Vistance Networks, Inc. (VISN) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the CommScope Second Quarter 2020 Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to your speaker today, Mr. Kevin Powers, Vice President of Investor Relations. Sir, please go ahead.

Good morning, and thank you for joining us today, and welcome to our second quarter earnings call. I'm Kevin Powers, Vice President of Investor Relations. And joining me today are Eddie Edwards, President and CEO; and Alex Pease, Executive Vice President and CFO. You can find the slides that accompany this call 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 SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Eddie, just 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 on a combined company basis, and of note, our second quarter of 2019 results include historical ARRIS results for the 3 days before the acquisition date, April 4, 2019, and reflects certain classification changes to align to CommScope's presentation. All quarterly growth rates described during today's presentation are on a sequential basis comparing our results to the first quarter of 2020, unless otherwise noted. I will now turn the call over to our President and CEO, Eddie Edwards. Eddie?

Thanks, Kevin, and good morning, everyone. Before we begin, I want to take a moment to sadly acknowledge the recent passing of our Chief Commercial Officer, Jeff White. Although new to the CommScope team, Jeff made an immediate impact, bringing his expertise and talent to our sales and marketing teams, positioning them for success during an extremely challenging period. We send our deepest condolences to Jeff's family, and support them in this difficult time. Jeff was part of the CommScope family, and we're thankful for the short time we had with him. In the coming days, we will evaluate our path forward and provide more information at the appropriate time. Moving to our business discussion this morning, I'd like to begin thanking the entire CommScope team for their incredible resilience over the past several months. From our operation staff to engineers innovating in our labs to who our sales team is creating new ways to support customers, and to our back office support, our people continue to execute on our core mission, thus creating lasting connections. Our purpose is derived by our values. For more than 40 years, we have built a deep-rooted culture that celebrates the unique contributions of all CommScope employees. Our diversity as a company is what makes us strong, collaborative and successful. In June, we launched our CommScope diversity and inclusion business network to further tap into the strength of our diverse workforce and their experiences. This employee designed and led network creates a forum for discussion, debate, and provides opportunities for CommScope employees to network, learn and lead. As our employees demonstrate our values, diversity and culture, we are working together to support our customers as they embrace what's next. Business models have changed, new opportunities have arisen, a need for fast, reliable ubiquitous connectivity has become the very backbone of commerce, education, health and safety. The workplace and home dynamics are shifting globally, and CommScope is well positioned to tap into these opportunities through the networks of the future that we create. Let's now turn to our performance in the quarter on Slide 3. Net sales increased 3%. EBITDA improved 21% sequentially. And we delivered earnings per share of $0.32. Free cash flow of $217 million was extremely strong through excellent management of the balance sheet. Our better-than-expected performance is a testament to the perseverance of the CommScope team and the innovative spirit that drives us. The team quickly adapted delivering reliable network connectivity, the power emergency response, telemedicine, distance learning and much-needed human interaction. We have demonstrated, once again, the strength of our business model, cash generation power of our economic engine, and the ability to weather significant cyclical disruptions only to emerge stronger through the cycle. And we'll move to Page 4. Broadband segment sales were flat year-over-year and grew nearly 10% sequentially as service providers are increasing investments to maintain network capacity. We expect this momentum to accelerate through the second half of the year. As the primary source of enterprise exposure, Venue and Campus sales continue to be impacted by COVID-19. They did improve sequentially, which is very encouraging and are expected to improve in the second half of the year. Importantly, visibility into our end markets is improving, and we see strong pockets of opportunity in certain core verticals such as health care, government and education. Disciplined expense accrual is a hallmark of what we do as a team and drove our significant profitability upside in the second quarter. As we continue to build a more efficient cost structure, the organization has adapted to our challenging environment, moving aggressively to make permanent cost improvements and in positioning the company to emerge stronger through the cycle. This is in our DNA and it’s how we've navigated through past cycles and always met or exceeded our financial obligations. We continue to invest in the core growth elements of the business, including in-building wireless, 5G, broadband networks of the future while exploring new technologies like open RAN and Wi-Fi 6E. While the COVID pandemic required us to quickly react and decisively, we have done so prudently, and we'll continue to invest in the strategic long-term growth drivers for the business. Finally, we generated strong operating cash flow and adjusted free cash flow of more than $200 million. We remain on target to deliver more than $400 million this year. Moving to Slide 5, let's review our performance across the business areas. Beginning with Venue and Campus, as we expected, we have seen some general construction delays due to site access restrictions. The project cancellations to date have been limited. Consistent with our expectation, the impacts are varying by vertical. For example, in hospitality, current hotel constructions are being completed. However, we are observing limited new construction starts. In education, we are seeing increased funding in projects, and progressing the schools to take advantage of the elongated summer break. The importance of Connectivity Solutions is greater than ever, where IoT has become a means to deliver a safer learning environment for students, enabling touchless navigation on-campus and social businesses. Schools from K-12 and at the university level are undergoing a rapid pivot to remote learning where reliable connectivity is essential. We have stepped up with rapid deployment Wi-Fi solutions that connect students in public places, such as school and library parking lots, and even in mobile solutions in metro school buses. For example, we were recently selected by the New Zealand Ministry of Education for the largest ever Wi-Fi 6 deployment that will include up to 38,000 Wi-Fi 6 access points and 12,000 multi-gigabit switches. Turning to indoor fiber. While the traditional enterprise data market was soft as expected, hyperscale sales remained strong. In the quarter, cloud-based video communication and entertainment uses surged as people responded globally to the pandemic. Our competitive positioning continues to improve as we showcase our global footprint, manufacturing prowess and the consumer-facing innovation, proving ourselves to be highly reliable supplier in the most challenging of circumstances. Finally, our DAS business continued to grow both year-over-year and sequentially, led by numerous stadium products, including the AT&T Stadium, home to the Dallas Cowboys. While there aren't fans in the stadiums, consumers are using this idle time – I mean, customers are using this idle time as an opportunity to upgrade their networks to the next-generation of technology that we provide, creating better fan experiences and more 5G use cases for the future. Moving to Broadband Networks. We are building momentum in this business led by cable operator investments to maintain network capacity. Upstream bandwidth has grown nearly 50% from pre-COVID-19 levels due to working from home, virtual learning and telemedicine. And the Broadband Network performance has never been more mission critical. Our backlog has grown significantly as operators invest in expanding capacity of their outside plants. And we are leading the way enabling these investments in both traditional HFC network upgrades as well as PON, DAA and other virtualized and cloud-based architectures. Our DAA solutions are now being deployed worldwide with multiple service providers in a variety of advanced network architectures. These deployments are expected to expand its operator's focus on increasing plant capabilities through a combination of traditional and next-generation architectures. Looking ahead to 2021, the U.S. regional – the U.S. Rural Digital Opportunity Fund, or RDOF, is expected to be another positive driver for the company, and demand for our passive fiber cable and hardened connectivity products is approaching record levels. To this end, we have directed investments to increase production capacity and support this growth in our Tier 2 and Tier 3 North American markets as well as in Europe. Moving to Slide 6, let's turn to Home Networks and Outdoor Wireless. In Home Networks, our home video – our Home Media Solutions, our video CPE, remained soft in the period as expected. This pressure is likely to increase in the third quarter due to ongoing OTT trends as customers work from excess inventory that was built in response to anticipated COVID-19 supply disruptions. That said, we do expect a modest recovery in the fourth quarter. We continue to drive cost out of this business while investing in innovation, and are seeing early successes with our IP streaming platforms, along with increasing interest in products that integrate voice input and speakers. Turning to broadband modems and gateways. This business has been more stable, given the importance of in-home connectivity in today's remote working and learning environments. Sales increased sequentially and only modestly declined year-over-year. We expect increasing strength in this business in the back half of the year and into 2021 with the introduction of critical new product line at a large North American operator. Finishing with Outdoor Wireless, sales were soft across every region outside of Europe for a variety of reasons. In Europe, 5G investment continues, and while COVID-19 has caused some countries to slightly delay their final spectrum auction and allocations, overall operators continued with their 5G readiness, and we're now seeing crews back in the field for installations. In addition, recent geopolitical tensions have created opportunities for us to gain share in several important markets, and we see this opportunity to be continuing as we head into 2021. Offsetting our positive trends in Europe, sales and our remaining international markets were soft due to currency volatility as well as commodity price pressure in markets that depend upon certain commodities for a meaningful portion of their economy. Sales have been particularly pressured in the Middle East and Africa, Central and Latin America and in Asia Pacific. In North America, trends were soft primarily due to the winding down of investments in large programs, such as FirstNet, the preservation of capital to invest in the upcoming C-Band auction and the front-end loading of much of the 2020 capital spending. In addition, COVID-19 impacted Metro Cell deployments as permitting was delayed temporarily. We view much of these trends as transitory effects of either COVID-19 or the natural pause in spending before new Spectrum is introduced and 5G spending ramps in earnest. It is important to note that we have not seen any loss of market share, and we remain one of the most important suppliers to our North American customers. We create the world's most sophisticated and high-performing antennas, and are uniquely positioned as new Spectrum is deployed. Mobile data uses surges and 5G-related tower spending accelerates. In addition, T-Mobile has resumed spending on the macro tower in the second quarter, and our full year assumptions remain relatively unchanged or in any unforeseen timing impact. We're excited to partner with them in the years ahead as they upgrade towers to deploy their newly acquired 2.5 gigahertz Spectrum and optimize their combined network post-acquisition. Let's move to Slide 7. But before turning it over to Alex, I'd like to detail our response to COVID-19. Operationally, CommScope's manufacturing facilities have safely resumed normal operations. We're maintaining strong production levels while ensuring appropriate safety procedures for our employees. On behalf of the entire leadership team, I extend my gratitude to our global network of contract manufacturers and suppliers who have been a key strength for CommScope and our ability to deliver for our customers. Our broad portfolio of solutions provide network operators with options to improve their mobile and broadband services in the near-term and prepare their networks for the future. While the pace and degree of change in our lives seems unpredictable, the role of communication networks is clear. Never has the importance of CommScope and our technology been more evident. At CommScope, we're also adapting and doing things differently. We truly believe this crisis has made us a stronger team. We have taken a long-term focused mindset, prudently managing costs while continuing to invest in growth for the future. We are meeting our commitments and are excited about the path ahead. And now I'll turn it over to Alex to discuss the financial results for the quarter. Alex?

Great. Thanks, Eddie, and good morning, everyone. I'll begin with a review of our second quarter 2020 financial results and the impacts of the decisive actions taken to build a more efficient cost model for our business. I'll then highlight our cash flow, capital structure and liquidity position. Finally I'll close out with some perspectives on how we see the balance of the year playing out. As a reminder, due to the impact of COVID-19 on our year-over-year results, all changes referenced during my discussion will be on a sequential basis, unless otherwise noted. You can find year-over-year comparisons and disclosures in our earnings presentation, press release and 10-Q. Turning to Slide 9 and our second quarter consolidated results, in the quarter, sales were $2.1 billion, an improvement of 3%. We estimate that sales were negatively impacted by about $50 million due to the supply constraints related to COVID-19. Orders for the quarter were $2.2 billion, yielding a strong book-to-bill ratio of 1.04 led by broadband networks. Gross margins were consistent at 32.1% and operating expenses decreased to $432.1 million or 20.5% of sales. Adjusted EBITDA of $280 million grew about 21%, primarily due to higher Broadband Network sales, improved Home Networks profitability and the cost actions we took to stabilize the business. In addition, our profitability was negatively impacted by approximately $30 million in cost related to COVID-19 supply disruptions and other incremental costs. Finishing up the P&L, book net interest expense was $141.4 million, and excluding the amortization of debt issuance costs and OID of $6.7 million, net interest expense was $134.7 million. Finally, earnings per share improved from $0.12 to $0.32. Moving on to Slide 10, I'll spend a few moments reviewing the actions we've taken to aggressively manage costs as COVID-19 began to impact the business. As Eddie mentioned earlier, tightly managing expenses in a cyclical industry is in our DNA. As you'll see here on the left-panel of the slide, as the pandemic began to unfold, we prudently managed costs, and we have consistently lowered our 2020 operating expense expectations. As I referenced on our last call, these actions include headcount optimization, discretionary spend reduction, a comprehensive R&D portfolio review and investment reprioritization. Looking at the right-panel of the slide, you'll see that each quarter, we've over-delivered on our expense plan, and we expect that trend to continue in the second half of the year. I'll note that the second quarter benefited from a few onetime expense benefits that we don't expect to repeat, such as the timing of marketing-related expenses and some lower professional fees. And we expect to exit the year at a run rate slightly less than $450 million, which is about $50 million below our original plan when we began the year. We believe that the majority of actions we've taken to contain costs are permanent in nature, and position us with an even more efficient and lean operating model as the cycle improves. That said, there are certain cost categories, such as travel and a portion of the marketing spending that we do anticipate rebounding as the business conditions normalize, although certainly not to the pre-COVID-19 levels. Turning to Slide 11, let's review our segment performance. In the second quarter, Venue and Campus sales improved 2% to $479 million, primarily driven by higher sales in China, Asia-Pac and North America, partially offset by declines in Europe and India. The improvement was most pronounced in our DAS, Ruckus and indoor-fiber and partially offset by declines in indoor-copper as we expected. Adjusted EBITDA of $38 million remains essentially flat. The improvements in operating expense and higher sales were offset by the impacts of unfavorable mix absorption and our strategic decisions to maintain critical R&D investments to drive future growth. Outdoor Wireless Networks sales declined 6% to $328 million. From a regional perspective, the sales decline was primarily driven by North America and the Middle East and Africa, partially offset by improvements in Europe and CALA. Sales softened, both on the macro tower and in the metro layer. Adjusted EBITDA decreased 15% to $76 million. Despite the improvements in operating expense, this was more than offset by lower sales volume and unfavorable geographic mix given the weakness in North America. Moving to Slide 12, Broadband Networks sales grew 10% to $672 million. The improvement was most notable in North America and Asia-Pac, partially offset by Central and Latin America and Europe. Sales improved in both Network Cable and Connectivity and Networking & Cloud due to cable operator capacity investments. Adjusted EBITDA increased 40% to $130 million. This significant improvement was primarily from higher sales volume and strong expense control. Shifting to Home Networks. Sales grew 4% to $624 million, primarily from improvements in North America, partially offset by Central and Latin America and Europe. From a product line perspective, the sales improvement was primarily due to growth in broadband carrier and retail gateways and modems and some expedited video shipments. In the quarter, due to the anticipation of supply disruption related to COVID-19, select video service providers chose to accelerate video set-top box shipments ahead of the normal video activation requirements. As Eddie mentioned earlier, this creates a headwind in the third quarter, but we expect inventory positions to normalize as we move into the fourth quarter. Finally, adjusted EBITDA of $35 million significantly improved from the first quarter, primarily from higher volumes, favorable mix and lower operating costs. Turning to cash flow on Slide 13, in the second quarter, we generated cash flow from operations of $209 million and adjusted free cash flow of $217 million, both significantly above our expectations. We continued to drive substantial working capital improvements with notable reductions to our days sales outstanding and extension of our days payable outstanding, improving our cash conversion cycle by 8 days quarter-over-quarter. We expect continued momentum from working capital enhancements and expect to deliver positive free cash flow generation through the balance of 2020. Turning to Slide 14, let's begin with our recent refinancing. As we continue to prudently manage our balance sheet, and out of an abundance of caution, we took an opportunistic approach to extend our maturities at historically attractive rates. With the high-yield markets open and receptive, after a turbulent couple of months, we issued $700 million of 2028 notes at 7.125%. They carry the same attractive covenant life structure as our existing maturities. We used the proceeds to repay the remaining $50 million of our 2021 notes and to retire $650 million of our notes due in 2024. Importantly, following the refinancing, our next nearest maturity due isn't until 2024. We believe taking this step was an insurance policy against future uncertainty, especially given the dynamic nature of the current operating environment. Our cash and liquidity positions remained strong throughout the quarter. As of June 30, we held $823 million in cash and cash equivalents and had $522 million of ABL availability for total liquidity of over $1.3 billion. As a reminder, during the quarter, we drew $250 million on our ABL revolver as a precautionary action. Subsequently, as liquidity and visibility have improved, on July 8, we fully repaid the full balance using cash on hand. Furthermore, we held more cash on the balance sheet during the second quarter in anticipation of any liquidity strains we might experience in the wake of the pandemic. As that risk is mitigated and our business has stabilized, we plan to resume debt repayment, beginning with $100 million in the third quarter. We will evaluate additional opportunities before year-end, depending on business performance and the macroeconomic environment as the pandemic unfolds. While net leverage at the end of the quarter remained elevated at 7.1 times, we remain laser-focused on achieving our long-term leverage target of two times to three times as the business recovers and the 5G investment cycle begins to take hold. Turning to Slide 15 for a few additional thoughts on our near-term outlook, following the same format as our last call, I'll provide a brief overview of the near-term outlook within our segments. In Broadband Networks, the market remains healthy as cable operators are accelerating investments to maintain network capacity. We are in the market with a fully virtualized distributed access architecture solution, and actively working on PON, cloud, advanced analytics and other cutting-edge solutions that will be increasingly relevant in 2021 and beyond. With an Outdoor Wireless Networks, T-Mobile is ramping. Europe is strengthening, and we expect North American carriers to be active in the upcoming C-Band auctions in December. We are seeing some delay in Metro Cell deployments as a result of COVID-19, but are confident that this is a transitory effect of the pandemic, and our Metro Cell business will be a strong contributor to growth as operators continue to need to densify their networks beyond the macro tower. Internationally, outside of Europe, we expect commodity prices and currency volatility to create headwinds in certain markets, particularly Central and Latin America as well as the Middle East and Africa. In Venue and Campus, DAS and hyperscale trends remain strong, and we're encouraged by the overall stability of the business through the pandemic and the growth outlook into the future. We have the industry-leading indoor wireless solutions with our OneCell and next-generation Era DAS platform, and are investing to integrate these LTE options with our Ruckus Wi-Fi technology to create a private network solution that is second to none. While our core enterprise business, particularly inside-copper, has softened since the beginning of the lockdowns, we continue to enjoy the benefits of having the industry-leading brand and market share, and we're hopeful that the worst is behind us. Within Home Networks, Broadband remains stable and will ultimately become a growth engine for the segment. Video continues to be a challenge for the reasons we've discussed, but we are managing costs aggressively and expect to rebound in the fourth quarter as inventory levels begin to normalize. Given these factors and the momentum we've built, we expect third quarter sales and adjusted EBITDA to modestly improve compared to the second quarter. Furthermore, we expect accelerating momentum from the third to the fourth quarter. Turning to Slide 16, I'll highlight a few more detailed assumptions across our segments. For Broadband Networks, we expect a high-teens third quarter sequential improvement led by outside plants. For the fourth quarter, we expect moderate sequential growth. For Venue and Campus, we expect mid- single-digit sequential sales improvement led by indoor-fiber and Ruckus. Additionally, we expect fourth quarter sales to be consistent with the third quarter. And this assumes we don't experience a material slowdown in the core enterprise spending resulting from new and unforeseen COVID-related impacts. We expect a low-teens sequential decline in Outdoor Wireless sales driven by front half weighted Tier 1 North American carrier CapEx plans and continued emerging market weakness. However, we do expect a moderate sequential improvement in the fourth quarter. For Home Networks in the third quarter, we expect a mid-teens sequential sales decline. This is driven by high customer video inventories, driving weakness in the quarter. However, we do expect steady growth in broadband gateways, given the launch of new platforms. As the headwinds from video inventory levels abate and new platform launches accelerate, we do expect strong sequential Home Networks growth in the fourth quarter. Additionally, a few full year assumptions to consider from a modeling perspective. We expect an adjusted effective tax rate of approximately 27%. Diluted share count in the range of 239 million to 240 million shares outstanding. CapEx of approximately $100 million. Interest payments of about $525 million. Cash taxes, around $105 million. Restructuring, integration and transaction cash payments between $110 million and $120 million. And most importantly of all, adjusted free cash flow of greater than $400 million as well as a commitment to pay down at least $100 million of debt in the third quarter. With that, I'd like to turn the call back to Eddie for some closing thoughts.

Thanks, Alex. While the environment remains challenging, we are focused on what we can control, and I believe we are well positioned for future growth and success. As we conclude our call and open it up for Q&A, I'd like to leave you with a few key takeaways. We continue to build a more efficient cost structure, focused on reshaping and transforming our business. We generated strong cash flow in the quarter, and we expect this to enable debt pay down in the second half of 2020. Our Broadband segment is the solution to keeping people connected at a time when global networks are strained. We are maintaining our strong culture and keeping our employees safe, continues to be a priority. Our global reach enabled us to be resilient and flexible with our global supply chain to quickly address regional market challenges. Visibility is improving and our business is stabilizing. And we are committing to derisking our capital structure and we remain optimistic. With that, we will now take your questions. Rain?

[Operator Instructions] Your first question comes from Sami Badri from Credit Suisse.

Hi, thank you very much. First question is for Alex. Regarding debt payments, and you guys did offer your free cash flow guidance of $400 million or greater than $400 million for the year. But should we think about your – the amount of money that you plan on paying down in 2020 as far as debt payments to look relatively comparable to 2019? Or can you just give us more guidance on kind of like the game plan and how we should be thinking about that?

Yes, so the commitment we made on the call was to pay down $100 million in the third quarter. We obviously have some amortization as well on the term loan that we'll pay down on schedule. Beyond that, we haven't committed to anything. Obviously, the environment that we're operating in is incredibly fluid and dynamic. And so we're trying to balance maximizing liquidity and being conservative on the balance sheet and to our commitments to continue to work on a deleveraging path towards two times to three times. So I can't really commit to anything beyond the $100 million that I committed in the call.

Got it. And then my second question is related to Outdoor Wireless Networks, kind of like trying to figure out two different things here. First thing is we obviously hear about telco is building out and densifying 4G LTE, and we continue to hear about 5G build-outs now starting to accelerate. And then given – looking at your guidance, right, I know that there's been a little bit of a slowdown with some of the telcos. But for the most part, there still continues to be some build-outs, right? But your guidance, at least, the results you delivered for the year and the implied for the back half of the year, does not really imply that there's something kind of big happening here, right? So maybe you could give us a little bit more detail around each telco and your spending plans, any kind of revised contracts, any kind of pricing terms that are renegotiated? Are the pricing terms is what's slowing things down? Is just deployment cadence? Is that what it is? Like maybe just giving us some more detail on what's going on specifically Outdoor Wireless from a telco spender perspective?

Okay, sure. And we talked about Europe being strong and continuing. And we talked about geopolitical happenings that give us some opportunities. That probably is not in 2020, but we'll have conversations with customers about as they change over their equipment and what that means to us going forward. The other international markets are still challenged, we think, with what's going on with COVID-19 and general economic challenges that they face with commodities and foreign exchange and things like that. In the North American market, we talked about C-band auctions. We think that, that's – and it's been talked about by some of our customers as to allocating for getting ready for the C-band auctions and the billions of dollars that will be required for that. So we think that, that will impact capital spending. It's all part of capital in one way or the other. We also talk about T-Mobile specifically. We are getting orders. We do believe that based upon what we thought they would do for the year, they are on target to do that. We know that some people have talked about slowness with them. We sell at different paces than some of the people that have talked about that. Our product is put into inventory and utilize as they need it. And so we feel comfortable based upon our conversations that we're having with them as to what those volumes will be relative to what our planning process is.

Got it. And then maybe just any kind of commentary around maybe rise in AT&T or other pricing contracts that you guys have normally talked about in prior years. Have there been any renegotiations or repricing of certain contracts and products?

Sami, they're always talked about. And I think that we have shown that we adapt to those conversations. And so there's nothing extreme that is outside the norm today. But we do engage with those conversations with our customers from time to time.

Got it. Okay, thank you very much.

Your next question comes from Jeff Kvaal from Wolfe Research. Please go ahead with your questions.

Thank you very much gentlemen. My first question, I'd like to begin with a little bit of color, if you could, on sort of the visibility improvements or business trends that are stabilizing. You talked about that across, maybe, I guess, many of the business lines. At the same time, I think, Alex, you mentioned it was still a dynamic or fluid situation. Can you help us sort of understand what is giving you the sort of the better visibility despite the ongoing COVID pandemic impacts to the business? And in particular, i.e. the fourth quarter is often a sequentially lower quarter in many of your businesses? So if you could talk about that a little bit, too, I'd be grateful.

Eddie, why don't you begin with that question, and Alex, if there's anything to add?

Yes, Jeff, I think what gives us comfort, our belief is what we're seeing in our order book. And where we saw softness in some of our verticals during the second quarter, I think we're starting to see some firming up there. In enterprise, hyperscale is a strong business for us, and that continues to be strong. So we see that continuing through the year. I think that what has been typical in the past. I'm not sure that counts this year. This is a whole different environment that we're facing. And so we're going to have to adapt. There is still a great need for communication because of where people are working and how they're working. We've seen considerable strength in the broadband business with the orders and where that's going. So we feel good about that. I think those are some of the highlights of what I would mention. Alex, if you have any other further comments?

Yes. Maybe just a couple of other details. So we have seen some pretty notable successes in the enterprise space, particularly on large projects. And one of the things that's been encouraging throughout the pandemic is we've seen very little cancellation of large projects once they're committed to. So Eddie mentioned in his remarks, we are seeing some softness in – on the hospitality space for reasons that I think would be obvious to everybody, but those are being offset by some pretty important wins on the Venue side of the business. We also see accelerating trends on the hyperscale side of business, where we've been very successful. So I think we feel good about the way the enterprise business is hanging in there.

Okay. And then secondly, would you mind giving us an update on how far – how your progress is developing with millimeter wave antennas?

Jeff, we work with a partner in that. We've been open about our relationship with Nokia and partnering with them on active antennas and technology outside of what CommScope's historical strength has been. So we'll continue to do that as necessary. It is not the focal point of what our business is from that standpoint, but we do support our customers as necessary. So we'll continue along those lines.

Excellent, thank you gentlemen.

Thanks Jeff.

Your next question comes from Meta Marshall from Morgan Stanley. Your line is open.

Hey great. Thanks. A couple of quick questions for me. On the broadband strength that you're seeing, do you think it's all just accommodating the current environment? Or are you starting to see decisions on architecture changes that could maybe stabilize spending into 2021? And then maybe just any update on OneCell progress. Thanks.

Hey, Meta, could you just repeat the first part of your question? Sorry, it was a little bit inaudible on our end.

Sorry. Just on any of the broadband strength that you're kind of speaking to. Just wanted to see, is that all just accommodating the current environment and elevated usage by people in the home? Or are you starting to see decisions on architecture changes that could make that momentum more stable into kind of future years? Thanks.

I think the answer is both. We have a large influx of licenses that are necessary to support our customers. We're making inroads into virtualization product areas. And so I think that will add strength as we get towards the back end of the year, we talked about in the remarks that we are selling these products both here and internationally. And so I think the answer would be in both areas that you asked.

Yes, Meta, one of the things just to help you from a modeling standpoint is, typically, the operators at around 20% to 30% additional capacity per year just to keep up with normal bandwidth demand and competition. When we were in the early stages of the COVID crisis, we saw network utilization jump by somewhere between 30% and 50%. So you saw a significant acceleration of that need to add capacity, which is one of the reasons why we're seeing the strength in the Broadband business. So that is what we're benefiting from substantially. But they will continue to add this 20% to 30% capacity even after things normalize. And if you wanted to model an upside scenario, you could have a point of view that all of the video conferencing, the use of advanced gaming, augmented virtual reality, those sorts of things are really driving a fundamentally different use of the network, which is certainly what we're seeing. And then maybe just to transition. You asked a question on the progress of OneCell. I'm sure Eddie will add to my remarks.

Yes. Yes, sure. OneCell continues to be a strength. We've invested a lot of time and effort and money in that product. It is taking hold. I think we have close to 100 venues under review as to how to deploy with one customer. And so that's pretty exciting. It's getting a lot of interest from other people looking at it as well. And we continue to sell the product in Europe as our – that's where we first launched, and it continues to be a strong product there. So we're extremely excited. We've talked about the radio business that is an opportunity for us in the venue business. And it's also usable outside in some areas. So we're excited about what it's going to mean to us in the future. And we're excited as we evolve from a single carrier to multi carriers to multi frequencies that this is going to be a great platform for the future.

And one thing, Meta, that I probably should have mentioned in response to Steven's comment on where the strength comes from in the second half of the year. One of the things we're seeing out of COVID is an increased reliance on sort of health and safety in the enterprise space, everything from IoT to monitoring, to remote elevators, those sorts of things. And all of those types of applications need to reside on either a OneCell solution or a Ruckus Wi-Fi solution. So to some extent, the success we had in late 2019 getting OneCell into the market, and we're really reaping the benefits from now as we work our way through this crisis. And it's also one of the things that's providing stability in the enterprise space.

Great, thanks.

Your next question comes from George Notter from Jefferies. Your line is open.

Hi, guys, thanks very much. I guess I wanted to ask about your structured cabling business. And I heard the comments certainly about the copper side being softer as we would expect going through this period of time. But where do you think that business is now in terms of run rate relative to what maybe a normalized run rate might look like going forward? I guess I'm just wondering if you've already seen kind of a step down in that business. And we're at some sort of stable type of run rate there that we can improve upon going forward. What's the perspective there? Thanks.

If you take the entirety of where that business is, that's where hyperscale is located, too, from a structured cabling standpoint. That business is growing double digits every quarter or has been for several quarters. And we continue to see considerable strength there. The traditional data center business is softer. And we expect it to be so until we see some clarification of where this economy is. And multi-tenant data center business is good, just like hyperscale is. So that's the two growth areas. And copper is a transitional business right now. It does provide us a lot of strength in certain markets. But it is not a growth engine today, it is a considerable money era, and we absolutely support it, and we think it has a lot of opportunities in PoE and things like that in the future. So it's something that we think is important to us, and it's something that enables a lot of the cash generation that the company sees.

Yes. And just building on what Eddie mentioned, obviously, the PoE is a really big deal, right? As everything in the enterprise space is being revisited, more access points and sort of touchless elevators, all of those refurbishments of the enterprise space are going to require an advanced CAT6A cable, which is the most premium product that we produce. So there are – while we are experiencing some secular declines in that business, there are also tailwinds as the role of the office plays out, and they need to upgrade the infrastructure.

George, the other thing, I think, in all of the buildings that we're in where fiber is included, copper is there as the base, the anchor of the building. And so I think it still has a long life that it might be used in different ways, which both Alex and I talked about, but it is still an important product for us.

Any sense for how big the copper piece of that business is relative to fiber and the content provider component?

It's still the largest component of what enterprise is. But as I said, it's not the growth engine, that is fiber. And within fiber, connectivity is extremely important. So that's where we're spending a lot of development money on as we see the transition of the technologies.

Yes, it’s very helpful, thank you.

Just to give you – in terms of the overall portfolio. So where fiber would play predominantly – or I'm sorry, where copper would play predominantly would be in the commercial real estate space. That's about 8% of our overall portfolio. And then copper would be a subset of that 8%. The commercial real estate is really where the traditional enterprise fiber business that's the Ruckus business and then the copper business and OneCell.

Great.

This business, as we entered COVID, it was one of the first to react, I guess, downward. It has been stable since April, and the last couple of months has been increasing. So it ebbs and flows with expectations of the market. And as I said, it is an important product for us from a support of the whole portfolio that we have.

Your next question comes from Simon Leopold from Raymond James. Your line is open.

Great, thank for taking the question. I wanted to ask about two of the verticals trends. First, on the cable TV market, it sounds like you're starting to see some of that DAA outside plant cycle. And one of your customers has been vocal about optimizing its network. I'm just wondering how that optimization system is affecting your CCAP business and your overall trends in broadband, whether you're seeing an effect. And then on the Wireless business, we're hearing a lot more about Open RAN. And given your position in the industry, I have to imagine this is important to you and you're playing in the standards bodies, but I'd like to get an understanding about how you see Open RAN affecting your business?

Okay, so OneCell call is Open RAN, and we're excited about that. And we're on the committees that talk about Open RAN. So we're a vocal promoter unlike some of our OEM friends. So we see it as a great growth opportunity for others, such as CommScope, who have a lot of technology to be able to participate outside of maybe where they normally have. We are a radio manufacturer today in our OneCell product. And I think you know in our long history. We have been tangentially attached to the radio business on the macro tower. We're not as a formal radio supplier but a supporter and so what we think the move to Open RAN, which is gaining traction is good for the industry, and we welcome it. And so we're glad to see the operators starting to support it. And we're all for that. I think in the – we have a large installed base, I think, as you know, in the CCAP market and all of that. We're seeing a lot of CMTS nodes splitting and all of that. And we've talked about this in earlier meetings where we, versus others, we think that we have a very cost-effective way for our customers to transition. I said in my – one of my first questions, that what we're seeing in-licensing has been a significant benefit in the broadband business. And I think we see a continuation of that. Our customers have seen as this market shifted when people stayed at home, which we still are. That the need is going to be different than what it was before. And so there was a lot of catching up or optimization that was necessary for them to stay competitive. And we think that will continue. We think the offerings that we have in place now for virtualization are highly competitive and significantly cost beneficial to the marketplace. So we think that, that market for most of the customers in it is open to us, and we look forward to competing.

So just a couple of points, Simon, to underscore. The first is that our CMTS business is actually up sequentially and up year-over-year. So the point Eddie made about the operator is continuing to invest in the network. We're certainly seeing that within our within the CMTS portion of the portfolio. On the traditional kind of Access Technology portion of the portfolio, we expect to see some strength there. As the node splitting activity that Eddie mentioned begins to build momentum. What we saw early on in the crisis was there was such demand that operators prefer to optimize the network more virtually than physically. And obviously, that gets them a certain amount of capacity addition, but ultimately, they're going to need to push the nodes deeper, which will drive the physical part, the hardware part of the business as well. Then under other point on optimization, and this is one of the things we do with operators. So we actually work with them to design some of these software solutions to help continuously optimize the network and get the most out of their investments. So if anything, that gives us a platform for incremental customer relationships and incremental product sales. So it's actually helpful to have that level of collaboration going on.

Thank you very much.

Thank you.

Your next question comes from Jim Suva from Citigroup Investment Research. Your line is open.

Thank you so much for the details thus far. Can you comment a little bit about discussions of pricing, kind of how it's been throughout the quarter, especially in a world of coronavirus and less in person meetings, a more uncertain world? Has pricing been a little bit more stable, normal, a little bit more pressured? Just so we can kind of think about it as we kind of actually look into kind of 2021. And the reason why I ask is in the past, CommScope has had quite a bit of consistency. But once in a while, some unexpected pressures that have come up on pricing.

Yes, I remember those well. So as I said earlier to one of the earlier questions, this is an ongoing process with our customers. We are continually bidding on new designs and new products and things like that, and they all take in price discussions and so with our customers, that is something that we normally do. And there are pressures in the market as some people are hurting for business, and they offer they are for pricing that is maybe outside the norm. I think from the standpoint, what do we do about that? I think that we have shown in the past as we have to remain competitive in the marketplace that we have a way to take cost out, to redesign, to be more efficient and do things like that. And at the end of the day, the margin is what is important to us. And I think that we have been pretty good at maintaining some consistency in those margins. There are sometimes lags, but those who happen over time. But I think overall, we're very good at taking care of that. So we don't see right now things that are outside of the control. Now there are some businesses that that pricing is challenging to understand. Some of those businesses, we need to make sure that we do earn a reasonable return or we might have to make some other decisions. And so that's sort of the synopsis, I think.

Yes. If you were to try to model it, generally, what we anticipate as we think about the business is 2% to 3% price compression, that's been offset by ongoing productivity. And we haven't seen anything different from that. If you were to look on a kind of a mix normalized basis, you'd actually see with the business that you're referring to that was impacted by some pricing a couple of years ago, you would see that we delivered on our commitment to more than claw back the margin compression that we saw from those actions through a combination of cost action as well as new product introductions because as we introduce new technologies, those carry with them higher price points. So we actually don't see margin compression driven by pricing.

Great thank you so much for the clarifications and details.

Your next question comes from Steven Fox from Fox Advisors. Your line is open.

Thanks, good morning. Just one question for me. One of your large competitors on indoor and outdoor-fiber connectivity has also seen a lot of the similar trends you've talked about this morning, but seems a little bit more cautious on the type of cycle that we could be having on optical going forward. I was just wondering if maybe you could sort of – not to go tit for tat with what they're saying, but could you just sort of highlight why you think maybe this is a good cycle on the optical side and maybe even historically better than normal cycle like you seem to be intimated could happen?

Hey Steve, thanks for that question. I think in some regards, we're at a different point in some of the verticals within fiber than that person may be. And I think we still have some growth opportunities to become more relevant, I would speak to hyperscale being the example there. And so I think that might be a different answer from the two office. What we see in the rural telephony needs going forward, we think is going to be a great opportunity. And as we said in there, we are adding capacity because we need it today. And so we see the benefit there. We think that this is a competitive market. I think that we have, not just cabling, but very, very clever connectivity products to go along with it. And it's the full solution, which some of us have and others don't have that full complement. So I think that market is good for those that do have it. And so we really don't see a slowdown in the near-term or in the medium-term relative to what we see in the marketplace. I have seen virtually every cycle in fiber and what can happen. So it's something that you do watch. But I think right now, in what we see, we feel comfortable with what we've discussed.

Thanks very much for that. That’s really helpful.

Thank you.

Operator, we will take one final question. Thank you.

Sure. Your next question comes from Samik Chatterjee from JPMorgan. Your line is open.

Hi, good morning thanks for squeezing me in here. If I could just ask two quick ones, on the Broadband Networks business, you had a strong improvement in margin sequentially. And I understand some of that is the increase in revenue. But can you add some color related to what you're seeing in the quarter, what you saw in the quarter due to software sales versus hardware? And if I interpreted your comments correctly, I think you indicated that going forward, you might see more of hardware sales as notes get added. So if you can just clarify that as to how you're thinking about the ebbs and flows related to hardware and software? And I have a quick follow-up. Thank you.

Yes, so I would – first and foremost, the strong performance in broadband is driven by really excellent cost control. And so we did that across the board. And just to point back to my original remarks, our expectations coming into the year were period overhead in this sort of $2 billion annualized and will deliver around $1.8 billion. So that's across the portfolio and really broadband led the way on that with some actions that they took last year as we were seeing softness in that business. So we're really reaping the benefit of that business. The other area where we're seeing some lift is through mix. So I mentioned CMTS sales up year-over-year and up sequentially quarter-over-quarter. So that will clearly have a positive mix impact. And we do anticipate that dynamic continuing through the back half of the year. Supporting that is the point that I mentioned previously, which we had seen some softness in the hardware side and the access technology side, we expect that to abate somewhat as the operators begin pushing note, getting back to more node splitting activity and you see more physical disruption of the networks as opposed to just virtual disruption of the networks. So does that make sense? Did I get at it?

Yes. Yes. No, that's helpful. And just a quick follow-up on the cash flow here, you generally – historically, you've generated most of the cash flow in the back half of the year. And so 2Q this time is exceptionally strong, and you're still guiding to about $400 million, which does indicate somewhat of a – maybe it's relative to previous years more lower seasonally cash flow in the back half. So just wondering if there was anything one-off there that helped 2Q? And is getting a pull forward from the cash flow that you would ideally generate in the back half of the year?

Yes. So that's a great question, and I appreciate you asking it because I do think it's important to note how strong the cash flow was in Q2. So that north of $200 million of cash flow in Q2 was really a great result and a product of really strong management of the balance sheet, which was well done by the team. On Q3, we expect a bit less than that. There is some normal seasonal AP runs that we have to do for some of our large contract manufacturer suppliers, which will lead to a bit of a decline there in Q3, but then that will rebound as we get to Q4. So yes, that gets you to your north of $400 million for the year. So we do expect to be substantially positive for the balance of the year. And I think all things considered, I feel pretty good about – to generate really strong cash in a challenging operating environment.

Great thank you.

Thank you. And we thank all of you for your continued interest in CommScope. We want you to keep you and your families safe. We're not through this pandemic yet, but we look forward to talking with you the next quarter. Thanks very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.