CommScope Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 10 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the CommScope First Quarter 2024 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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Massimo DiSabato, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning and thank you for joining us today to discuss CommScope's 2024 First Quarter Results. I'm Massimo De Sabato, 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.

Speaker 1

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.

Speaker 1

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 Chudway.

Speaker 2

Thank you, Massimo. Good morning, everyone. I'll begin on Slide 2. We continue to see uncertainty in our business. In the Q1, we saw recovery in our CCS and OWN order rates as service providers have worked down inventories and demand appears to be rebounding.

Speaker 2

This is a positive sign and one that we have been waiting for. Unfortunately, with the early signs of recovery in CCS and OWN, our A and S and mix segments realized further deterioration in the quarter. In A and S and mix, we experienced lower sequential quarterly revenues driven by delayed upgrades, customer inventory and lower demand. Visibility remains limited across all segments as customers continue to manage through macroeconomic conditions and upgrade plans. Based on current visibility, we expect the 2nd quarter revenue and adjusted EBITDA to be higher than the Q1.

Speaker 2

Turning to the Q1 results, CommScope delivered net sales of $1,168,000,000 and adjusted EBITDA of $153,000,000 for the Q1 of 2024. Our Q1 continued to be negatively impacted by lower market demand and larger than expected customer and channel inventory build up. As I've mentioned in past calls, we continue to control what we can and navigate macroeconomic challenges that impact our businesses. We are the market leader in most of our businesses with a comprehensive strategy and capacity in place to meet expected future demand. In addition, as referenced in our Q4 call, we are managing our cost structure and are on track with our plan to take out $100,000,000 of annual cost.

Speaker 2

Now I'd like to give you an update on each of our businesses. In the quarter, CCS saw stronger ordering patterns than we saw in late 2023. As mentioned, we believe that this is due to our service providers continuing to digest their inventories they had on hand as well as stronger enterprise sales from data center and building and campus. Starting with our enterprise side of the business, we continue to find success with our launch of our Systemax 2.0 structured cabling solution. The introduction of innovative offerings such as GigaReach and XL5 cable enable greater distances and increased bandwidth capabilities.

Speaker 2

These new cables support both building and campus solutions for the next wave of applications like security and multi gig WiFi 7 access points. In addition to our building and campus market, the cloud and hyperscale portion of the business saw additional project momentum and build outs of Gen AI data centers. We're working with several of the large players in this arena as our products and services are well positioned for these builds. To supplement strong demand in this business, we are in the process of expanding our connector capacity with the capacity to be implemented by mid year. Turning our attention to our broadband business, we're encouraged to not only see ordering patterns stabilize, but growth in order rates throughout the quarter as service providers work through high inventory levels over the past few quarters.

Speaker 2

Much of our research suggests that fiber to the home passings in the United States remained at historic levels, thus the need to refresh inventory. As we look forward to the government beat funding initiatives, we have launched 100 of Build America, Buy America qualified products. I would encourage you to visit compscope.com to see the breadth of our bottling compliant products. These products and solutions are positioned to capture the long term market tailwinds supporting broadband infrastructure projects that are expected to start late in 2024 and into 2025. All of these factors and the recent order trends are evidence of a potentially stronger second half of twenty twenty four and return to growth for the CCS segment.

Speaker 2

Turning to mix, as we had discussed on the Q4 earnings call, the business is seeing weaker than predicted sales primarily driven by a ruckus business impacted by higher than average inventory levels in the channel. As we work with our partners to bring their inventory down to NICS segment performance. In addition to the inventory build, we are also seeing a rather significant reduction in demand. We have a number of initiatives underway to help the business, but we do not expect that these initiatives will fully offset the lower demand we expect to see over the next few quarters. It is also important to note that this is not just impacting Ruckus, other competitors in this space are citing similar issues.

Speaker 2

A bright spot in the Ruckus business is that we are seeing continued momentum towards our Ruckus 1 and Ruckus AI solutions. As our customers are looking for more ways to optimize our networks, they are turning to our software solutions for help. As we reinforce our CommScope NEXT initiatives, we expect to continue to improve this business as we believe it has significant long term growth potential. We are not done as we continue to evaluate every aspect of this business for incremental opportunities including investing in the next generation of product solutions and SaaS. Our NICS business was positively supported by ICN performance led by the DAS business providing in building 5 gs connectivity.

Speaker 2

This positions us nicely to grow with operators and enterprises as well as in public and private networks. With that said, our NICS segment and specifically Ruckus remains under substantial short term pressure as demand significantly declined in the last quarter driven by too much inventory in the system and slower overall market demand. In the Q1, we saw a drop in the Ruckus sales funnel with purchasing decisions being pushed to future periods. We expect that the lower demand will continue at least throughout the next few quarters as inventory is digested and the demand drivers reset. In OWN, as mentioned in previous calls, 2023 saw a decline in U.

Speaker 2

S. Carrier capital spend as well as pressure from U. S. Carriers digesting inventory. During the Q1, we have seen some continued recovery in order rates, largely supported by increased base station antenna sales.

Speaker 2

We expect that 2024 revenues will look similar to what we saw in 2023, but with the stronger second half of the year. Again, as previously stated, we continue to focus on what we can control and we are ready to support our customers when they are ready. In addition, we continue to develop and commercialize new products to help our customers build reliable and efficient wireless infrastructures. Last quarter, we introduced our new seed base station antenna solution aimed at delivering 15% greater efficiency at a fixed power level. In this quarter, we are happy to report that it's gained multiple operator design wins.

Speaker 2

Again, like we are in CCS, we are well positioned in the market and feel like we have the right solutions to support the market as recovery continues. Finishing with ANS, the first half of twenty twenty four will be historically weak due to our customers being faced with larger than expected inventory and navigating the choices for next generation HFC architecture. As mentioned previously, the A and S segment has made a successful transition to a leading supplier of edge related products, including nodes, amplifiers, RPD and RMD modules and remote OLTs for node PON. We will have a significant role helping our customers build out their next generation of multi gigabit networks while continuing to support our large installed base of CMTS products. We also recently launched DOCSIS 3.1 enhanced solution enabling operators to turn on services between 5 8 gigabits per second largely through existing infrastructure and a software upgrade.

Speaker 2

As we move closer to the second half of the year, we are on track to start delivering products supporting DOCSIS 4.0 upgrades and we will likely see increased momentum towards the latter part of 2024. We will continue to invest in our virtual CMTS solution that will be fully DOCSIS 4.0 compliant as major MSOs determine which path to take. Whether it be the extended spectrum DOCSIS variant or full Duplex DOCSIS, we will have the right product to support them in their journey. With that said, as we suggested would be the case in our Q4 comments, our customers were faced with larger than expected inventory and adjusted shipments to right size their inventory. As a result of these two issues, we anticipate that order rates and revenues will be negatively impacted in the next few quarters.

Speaker 2

We're continuing to navigate our businesses through varying market conditions. But as we stated in the past, we are well positioned for a market recovery. And while we remain confident that a recovery will occur, the timing and intensity of that recovery continues to be uncertain. We have been in regular dialogue with our customers and evaluate market data and projections for each of our business segments. Understanding demand drivers has been difficult for us as well as our competitors.

Speaker 2

We will continue to control what we can and will support our customers in the process. And with that, I'd like to turn things over to Kyle to talk more about our Q1 results.

Speaker 3

Thank you, Chuck, and good morning, everyone. I'll start with an overview of our Q1 2024 results on Slide 3. For the Q1, consolidated CommScope reported net sales of $1,168,000,000 a decrease of 30% from the prior year, driven by declines in all segments. Adjusted EBITDA of $153,000,000 decreased by 51%. Adjusted EPS was negative $0.08 per share.

Speaker 3

We experienced lower revenue driven by continued delays in upgrades, customer inventory levels and overall lower market demand. The sequential trend of quarterly revenue and adjusted EBITDA decline continued in the Q1 of 2024. CommScope backlog ended the quarter at $1,162,000,000 up slightly versus the end of the 4th quarter. As mentioned previously, in all of our businesses, we are back to normalized backlog levels. Order rates are going to be the direct driver of revenues over the next few quarters.

Speaker 3

As Chuck mentioned earlier, we saw an increase in order rates from the Q4 of 2023 to the Q1 of 2024, particularly in CCS and OWM. Although this is a positive sign, we continue to lag well behind historical revenue levels. Turning now to our Q1 segment highlights on Slide 4. Starting with CCS, net sales of $605,000,000 decreased 26% from the prior year. CCS adjusted EBITDA of $95,000,000 decreased 37% from the prior year, driven primarily by the drop in revenue.

Speaker 3

The decline is being driven by the broadband business. We continue to see increases in order rates during the quarter. On a sequential basis, revenue was up 9%. Despite the pickup in order rates, these order rates still remain low relative to the historical levels in 2021 2022. Although CCS order rates improved and customer conversations remain bullish on medium and long term growth, the short term demand profile remains uncertain.

Speaker 3

However, based on current visibility, we expect higher CCS revenue and adjusted EBITDA in the Q2 of 2024 versus the Q1. NICS net sales of $180,000,000 decreased by 37% versus the Q1 of 2023. From a business unit perspective, ruckus decreased 46% and ICN decreased 17%. NICS adjusted EBITDA of negative $1,000,000 decreased $59,000,000 from the prior year, primarily driven by the decline in Ruckus revenue. In Ruckus, as we have worked through supply chain constraints and released product out of backlog, order rates have declined as channel partners digest inventory.

Speaker 3

It should also be noted that with ruckus backlog at historical levels, seasonality is also impacting Ruckus revenue. Historically, the Q1 is the lowest revenue quarter for Ruckus. In addition to channel inventory and seasonality, overall demand is lower in the market. During the quarter, we also saw our near term funnel decline as customers push projects and upgrades to later periods. Based on latest third party forecast, the Ruckus market will decline in 2024.

Speaker 3

We expect Ruckus to have a challenging year relative to 2023. Despite these challenging short term market conditions, we are excited about our continued product development, specifically our Ruckus 1 and WiFi 7 products. We feel that we are well positioned to continue to take market share in the medium and long term. OWN net sales of $196,000,000 decreased 24% from the prior year and across the majority of the business units. Despite limited visibility to a recovery, order rates in this segment started to increase in the Q1.

Speaker 3

We continue to aggressively manage costs in this segment to offset the revenue decline. OWN adjusted EBITDA of $44,000,000 declined only 26% from the prior year. Our continued investment in new product development positions us for continued leadership in this segment. We expect 2nd quarter OWN revenue and adjusted EBITDA to increase compared to the Q1. A and S net sales of $187,000,000 decreased 38% from the prior year due to customer inventory adjustments and upgrade delays.

Speaker 3

ANS adjusted EBITDA of $15,000,000 was down $32,000,000 or 68 percent from the prior year driven by lower revenue. As mentioned on our previous call, several large customers approached us about lowering order rates as they dealt with higher inventory levels and delayed timing on upgrades. This had an impact on our Q1 revenues. Also, we expect these adjustments to have a significant impact throughout 2024. Despite the short term challenges, A and S continues to position itself to take advantage of the DOCSIS 4.0 upgrade cycle.

Speaker 3

We're the only supplier that can supply all the products from amplifiers, nodes, modules and CMTS, including virtual CMTS. Turning to Slide 5 for an update on cash flow. As indicated on our prior call, we expected the Q1 to be a use of cash because of the lower EBITDA, higher cash interest paying quarter and timing of our annual cash incentive payout. That said, for the Q1, cash flow from operations was a use of $178,000,000 and adjusted free cash flow was a use of of $154,000,000 2024 Q1 cash flow from operations declined from the prior year as a result of the lower EBITDA. We continued to reduce inventory in the quarter.

Speaker 3

As previously discussed, we're still holding excess inventory driven by the supply chain constraints in 2021 2022. As revenue declines, it delays our ability to monetize this excess inventory. Turning to Slide 6 for an update on our liquidity and capital structure. During the Q1, our cash and liquidity remained strong. We ended the quarter with $357,000,000 in global cash and total available cash and liquidity of over $900,000,000 As expected during the quarter, our cash balance decreased by $187,000,000 We did not draw on our ABL revolver during the Q1 and therefore ended the quarter with no outstanding balance.

Speaker 3

As previously mentioned, our ABL availability was negatively impacted by the home divestiture in early 2024. During the quarter, we paid the required $8,000,000 of term loan amortization. We purchased no debt on the open market. Going forward, we intend to 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 9.9 times.

Speaker 3

I'm now turning to Slide 7, where I'll conclude my prepared remarks with some commentary around our expectations for 2024. Despite some pickup in CCS and OWN order rates in the Q1, our current order rates remain low as we are dealing with lower market demand. The magnitude of demand drop off in NICS and A and S is concerning. The lower order rates had a significant impact on our revenue and adjusted EBITDA. As we have said throughout the downturn, we remain bullish on medium and long term growth in all of our segments.

Speaker 3

However, visibility to the timing and magnitude of the recovery remains unclear. The recovery in CCS and OWN order rates is definitely a positive sign. Based on current visibility, we expect the Q1 to be the lowest revenue and adjusted EBITDA quarter of the year. We continue to control what we can control including implementing the $100,000,000 of our annual cost reductions we have referenced on previous calls. We are encouraged by our ability to manage costs during the downturn and are well positioned to drive profitability when revenues return.

Speaker 3

We've been able to achieve these cost reductions while continuing to invest in all of our segments with new product development and enhanced customer support. Finally, I'd like to address our capital structure. Not much has changed since last quarter. We continue to evaluate alternatives, including asset sales to address the 2025 maturity and beyond. We have proposals from certain credit groups to deal with essentially all of our near term maturities.

Speaker 3

However, we do not believe that proposals we have received to date align with our strategic goals or optimize our capital structure. As mentioned in our last call, our credit documents are very flexible. We intend to use this flexibility to optimize our capital structure, including dealing with the 2025 maturity. For today's call, we will not be making further comment with respect to our capital structure. However, we will provide updates as appropriate.

Speaker 3

And with that, I'd like to give the floor back to Chuck for some closing remarks.

Speaker 2

Thank you, Kyle. As predicted, the Q1 was a very challenging quarter. We're in the middle of a hardware recession and our revenues reflect that recession. Although there were some bright spots in the quarter with CCS and OWN order rates, visibility to a pending recovery remains uncertain. The fall off in demand in the mix and ANS businesses were sharper than we predicted as customers manage inventory and push out projects and upgrades.

Speaker 2

I'm confident we're doing the right things with the levers we control like customer interface, cost, new product development and capital. We're very focused on supporting our customers and we appreciate their support. When market conditions improve, we are well positioned to capture the recovery in all segments. In addition to managing the businesses, we are extremely aware of our capital structure and liquidity. We will continue to work on managing these aggressively for the benefit of our shareholders.

Speaker 2

We appreciate your continued support and patience. And with that, we'll now open the line for questions.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from the line of George Notter of Jefferies LLC. Your line is now open.

Speaker 4

Hi guys, thanks very much. I wanted to ask about potential asset sales. I think last quarter you guys made a comment to the effect of you won't be selling assets in the near or medium term. I think from the press release and some of your comments, it sounds like maybe that's on the table a bit more. I'm just wondering if there's been any change in the outlook there?

Speaker 3

Yes. Hi, George. I'll just I'll refer to the prepared remarks. I mean, it continues to be an alternative for us. We're continuing to look at those and have dialogue.

Speaker 3

And I think what we said last time is we're not going to go sell those assets any value. So I mean, I think the dialogues continue, and it is an alternative.

Speaker 4

Okay, got it. And then on CCS, I was very interested in the comments about order rates improving. Are there specific pieces of the business where you're really seeing order rates improve? And I guess as I think about CCS, I mean there's parts of the business that are more asset intensive. I'm thinking about fiber cabling manufacturing for example.

Speaker 4

And then areas of business that are less capital intensive, I guess I'm thinking here about fiber connectivity. And I assume that as fiber cabling gets better, it's a better lever for you in terms of EBITDA improvement as you utilize those assets. But I'm wondering if there's kind of a chain of events here in terms of really getting that business back to reasonable looking profitability.

Speaker 2

Well, thanks for the question, George. I think what we're saying what we said in the remarks is that we're starting to see stronger order rates, but I'd say that we are still well below our 22 levels, but we are seeing pickup. And I would say we're seeing pickup both in the broadband or the NCC portion of our business as well as the building and data center part of our business. We're seeing actually probably more of a pickup in the building and data center side than the NCC side right now. But to your point, I mean, we made the capacity investments prior to the last ramp up And we need more connectivity, which we've talked about in our remarks, which we're adding by mid year.

Speaker 2

But we're going to have capacity to support us even above the levels we had in 2022 going forward.

Speaker 4

Okay. Thanks very much. I appreciate it.

Speaker 3

Thanks.

Operator

One moment for our next question. Thank you. Our next question comes from the line of Meta Marshall of Morgan Stanley. Your line is now open.

Speaker 5

Great. Thank you. Maybe wanted to ask 2 questions. First on the CCS business, you spoke about kind of some of your enterprise traction, but is there anything to note with kind of data center customers or cloud customers that you might have? And then maybe second, just some commentary on gross margins.

Speaker 5

Clearly, EBITDA was a highlight. Is that all utilization that led to kind of gross margins being a hair short of expectations or just any commentary on how we should look at gross margins throughout the year? Thanks.

Speaker 2

Thanks, Meta. I'll take the first part and Kyle can hit the gross margins. But I would say on the data center side, that's where we're seeing our biggest lift in the building and data center part of our business, hyperscalers as well as cloud. And I would say it's linked to the Gen AI and the press there. What's going on?

Speaker 2

There's just a lot of interest plus we have some really nice products with PROPEL with and then our structural cable system acts 2.0 stuff that helps support that. So we feel good about where we are in that business.

Speaker 3

Yes, I'll get to the gross margin. So I think on the gross margin side, clearly the level of revenue and the absorption of our fixed cost has an impact on the margin side. I think also when we think about the businesses and just level of gross margins, our ANS and mix business tend to be a little bit higher on the gross margin basis. So there's a mix component that's impacting the margins in Q1 just as well as the fixed cost leverage.

Speaker 5

Great. Thank you.

Operator

One moment for our next question. Our next question comes from the line of Simon Leopold of Raymond James. Your line is now open.

Speaker 6

Thanks for taking the question. Yes, I want to follow-up on that gross margin commentary and see if you could help us maybe build a little bit of a bridge to the December quarter versus the March quarter in terms of the changes. What I'm really trying to understand was, was it that on the lower volumes, things like NICS and ANS were down materially relative to the prior quarter or anything you can help to sort of bridge the 2 quarters? And then I've got a follow-up. I'll let you answer that one first, please.

Speaker 3

Yes. On a sequential basis from Q4 to Q1, the A and S business and the NICS business were down relative to what we saw in CCS and OWN where we saw a little bit of growth. And as I answered in the previous question, the mix of those businesses does have an impact on just the margin profile as just A and S and Ruckus in particular have a little bit higher margin profile than the CCS and OWN business.

Speaker 6

Yes. What I'm trying to clarify here is that it's not just the mix of segments, but the gross margin within A and S and within the Ruckus businesses were down materially versus the prior quarter themselves. Is that correct?

Speaker 3

Yes, because the revenues are down and you're not getting the coverage and the fixed costs in those two businesses.

Speaker 6

Perfect. That's what I want to make sure I understood. So what I wanted to ask about was sort of the trajectory of the ANS recovery and some of the key drivers. I guess what I'm wondering about is the availability of the key components and chips for the DOCSIS 4 products. What's your expectation on the availability or timing of when you expect those amplifiers would ramp?

Speaker 6

And how are you thinking about the possibility of products that would essentially be a single amplifier that could be dual function, either a full duplex or extended spectrum. Is that something you'd be offering? And if so, what's the timing of that?

Speaker 2

Yes. I'd start by saying, on the amplifier side, Q4 for being able to launch that FDX product ESD a little bit sooner than that. And then related to where we're going with the products and our business, and the future ramp up, I would say, in general, our customers just have too much inventory right now and they're trying to figure out where they want to go with HFC or do they want to go to DAA. And I mean, we have a pretty large installed base. So we have some customers that just want to do more with their existing network and look at DOCSIS 3.1e for example, we're ready to go with that as we talked about that gets you a 5 to 8 gigabits down speed just with software upgrades if you have the right hardware.

Speaker 2

And then of course we have our virtual CMTS that's in labs right now with the RPDs and RMDs. There are some challenges with parts for the ESD side of those, but that's getting worked out. I'm talking about the main chip. On the FDX side, those are pretty much ready to come in. So I hope that helps answer the question for you.

Speaker 6

It does. Thank you very much.

Operator

One moment for our next question. Thank you. Our next question comes from the line of Steven Fox of Fox Advisors LLC. Your line is now open.

Speaker 7

Hi, good morning. I had two questions. First of all, Chuck, I understand that there's a lot going on within the different businesses that makes you talk about limited visibility. But can you just dial in a little bit closer on your thinking for the CCS business for the full year? Some of your competitors have talked about improvements as we go throughout the year to varying degrees.

Speaker 7

I was wondering what you thought on that. And then secondly, Kyle, just on the cash flow statement, I just want to confirm that the cash flows for the quarter came in basically where you're looking at what you're looking for 90 days ago or if there were any puts and takes we should know about? Thanks.

Speaker 3

Yes. Let me answer the second one first and then Chuck can answer the first question. Yes. I mean, I think we said in our prepared remarks that the cash flow was sort of in line with what our expectation was. There weren't any major puts or takes on the cash flow other than maybe a little bit of a bump just because of the better EBITDA, but in general, it came in line.

Speaker 3

Great.

Speaker 2

Yes. So, Stephen, yes, I would say that, as I shared, we are seeing the pickup and the order momentum that we are seeing, we do believe we're going to have a sequential improvement in Q2 and a stronger second half than the first. So that would lead you to think that we would believe that Q1 would be our lowest quarter in CCS and it would continue to build from there.

Speaker 7

So in general, it sounds like you're in line with competition. There's no areas where you're lagging or leading in terms of end markets or product areas?

Speaker 2

That's correct.

Speaker 7

Okay. Thank you.

Operator

One moment for our next question. Thank you. Our next question comes from the line of Samik Chatterjee of JPMorgan. Your line is now open.

Speaker 7

Yes. Thank you and thanks for taking

Speaker 8

my questions. Maybe for the first one, Kyle, I hear you on the loss of volume leverage in ANS and NICS as revenues come down there and that likely continues into 2Q is what I'm sensing from your tone here. But how should we think about your ability to sort of take cost out through the year in those two businesses just to buffer some of the loss of volume leverage as you go sort of look at the lower order rate in those two businesses?

Speaker 2

Can I

Speaker 7

have a quick one?

Speaker 3

Yes. Question. So I guess what I would say on the cost side, we've mentioned we're in the process of $100,000,000 sort of fixed cost reduction. We're in the middle of identifying projects and implementing projects. I would say that as we sort of get to the end of the year, that will be fully baked into our numbers.

Speaker 3

And what I would say on that is that although that's across all of our segments, definitely the NICS business and ANS are part of that $100,000,000 reduction. I think also with that said, in both of those businesses, we expect that there is going to be a recovery in that business in those businesses and we're going to continue to make investments in those businesses as it relates to supporting our customers and generating new products. So I mean, I think there's always the balance on the cost side, but we definitely continue to look at cost reduction and I think we'll definitely get some additional cost out as we work through the year.

Speaker 8

Got it, got it. And for my follow-up, if I can just go back to CCS and your commentary about what you're seeing in terms of strength on the data center side of the business. Can you just talk a bit more about what does your sort of overall customer footprint there look like across data center companies and sort of cloud companies? Do you feel you have your fair share already? Or as you think about this investment cycle on the data center side, do you think there's more opportunity for market share relative to where you stand today?

Speaker 2

Look, I believe this market is growing at really, really fast rates and I think we're holding share now. I think we obviously have an opportunity to gain share. We have some great partners, as well as some great products. So I wouldn't count us out on this in terms of gaining share and I believe the market is very strong right now and we're definitely getting our fair share of it and I believe we have an opportunity to do more.

Speaker 9

Thank you.

Operator

One moment for our next question. Our next question comes from the line of Amit Daryanian of Evercore. Your line is now open.

Speaker 9

Good morning. Thanks for taking my question. I have 2 as well. I guess, first off, on the free cash flow side, I think you folks talked about lower free cash flow expectation in 2024 versus 2023. And I think you called out working capital requirements is a big driver for that.

Speaker 9

Can you just help me think about do you think free cash flow will be positive in Q2 and for calendar 24?

Speaker 3

Yes. I mean, we're not providing that level of guidance. I mean, I think I'll characterize it as we we definitely won't see the cash burn that we saw in Q1, but there's probably some level of cash burn that happens in Q2. Historically, we're building a lot of cash in the Q4. And so the profile is sort of burn cash early in the year and then build it back in Q4.

Speaker 3

I think that similar profile will be what we see in 2024.

Speaker 9

Got it. And then just on the CCS side, could you just talk about what contribution do you think bead projects could have for the company over time? And is it reasonable to think that that might be more of a calendar 2025 revenue contribution versus 21? So I'm wondering, A, if you could size what that potential could be and when do you think that you start to see the benefits there?

Speaker 2

Yes. I would say, it's going to be at the very end of 2024 probably at the earliest, but most likely we believe it's more 2025 now. In terms of the opportunity there, I think I said in our last earnings call, it's around $4,000,000,000 opportunity over 4 to 5 years. I think that still holds.

Speaker 9

I'm sorry, is that that $4,000,000,000 to $5,000,000,000 or 4 years, is that the TAM or is that what CommScope could get? Just to understand that.

Speaker 2

Yes, that's the TAM.

Speaker 9

Got it. All right. Perfect. Thank you.

Operator

One moment for our next question. Thank you. Our next question

Speaker 7

My question is mainly related to inventories and where they sit at customer levels. I guess, first on mix, if there's any more color you can give on where inventory levels sit today and any visibility in terms of when demand comes back? And I ask it in the context of commentary that implies 1Q should be the bottom with an uptick in subsequent quarters, yet the commentary doesn't sound too great in terms of end market demand. So that's the first question. And then maybe secondarily on CCS similarly, you talked about uptick in orders in CCS.

Speaker 7

Just wondering whether customers are largely done with inventory work downs or if that's varied across different types of carrier customers? Thank you.

Speaker 3

Yes. I think as you mentioned, as we think about just where our customers are with inventory destocking, clearly it's by business. I think as we think about your questions just around sort of the NICS and Ruckus business, I mean, I think we have visibility to the inventories. The inventories have been coming down. I think where we are in that business is there's probably still a little bit of ways to go before we get to the destocking that needs to take place to start seeing sort of more normal growth.

Speaker 3

I think on the CCF side of the business, I think as Chuck mentioned in his comments, I think we're probably close to the inflection point of seeing that inventory have been worked down by the customers and we're now starting to get back to sort of normal growth levels. And I think we're seeing that in some of these order rates that we've talked about.

Speaker 7

Great. Thank you.

Operator

One moment for our next question. Thank you. Our next question comes from the line of Tim Savageaux of Northland Capital Markets. Your line is now open.

Speaker 6

Hi, good morning. Question on CCS, you mentioned increasing order rates throughout the quarter. I guess my question is, have you seen that continue here into Q2? And have you seen any changes with regard to the mix? You mentioned stronger building in data center, an uptick in carriers, but maybe not as much.

Speaker 6

Have you seen or do you expect that to change here as we go forward? And just as a follow-up, if you look at the magnitude of the sequential increase you're expecting for CCS in Q2, can you give us some more color on that, say, relative to what you saw in Q1 over Q4? Thanks.

Speaker 2

I'd start by saying, we believe that where we are right now is kind of we're hopeful. We're cautiously optimistic that this is the start of the recovery. Right now the data center and building a campus business is stronger than broadband, but I believe those will kind of line up to get to the same level of growth going forward, and potentially broadband being more. But we haven't seen that yet, but we that's what we would expect as this thing moves forward.

Speaker 3

Yes. And I'll sort of answer your question about Q2 relative. I mean, I think what we're seeing is it continues to be a little bit dynamic from the standpoint of even though we're sort of end of the quarter, I think it's still dynamic. I mean, I think as we said, I think we'll we'd sort of stick with Q2 being higher than Q1 for CCS revenues. But clearly, it's pretty dynamic and we're seeing the increases and we're not exactly sure where that that's going to wind up at the end of the quarter.

Speaker 3

So, I don't think we're going to be specific about what that's going to look like, but we'll have to play through the quarter.

Speaker 6

Thanks very much.

Operator

I'm showing no further questions at this time. I would now like to turn it back to Chuck Treadway, Chief Executive Officer for closing remarks.

Speaker 2

Yes, thank you for your time today and I appreciate your interest in CommScope. I'd like all of you to have a great rest

Speaker 3

of the week. Thank you.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
CommScope Q1 2024
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