considering market share, much of it is divided among major customers. The timing of their network upgrades influences this. Overall, our market share in terms of hardware has remained relatively stable, and it largely depends on when we integrate our products into the network compared to our competitors.

Thank you.

Thank you. Our next question or comment comes from the line of Matt Niknam from Deutsche Bank. Your line is open sir.

Hi everyone, I appreciate you taking my questions. I have two inquiries. First, regarding RUCKUS, you’ve clearly experienced some positive revenue shifts. I'm curious if this is mainly due to cyclical factors and the inventory adjustments your channels are managing, or if you're gaining market share due to uncertainty with two of your competitors considering a merger. My second question is about free cash flow. You've reconfirmed your breakeven guidance for the year, but I noticed you experienced a cash burn of around $200 million in the first quarter. How should we expect free cash flow to trend in the second quarter and beyond? Thank you.

Thank you for the question. You're right. Regarding RUCKUS, I believe our channel inventories are resolved now. We are gaining traction with our new products, including RUCKUS One and Wi-Fi 7, and our vertical market strategies are also beneficial. There is some uncertainty regarding a significant potential acquisition that will be addressed in court soon. Additionally, a 51% growth is quite notable. While I haven't seen all the competitive numbers, this year-over-year growth suggests we may be capturing market share, and it stands out as a strong figure.

On the cash flow side, I think the trajectory will be pretty similar to what we've seen in the past. In the second half, we will see an increase in cash, with a strong focus on Q4 as we progress through the year.

Thank you. Our next question or comment comes from the line of Michael Fisher from Evercore. Mr. Fisher, your line is now open.

Yes, great. Just wanted to start on the free cash flow guidance for the year. I know you called out the headwind from working capital and capacity expansion. I'm just wondering, in a more normalized environment for those two factors, what percentage of EBITDA over the long-term would you expect to convert into free cash flow?

I think in our prepared remarks, we mentioned that in 2025, we anticipate building about $250 million in working capital and capital expenditures, which would be over $200 million. If everything were to normalize, that number would essentially revert back into free cash flow.

Okay. Regarding the mix adjusted EBITDA guidance being lower sequentially, I'm trying to understand why that is, as it seems you outperformed many of your competitors this quarter. Most analysts anticipate that the RUCKUS market will remain quite strong throughout 2025, so I'm curious as to why you expect a sequential decrease next quarter.

Yes. We had a few onetime favorable items relative to some inventory adjustments that we had in Q1. And then as we work through the year, we have to book our incentive compensation and the way that, that just flows through in Q2 versus Q1. Those are sort of two items that are headwinds. We'd expect to get back to sort of more normalized growth in the second half of the year, but we may take a little bit of a dip here in Q2. Clearly, that will depend on where the revenue comes in. But those are two sort of headwinds that we have going from Q1 to Q2.

Great. Thanks for taking my questions.

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Yes. Thank you so much for your time today, and we appreciate your interest in CommScope. Have a great rest of your week. Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Everyone, have a wonderful day.