Spotlight: CommScope Q1 Results Expected to Be Weighed Down by Telcos’ Capex Crunch; Positive Medium- to Long-Term Outlook; SUNs Trade With Wide Credit Spreads, Offering Lower SPTL Than Telecom Peers

Relevant Documents:
FY’22 10-K
7.125% SUNs Due 2028 OM
Q4’22 Presentation
 
CommScope’s management provided guidance of a “soft” first-quarter performance for its upcoming first-quarter results next week. The company said it expects to see negative impacts on top-line growth from a capital expenditure crunch in the telecom industry, distributors’ inventory digestion and the persistent semiconductor shortage. These challenges were also mentioned in Nokia’s and Ericsson’s first-quarter earnings calls last week.

The company reported 7.5% top-line growth, improved EBITDA margin and moderate deleveraging for fiscal year 2022. Despite that, its total net sales and adjusted EBITDA margin are still below the pre-Covid-19 pro forma combined entity level, including the acquisition of Arris. In recent years, its performance was affected by the low demand in 2020 caused by project delays during Covid-19 lockdowns, supply-chain disruptions first caused by Covid-19 lockdowns and then the Russia-Ukraine war, and intense commodity inflation in 2022.

The significant decrease in home sales, due to lower demand and key material (semiconductor) shortage, partially offset the growth in its connectivity and cable services and outdoor wireless networks segments, which was driven by 5G deployment and fiber broadband projects.

However, management said it remains positive in the medium- and long-term outlook and anticipates some improvement in the second half of the year with the introduction of new products, kicking off key access network solutions projects and better chip access through supplier discussions.

The company’s 2023 core adjusted EBITDA guidance ranges from $1.35 billion to $1.50 billion, implying low-single-digit top-line growth including price increase impacts. According to management's guidance, the 2023 adjusted EBITDA margin is expected to be in line with the fourth quarter of 2022, with further sales price increases and annual cost savings of $51 million offset by ongoing input inflation in certain materials.

Investment Rationale

CommScope’s net sales will be negatively affected in the short term by the telecom sector’s slowdown in capex investment, but stable single-digit growth is expected in the medium to long term, supported by the U.S. government’s multiyear fiber buildout program and increasing demand from data centers and enterprise customers to keep pace with the digital transformation.

On the basis of current available information and management’s guidance, Reorg projects that the company will be able to generate low positive net cash flow in 2023. With increases in EBITDA and net cash contributions, we expect it to achieve a small deleverage in the downside case and leverage below 7x in the base case. Note that the leverage ratio is calculated by dividing net leverage, excluding preferred equity, by adjusted EBITDA.

No restructuring triggers have been seen prior to the $1.3 billion senior unsecured notes’ maturity in June 2025. Management said it is focused on generating net cash flow and reducing leverage over next two years to better position for refinancing, and it said it has been actively engaging with banks to explore refinancing opportunities.
 
Additionally, the company is strategically positioning itself to capitalize on growth potential by investing in next-generation technologies and shifting the focus of its networking, intelligent cellular and security solutions, or NICS, segment toward higher-margin software products. With solid demand underpinned by government support and network upgrade requirements, the credits represent a compelling long-term investment opportunity.

Despite the positive long-term outlook, we expect to see greater volatility in the credit prices than its peers such as Nokia and Ericsson, given its considerably high leverage level of 8.1x including preferred equity and thin equity cushion. Please see “Peer Analysis” below for more details.

CommScope's higher leverage compared with its manufacturing peers limits arbitrage opportunities within the peer group and requires a wider credit spread and thus yield. Compared with telecom names with the same credit rating, CommScope’s notes have relatively low yields and spread per turn of leverage, or SPTL, reflecting investors’ perception of lower risks and better long-term growth opportunities in the network infrastructure manufacturing business. See “Relative Value” below for more details.
 
CommScope’s senior unsecured notes, or SUNs, with maturities in 2027 and beyond are currently trading at a significant discount, with yield to maturity, or YTM, ranging from 15.1% to 16.2%. The 5% SUN due 2027 and 7.125% SUN due 2028 are trading at around 70, and 8.25% SUN due 2027 is trading near 80. This high yield reflects investors’ concern on the short-term headwinds that management warned about at the JPMorgan High-Yield Conference on March 7. The SUNs’ yields are up by over 300 bps since then.

The SUNs’ prices rebounded slightly after the company’s March 29 announcement of its fiber optic cable production expansion plan. However, on April 18, the company’s confidential data was leaked on the “dark web” after an alleged ransomware attack. The stolen data includes employee IDs, invoices, company files and bank documents. While the full impact of the attack on the company's operations remains undisclosed, it has been confirmed that there is no evidence of customer information being affected.

Yields for the unsecured notes increased by about 100 to 200 bps after the incident. Meanwhile, the yields for its senior secured notes, or SSNs, had only small fluctuations with a moderate upward trend over the period.

For other telecom equipment providers, such as Belden, Nokia, Ericsson and Amphenol, these peers’ leverage levels remain at or below 1.1x, which is significantly lower than CommScope’s 8.1x. The associated lower credit risks have been reflected in their double-B or investment-grade credit ratings. As a result, their SUNs with short- and medium-term maturities offer lower yields, typically below 5%, compared with CommScope’s.

While the manufacturer peers are in a different position in the credit risk spectrum with CommScope, the securities of single-B rating telecom companies’ such as Lumen and Altice USA offer more comparable yields with CommScope’s. Lumen stands out from the relative value perspective by providing the highest YTM along the forward curve and also highest SPTL based on a low leverage of 3.1x. Lumen’s 4.5% SUN due 2029 and 6.875% senior debentures due 2028 provide the highest yield at 22.5% among the comparable notes, with a SPTL of 7.3%. CommScope falls short with a SPTL of approximately 2% for SUNs with maturities in 2027 and 2028.

It is worth noting that while telecom names look more appealing from a relative value perspective, this sector faces different risk factors from the telecom equipment vendor, which is more susceptible to macroeconomic conditions and has much higher capex requirements (approximately 20% of revenue). In contrast, telecom equipment vendors anticipate solid growth in the medium to long term, benefiting from the tailwinds of the government’s broadband funding program.
           
Broadband equipment vendors such as CommScope, Nokia, and Ericsson have all faced similar challenges over the past three years: Sales were initially hit by project delays, factory closures and supply-chain disruptions caused by pandemic lockdowns in 2020. The top line began to recover in 2021 on the back of increased demand from service operators, data centers and smart buildings encouraged by a fundamental shift to remote working and cloud services. In 2022, the sales growth continued supported by rollout of 5G network by telecoms.

Additionally, the low sales volume in 2020, coupled with material constraints and input inflation in 2021 and 2022, further hampered their profit margins. Although these vendors began passing costs to customers from the fourth quarter of 2021, persistent inflation and a high backlog volume prevented margin improvements until the second half of 2022 for CommScope and the fourth quarter for Nokia and Ericsson.

Based on the latest reported figures, these three companies have a similar level of the adjusted EBITDA, excluding one-off costs and equity-based compensation. CommScope and Nokia both reported 13.8%, while Ericsson reported 13%. Despite the improvement in EBITDA margins, their profitability is still shadowed by chip constraints and commodity inflation.

The enterprise valuations, or EV, for Nokia and Ericsson took a significant hit during the market crash last summer, and despite providing stable to positive outlooks for 2023, they have yet to regain favor from equity investors. Their equities have been traded down further after seeing the soft demand reported in the first quarter this year. Currently, the EV multiples for Nokia and Ericsson are 6.1x and 5.1x adjusted EBITDA, respectively, and since neither company has positive net debt, this valuation purely presents the equity value.

CommScope’s EV stands at 8.8x, in line with the manufacturing sector’s average EV multiple of 8x to 9x. However, with a high leverage level at 8.1x (including preferred equity), the company’s equity cushion is concerningly thin at 0.7x.

Belden and Amphenol are notable for their emphasis on higher-margin business segments, which is reflected in their superior EBITDA margins compared with CommScope. On the one hand, Belden focuses on industrial automation, which accounts for 54% of its business, providing industrial customers with high-performance networking and machine connectivity products. The company is well positioned to benefit from the increasing demand for automation services as industrial clients contend with labor shortages, capacity requirements and production reshoring.

Amphenol, on the other hand, specializes in high-tech interconnect, sensor and antenna services, which is a niche market that is relatively insulated from the current macroeconomic uncertainty. Amphenol’s EV stands at 16x EBITDA with a 14.9x equity cushion, reflecting the unique nature of its products and strong demand.

Telecom companies, as a key group of customers for CommScope, have been investing heavily in 5G networks over the past two years. However, many U.S. telecom giants have recently indicated in their annual calls that they have achieved satisfactory levels of 5G coverage and will slow down their capex investment in the short term to ease liquidity pressure. Cable and connector manufacturers have observed this spending decrease since the fourth quarter of last year and expect this trend to continue in 2023.
 
CommScope, based in Hickory, N.C., is a global provider of infrastructure services for communication and entertainment networks. It designs, manufactures, installs and supports the hardware infrastructure and software intelligence that 1) enables service providers, including cable, telephone and digital broadcast satellite operators and media programmers, to deliver media, voice, internet protocol, or IP, data services and Wi-Fi to its subscribers and 2) allows enterprises to experience constant wireless and wired connectivity across complex and varied networking environments.

Sales to customers outside of the United States comprised 38%, 42% and 39% of total net sales during the years ended Dec. 31, 2022, 2021 and 2020, respectively.
 
Operating Segments

As of Jan. 1, 2022, to reorganize its internal management and provide a better performance comparability with competitive peers, the company reshaped its operating segments as follows:

Connectivity and cable solutions, or CCS (41% of FY 2022 net sales): Provides fiber optic and copper connectivity and cable services for use in telecommunications, cable television, residential broadband networks, data centers and business enterprises.

Customers and sales channel: CCS products are primarily sold directly to cable television system operators, broadband operators and other service providers that deploy broadband networks. These products are also available through independent distributors or system integrators catering to large telecommunication operators.

Competitors: Amphenol Corp., Belden Inc., Clearfield Inc., Corning Inc. and Sterlite Corp.

Outdoor wireless networks, or OWN (16% of FY 2022 net sales): Focuses on the macro and metro cell markets, providing base station antennas, radio frequency, filters, tower connectivity, microwave antennas, metro cell products, cabinets, steel, accessories and wireless spectrum management business Comsearch.

Customers and sales channel: The products are primarily sold directly to wireless operators, original equipment manufacturers, or OEMs, and other service providers involved in wireless networks deployment projects. The segment faces a customer concentration risk due to its heavy reliance on a few large operators.

Competitors: Comba Telecom Systems Holding Ltd., Nokia Oyj, Huawei Technologies Co. Ltd., Rosenberger NA and Telefonaktiebolaget LM Ericsson.

Networking, intelligent cellular and security solutions, or NICS (10% of FY 2022 net sales): Provides wireless networks for enterprises and service providers. Product offerings include indoor and outdoor Wi-Fi and long-term evolution access points, access and aggregation switches; internet of things, or IoT, suite, on-premises and cloud-based control and management systems; and software for security, location, reporting and analytics.

Customers and sales channel: NICS products are primarily sold through independent distributors or system integrators for large telecommunications operators and to enterprise customers in various markets, and service providers indirectly through channel partners. It also sells directly to cable television system operators, broadband operators and service providers that deploy broadband networks, but direct sales make up only a small part of the business.

Competitors: Cisco Systems Inc., Comba Telecom Systems Holding Ltd., Corning Inc., Extreme Networks Inc., Hewlett Packard Enterprise Development LP, Huawei Technologies Co. Ltd., JMA Wireless, Juniper Networks Inc., SOLiD Inc. and Ubiquiti Inc.

Access network solutions, or ANS (14% of FY 2022 net sales): Provides solutions for cable modem termination systems, or CMTS, video infrastructure, distribution and transmission equipment and cloud services that enable facility-based service providers to construct a state-of-the-art residential and metro distribution network.

Customers and sales channel: The ANS segment offerings are primarily sold directly to wireline network service providers, including telephone companies and cable television network providers. However, in some cases, sales may also be facilitated through specialized resellers and distributors who primarily provide logistics support, and occasionally post-sale service and support. The customer base includes most of the wireline and satellite operators worldwide.

Competitors: ATX Networks Corp., Casa Systems Inc., Cisco Systems Inc., Harmonic Inc., Technetix Group Ltd., Teleste Corp. and Vecima Networks Inc.

Home (19% of FY 2022 net sales): Offers subscriber-based services for in-home communication networks, including broadband and video technologies, as well as devices for connecting homes to the internet and enabling smart home services.

Customers and sales channel: The products are primarily sold directly to wireline network service providers, such as telephone companies and cable television network providers, and some satellite video distributors, to be deployed into their subscribers’ homes and businesses. Satellite video distributors also purchase some of the products for deployment in their subscribers’ premises. Specialized distributors are used in some cases.

Competitors: Humax Co. Ltd., Kaonmedia Co. Ltd., Nokia Oyj, Sagemcom Broadband SAS, Vantiva SA. and ZTE Corp.

Manufacturing Facilities

CommScope employs a dual approach to meet its supply requirements, utilizing both in-house manufacturing capabilities and contract manufacturers. It operates 19 manufacturing facilities, with three in China, five in the U.S., one in India, five in Mexico and five in Europe. Twelve of the facilities are owned by CommScope, while the remainder are leased.

The company leverages lower-cost geographies, such as China, the Czech Republic, India and Mexico, for high-labor content products while investing in automated plants in higher-cost regions in proximity to customers. Additionally, the company collaborates with contract manufacturers worldwide, including Brazil, China, Malaysia, Mexico, South Africa, Thailand, Vietnam and the U.S., to produce all products in the home segment and certain products in CCS, OWN and ANS segments. All of the Ruckus offerings are produced by contract manufacturers.

As of Dec. 31, 2022, the carrying value of land, buildings, machinery, equipment and construction in progress amounted to $609.6 million. Please see the property details in the appendix at bottom.

Customer and Supplier Concentration

CommScope’s customers include most of the leading global telecommunications operators, data center managers, cable television providers or management service organizations and thousands of enterprise customers, including many Fortune 500 companies. The company’s sales force actively cultivates direct relationships with end-users to generate demand for its products, despite a significant portion of sales being fulfilled through channel partners.

Its key customers and distributors include Altice USA Inc.; America Movil SAB de CV; AT&T Inc.; Charter Communications Inc.; Comcast Corp.; Cox Communications Inc.; Graybar ElectricCo. Inc.; KGP Co.; Liberty Media Corp.; Power & Telephone Supply Co.; Purchase Power Exchange LLC; Talley Inc.; T-Mobile U.S. Inc.; Verizon Communications Inc.; Vodafone Group PLC; and Wesco International Inc. (including Anixter International Inc.).

Comcast is one of the most important clients, representing 11% of the company’s net sales in FY 2020. There has been a reduction in the key customer concentration over the past two years, with the top two direct customers contributing approximately 15% of total net sales, and no single direct customer accounting for 10% or more of net sales.

The company relies on sole suppliers or a limited group of suppliers for certain key components, subassemblies and modules and a limited group of contract manufacturers to manufacture a significant portion of its products. Any disruption or termination of these arrangements could have a material adverse impact on the company’s results of operations.
  Revenue Breakdown
 
CommScope’s FY 2020 net sales were down by approximately 14% compared with pro forma FY 2019 net sales for the combined business with ARRIS, as a huge number of facility construction projects were postponed due to lockdowns, and supply-chain disruptions extended lead time. The sales declined across all segments other than CCS (known as broadband networks in 2020), thanks to the tailwind of increased capex in the communication industry.

Despite significant supply-chain-related challenges posed by Covid-19, CommScope’s core business sales, excluding the home segment, recovered by 11.8% to $6.74 billion in FY 2021, led by the sales growth in CCS and OWN segments.

The sales growth was driven by increased demand from service providers for broadband development to address network strains caused by the fundamental shift to remote work and education as well as higher demand for indoor copper and fiber cabling for enterprises and data center customers. The continued investment by the U.S. carriers in rolling out 5G networks nationwide also contributed to this growth.

CommScope started the conversation of price increases in the fourth quarter of 2021 after its quarterly EBITDA margin was down by almost 2% in the third quarter of 2021, hit by soaring commodity and transportation costs. As the impacts of price increases gradually flew through the backlog, together with higher sales volume, it achieved a 7.8% top-line growth in FY 2022. The core business increased by 11.7%, mainly driven by a 24.1% increase in CCS sales, partially offset by a 5.5% decline in ANS.

The growth across all segments, particularly NICS and ANS, within the core business was considerably suppressed by the semiconductor shortage. We will address the ramifications on the home segment later on. Nevertheless, despite the unfavorable effects of the supply chain, NICS demonstrated a commendable growth rate of 9%, driven by the robust demand for Ruckus Networks. OWN maintained its sturdy growth trajectory in 2022, attributable to the continuous investment made by carriers worldwide in 5G networks.

The FY 2022 net sales of ANS declined 5.5% from the prior year. In addition to the unfavorable effects of chip and other supply constraints, the slump was propelled by a deceleration in customer spending, following a pandemic-induced demand for bandwidth. Additionally, the product shift toward lower-priced hardware-centric products on the network edge contributed to the decline.

The company originally intended to spin off its noncore business, the home segment, into an independent publicly traded company in the first half of 2022. However, the plan has been postponed as the segment is underperforming due to semiconductor constraints. The company is aiming to improve the segment’s financial performance before the spinoff. Please see our report on its initial spinoff plan HERE.

The sales of the home segment experienced a significant decline over the past three years, suffering from longer lead time caused by the semiconductor shortage and also weak demand for both broadband and video products. The delivery time for semiconductors has been extended to 12 to 18 months. Among all segments, home networks has the most significant impact from chip shortages, with approximately 96% of its revenue exposed to semiconductors, compared with only 25% to 50% for the other segments.

When considering the blended average for the portfolio, around 45% of the company’s revenue is exposed to the semiconductor. If supply constraints were not a factor for the entire year, the company could have potentially achieved an incremental revenue of around $465 million and an incremental EBITDA of approximately $130 million, solely due to semiconductors.

Cost Structure and Profitability

Deteriorating gross margin due to inflationary pressure and shift to lower-margin products:

A downward trend has been seen in the gross margin since the Covid-19 outbreak, with 32.6%, 31.3% and 30.4% for FY 2020, FY 2021 and FY2022, respectively. The adverse impact of the pandemic on global supply chains caused a surge in raw material prices and transportation costs, which severely affected the gross margins across all segments during FY 2021, except for ANS, which benefited from a favorable mix of products and geographies during the period.

In 2022, the company implemented price increases throughout the year to address the ongoing input inflation stemming from the Russia-Ukraine war. The gross margins for CCS and NICS rebounded toward historical levels following the price increase. However, ANS’ gross margin declined further to 21.5% from 27.8% in the prior year, primarily due to a shift in product mix toward lower-margin nodes and amps on the edge of networks. The home segment experienced the largest decline in gross margin, falling to 1.5% in FY 2022 from 5.5% in FY 2020 as a result of low sales volume and escalating semiconductor prices.

The management estimated the full-year impact of semiconductor constraints on gross margin at $270 million.

Improved adjusted EBITDA margin for FY 2022 driven by cost efficiency achieved by the NEXT restructuring plan and price increases:

CommScope’s largest operating expenses are related to selling, general and administrative, or SG&A (12.3% of FY 2022 revenue), followed by research and development, or R&D (7.1% of FY22 revenue), and restructuring costs related to CommScope NEXT (11.2% of FY 2022 revenue).

Overall, the lower gross margin consequently led to a decrease in adjusted EBITDA margin, which was down to 13% in FY 2021 from 14.4% in FY 2020 and 15.5% in FY 2019. In 2022, the adjusted EBITDA margin improved slightly to 13.8%, benefiting from the cost-saving program with lower costs in SG&A and R&D. Note that the adjusted EBITDA excludes the exceptional costs, such as event-driven costs related to restructuring, transformation program and M&A activities, equity-based compensation and asset impairments.

CommScope’s SG&A costs have been subject to fluctuations in recent years because of event-driven transaction, transformation and integration costs associated with the integration of ARRIS, the CommScope NEXT transformation, and the preparation of the home spinoff. However, excluding these event-driven costs, SG&A costs have been declining over the years, attributable to acquisition synergies and cost-saving initiatives. In FY 2021 and FY 2022, SG&A costs, excluding exceptional costs, amounted to $1.14 billion and $1.1 billion, respectively, or 13.3% and 11.9% as a percentage of total revenue.

The company has slowed down its investments in R&D. The costs amounted to $657.4 million in FY 2022, about $25 million less than FY 2021 and $50 million less than FY 2020, driven by the reduction of R&D spending in home, the noncore business with little growth space.

Cash Flows and Leverage

Higher working capital requirements in 2022: CommScope’s working capital cash outflows more than doubled in FY 2021 and have continued to rise in FY 2022 to $207.1 million, driven primarily by inventory buildup to address supply-chain disruptions, especially for semiconductors. The days sales of inventory, or DSI, reached 90 days in FY 2022, up approximately 30 days compared with pre-Covid-19 levels. With difficulty in purchasing key materials, the company received less favorable purchase terms, resulting in a decrease in days payable outstanding, or DPO, to approximately 60 days in FY 2022 compared with 72 days in FY 22021 and pre-Covid-19 levels of 70 days.

Management noted improvement in receivable collections, with days sales outstanding, or DSO, of 60 days in FY 2022, which is five days less than in FY 2021.

Consistent investment in capex: The company has aggressively expanded its production capacity in the past two years, including a new Mexico plant, aiming to capitalize the growth potential fueled by government funding initiatives, carriers’ 5G coverage expansion and deeper fiber deployment. Capex guidance for 2023 amounts to $125 million to $150 million for cable production expansion.

Challenges with positive NCF generation and high leverage: CommScope’s leverage level remained above 7.2x since its ARRIS acquisition in 2019, or 8x including the preferred equity. It generated a negative levered free cash flow, or FCF, of $9.1 million in FY 2021, due to high leverage and rising rates, coupled with additional working capital needed for inventory management. With further recovery in sales and EBITDA during 2022, its levered FCF increased to $88.7 million, with a cash conversion rate of 6.9%. In 2022, its net cash flow turned positive for the first time in the past three years.

Convertible Preferred Stock

As of Dec. 31, the company had authorized 1.2 million shares of Series A convertible preferred stock, with a total value of $1.1 billion. Holders of the convertible preferred stock are entitled to a cumulative dividend at the rate of 5.5% per year, payable quarterly in arrears. Dividends can be paid in cash, in-kind through the issuance of additional shares of convertible preferred stock or any combination of the two, at the company’s option.

The convertible preferred stock is convertible at the option of the holders at any time into shares of CommScope common stock at an initial conversion rate of 36.3636 shares of common stock per share of the convertible preferred stock, which is equivalent to $25.20 per common share. Given that CommScope’s common equity trades at around $4.50 per share, the conversion will not be executed.

The dividend payments were only made to the preferred stock during the past three years, with cash dividends of $14.9 million, and $44.1 million of dividends paid in additional shares of the convertible preferred stock in 2022.

Hedging Positions

Interest rate risk: At the end of December 2022, the company’s outstanding variable-rate senior secured term loan amounted to £3.1 billion. It has entered into $300 million interest rate swap derivatives with maturities of up to 15 months, hedging approximately 10% of its variable interest rate exposure.

Projected interest payments are shown in the chart below:
 
Foreign currency risk: CommScope generates approximately 40% of its net sales from outside the U.S. and operates manufacturing facilities in China, India and Mexico in addition to Europe. As of Dec. 31, the company held foreign exchange contracts worth $522.2 million with maturities of up to eight months, representing less than 15% of its international revenue for FY 2022.

Commodity price risk: The company is exposed to price fluctuations of raw materials, mainly including aluminum, copper, steel, bimetals, optical fiber, plastics and other polymers, capacitors, memory devices and silicon chips. Management said it tends to mitigate these risks by working closely with key suppliers to secure favorable pricing, delivery terms and supply availability. As of Dec. 31, CommScope had forward purchase commitments of approximately $4.9 million under take-or-pay contracts for certain metals, which it expects to consummate in the second quarter of 2023. No positions in derivative instruments have been taken.
 
Management provided a guidance of 2023 core segment adjusted EBITDA ranging from $1.35 billion to $1.5 billion, including the consideration of telecom companies’ slowdown in capex investment.
Sales:

CCS
 

• The softness in carriers’ demand for cable solutions that emerged in the fourth quarter of 2022 is expected to continue in the first half of 2023, as customers need to adjust the currently high inventory levels. Management said it is confident that the demand will recover in the medium and long term, as the full implementation of 5G coverage has not yet been achieved.
   
• The growth in CCS is expected to be immune to macro trends on the back of government’s support, including the Rural Digital Operating Fund in the United States and upcoming programs in other countries such as Australia, Canada and the United Kingdom.
   
• Management said that it believes that the demand from enterprise customers will remain solid, driven by the ongoing transformation to digital working environments.
   
• The company said it expects to deliver sales growth in 2023 driven by a structurally growing market and a full-year effect of price increases.

OWN
 

• In 2023, it is expected that the increase in sales from new products such as the Mosaic antenna will offset or partially offset the negative impact caused by the slowdown of investment in the telecom sector.
   
• Low-single-digit growth is expected in the long run.

ANS
 

• The ANS sales is highly event-driven. Management has warned of a relatively weak performance during the first half year, as the main projects are all scheduled for the second half of the year.
   
• The shift from head-end to edge products will continue in 2023. Management said it is confident with the volume of sales and anticipates a flat adjusted EBITDA margin.
   
• The company is committed to R&D investment to prepare for the next evolution of HFC networks.

NICS
 

• The segment has been underperforming because of semiconductor shortage. Management said it expects to deliver a better result during the second half of the year when the availability of chips is improved.
   
• The company will continue to invest in software development to shift the segment focus from hardware to software, which provides higher margins.
   
• The company said it aims to unlock the growth potential by introducing comprehensive connection and security solutions with new products, services and software offerings.

Home
 

• While the first quarter is expected to be challenging for the segment due to weak demand and semiconductor supply constraints, the company said it anticipates “profitable” full-year 2023 results, with noticeable performance improvements in the second half of the year.

Inflationary pressure:
 

• Certain raw materials such as glass used for fiber optic cable have experienced further price increases. The negative impacts are expected to be offset by decreased transportation costs, full-year benefit of sales price increase (flowing through backlogs), and cost savings initiated from CommScope NEXT.
   
• The company said it expects full-year EBITDA margin to be largely in line with the fourth quarter of 2022, which is close to the historical level.

Working capital:
 

• Management said it plans to maintain a high inventory level over 2023 to manage the shortage and long delivery time for semiconductors. Therefore, no significant working capital movements are expected in 2023.
   
• Some cash inflows from working capital may be seen in 2024 as the inventory is adjusted down once the supply-chain disruption gets eased.

CommScope NEXT restructuring costs:
 

• Cash payments of $58.2 million in 2023 and $500,000 in 2024.

Capex:
 

• Heavy investment in production expansion with anticipated capex of $125 million to $150 million in 2023.

Interest expenses guidance:
 

• Management estimates the interest payments to be $635.8 million due in 2023 based on the forward curve as of Dec. 31. Reorg estimated the full-year interest costs to be approximately $650 million based on the current forward curve.

  Strengths
 

1. Future growth driven by solid demand - The company is well-positioned to take advantage of some of the most powerful tailwinds in the communications industry. Key demand drivers include the Rural Digital Opportunity Fund, which will pledge $20.4 billion over a decade to support the development of broadband networks in rural areas, the introduction of new mid-band spectrum to power 5G, and the fundamental shift toward distributed work and education.
    
2. Established sales channels and customer relationships - As a key supplier in the wireless infrastructure market, the company has established sales channels globally, with direct relationships with end-users to provide highly customized solutions.
    
3. Strong competitive position - The company is competitive in the active cable technology business with a significant presence in the HFC networks of various cable operators and a comprehensive product portfolio, providing a one-stop shopping for its customers.

Risks
 

1. Weakening demand from telecom customers - U.S. carriers are cutting their capex investment following two years of rapid fiber and 5G deployments, as a corresponding drop in demand in CCS and OWN segments is expected.
    
2. Persistent semiconductor shortage - Approximately 96% of home sales is exposed to semiconductor, and 25% to 50% for other segments. The supply constraints are expected to continue throughout 2023, which largely limits the company’s ability to fulfill backlogs and extend the lead time. The company has been building up inventory to manage the shortage, with increasing cash tied up in working capital.
    
3. Heavy reliance on third-party distributors for sales - The company sells certain products primarily through independent distributors. As the company has not secured any minimum purchase commitments or exclusive contracts with distributors, it may face challenges in maintaining its market share against competitors offering lower prices.
    
4. Highly competitive market - The network equipment market is highly competitive and subject to rapid technological change, which demands a high R&D capex investment from CommScope to maintain its competitive edge.
    
5. Legal / intellectual property risks - The company faces the risk of intellectual property claims and infringement notices, which may lead to paying damages, royalties, stopping product offerings, ceasing relevant or other activities, or indemnifying customers for related costs. As of Dec. 31, 2022, and 2021, the company had liabilities of $37.1 million and $24.6 million, respectively, recorded in accrued and other liabilities and noncurrent liabilities related to certain intellectual property assertions that have been settled or are in the process of settlement.
    
6. Third-party contract manufacturers risks - CommScope’s outsourcing strategy exposes the company to third-party risks, including the possibility of supply-chain disruptions caused by factors outside its control. For instance, the closure of some of the third-party manufacturers’ factories during Covid-19 had a significant effect on CommScope’s operations. Moreover, failure of renewing the manufacturing arrangements could result in production delays, increased costs or other negative impacts on the company's financial performance.
    
7. Key customers risk - CommScope has a high customer concentration, with the top two direct customers, including Comcast, contributing approximately 15% of total net sales in FY 2022. Additionally, accounts receivable from Charter Communications represented approximately 12% of accounts receivable as of Dec. 31. This concentration of key customers exposes the company to potential revenue loss, making it vulnerable to changes in the buying patterns of these clients.

  Under the most restrictive debt documents (the term loan, secured notes, and 2027 and 2028 unsecured notes issued by CommScope Inc., which include nearly identical restricted payment and investment baskets), it provides CommScope with limited flexibility to incur secured or structurally senior debt but fairly significant flexibility to pay dividends and transfer assets to unrestricted subsidiaries. Please see the full covenant analysis reports HERE.
     
Organizational Structure
 
Property List
 
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