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First Quarter 2019 Highlights (all comparisons are year-over-year)
CommScope Holding Company, Inc. (NASDAQ: COMM), a global leader in infrastructure solutions for communications networks, reported results for the quarter ended March 31, 2019.
The company reported first quarter sales of $1.10 billion, a decrease of 1.9% compared to $1.12 billion during the same period in the prior year. CommScope generated a net loss of $2.3 million, or $(0.01) per basic share, a decrease from the prior year period's net income of $33.7 million, or $0.17 per diluted share. Non-GAAP adjusted net income for the first quarter of 2019 was $93.0 million, or $0.48 per diluted share, versus $95.0 million, or $0.49 per diluted share, in the first quarter of 2018. A reconciliation of reported GAAP results to non-GAAP results is attached.
First quarter results do not include ARRIS, which CommScope acquired on April 4, 2019.
“We delivered solid first quarter revenue at the high end of our range and adjusted earnings per share that exceeded our expectations,” said President and Chief Executive Officer Eddie Edwards. “Capitalizing on our excellent customer relationships and market position, we drove strong Mobility Solutions results, as telco providers continued to rely on CommScope to build out their networks’ rapidly increasing capacity and coverage requirements. While Connectivity Solutions results were softer than expected, we see improving trends in the second half of the year, and we are well positioned for future earnings growth.
“We are excited to have closed the ARRIS acquisition early last month and welcome the new team members to CommScope. We believe that together we can transform our combined companies to deliver even greater benefits to customers worldwide. While we still expect to deliver the financial targets from the acquisition that we previously disclosed, the recent, significant declines in capital spending by certain cable providers is having a pronounced impact on ARRIS. We are taking steps to address this situation and moving quickly to combine ARRIS, Ruckus and CommScope in a way that positions us for long-term success. We are confident that, with ARRIS and Ruckus, we can grow faster than the industry and benefit from favorable networking market trends, while enhancing shareholder value.”
CommScope First Quarter 2019 Overview
Sales decreased 1.9% year over year as growth in the U.S. was more than offset by lower sales in the Europe, Middle East and Africa (EMEA) and Asia-Pacific regions. Sales benefited from the continued build out of 4G networks partially offset by a decline in Indoor Copper. Changes in foreign exchange rates unfavorably impacted net sales by approximately 2%.
GAAP operating income decreased 12.6% year over year to $90.7 million. Non-GAAP adjusted operating income, which excludes amortization of purchased intangibles, integration and transaction costs and other special items, increased 1.1% year over year to $190.7 million, or 17.3% of net sales, an increase of 50 basis points. Both GAAP operating income and non-GAAP adjusted operating income benefited from higher North America sales volumes, mix and lower material costs. These favorable trends more than offset the impact of reductions in certain selling prices. GAAP operating income was also negatively impacted by restructuring, integration and transaction costs, which are excluded from non-GAAP adjusted operating income.
Non-GAAP adjusted EBITDA, which equates to non-GAAP adjusted operating income excluding depreciation, increased year over year to $208.4, or 19.0% of net sales, an increase of 40 basis points.
First Quarter 2019 Segment Overviews (all comparisons are year-over-year)
ARRIS Acquisition Update
On April 4, 2019, we completed the acquisition of ARRIS. The combination of the two companies is expected to drive profitable growth in new markets and shape the future of wired and wireless communications. With the acquisition, CommScope will be better positioned to capitalize on long-term industry growth trends, including network convergence, fiber and mobility everywhere, Internet of Things, demand for additional bandwidth, low latency and ultra-high reliability.
In addition to creating long-term growth opportunities, the acquisition is also expected to deliver near-term financial benefits including:
1Financial metrics presented are adjusted to exclude purchase accounting charges, transaction and integration costs and other special items.
ARRIS First Quarter 2019 Financial Performance
The company is providing ARRIS’ first quarter 2019 results in an effort to provide greater transparency into performance trends. All comparisons are year over year to ARRIS’s 2018 first quarter.
Total ARRIS revenue for the first quarter was $1.38 billion, reflecting a decrease of 12.4%, and operating loss for the first quarter was $45.9 million. ARRIS’s total non-GAAP adjusted operating income of $66.7 million decreased 64.2%, and non-GAAP adjusted EBITDA of $85.9 million decreased 58.9%.
A reconciliation of ARRIS’s GAAP results to non-GAAP results is attached.
“The ARRIS business has been navigating revenue pressures driven by several external factors,” said Executive Vice President and Chief Financial Officer Alex Pease. “This includes a reduction in capital spending by certain large North American network operators, a channel inventory draw-down and the impact of transitioning production out of China due to tariffs. We believe these issues are largely timing related and are confident in our ability to manage through them. We expect to build upon our well-established track record of meeting or exceeding synergy targets to deliver solid value for shareholders.”
Today, CommScope management issued second quarter 2019 guidance. This guidance excludes ARRIS results recorded in the first three days of April 2019 during the pre-close period.
“After a thoughtful and constructive evaluation of the company’s business dynamics, specifically that a significant portion of revenue is derived from short-cycle or project-based engagements, CommScope’s Board of Directors and executive leadership team have decided to transition away from providing annual financial guidance,” Edwards said. “We believe quarterly guidance is more helpful in evaluating our company and appropriately reflective of our forecasting capabilities, and that the timing to make this change is appropriate as we integrate with ARRIS.”
During the company’s conference call, CommScope management will continue to provide a qualitative overlay of the expected full-year performance.
Second Quarter 2019 Guidance:
A reconciliation of GAAP to non-GAAP outlook is attached.
Conference Call, Webcast and Investor Presentation
As previously announced, CommScope will host a conference call today at 8:30 a.m. ET in which management will discuss first quarter 2019 results and second quarter 2019 guidance. The conference call will also be webcast.
To participate in the conference call, dial +1 844-397-6169 (US and Canada only) or +1 478-219-0508. The conference identification number is 4392174. Please plan to dial in 15 minutes before the start of the call to facilitate a timely connection. The live, listen-only audio of the call and corresponding presentation will be available through a link on CommScope's Investor Relations page.
A webcast replay will be archived on CommScope’s website for a limited period of time following the conference call.
CommScope (NASDAQ: COMM) and the recently acquired ARRIS and Ruckus Networks are redefining tomorrow by shaping the future of wired and wireless communications. Our combined global team of employees, innovators and technologists have empowered customers in all regions of the world to anticipate what’s next and push the boundaries of what’s possible. Discover more at www.commscope.com.
Non-GAAP Financial Measures
CommScope management believes that presenting certain non-GAAP financial measures enhances an investor’s understanding of our financial performance. CommScope management further believes that these financial measures are useful in assessing CommScope’s operating performance from period to period by excluding certain items that we believe are not representative of our core business. CommScope management also uses certain of these financial measures for business planning purposes and in measuring CommScope’s performance relative to that of its competitors. CommScope management believes these financial measures are commonly used by investors to evaluate CommScope’s performance and that of its competitors. However, CommScope’s use of the terms non-GAAP adjusted operating income, non-GAAP adjusted EBITDA, non-GAAP adjusted net income and non-GAAP adjusted diluted earnings per share and adjusted free cash flow may vary from that of others in its industry. These financial measures should not be considered as alternatives to operating income (loss), net income (loss) or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance, operating cash flows or liquidity.
Forward Looking Statements
This press release or any other oral or written statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These statements may discuss goals, intentions or expectations as to future plans, trends, events, results of operations or financial condition or otherwise, in each case, based on current beliefs of management, as well as assumptions made by, and information currently available to, such management. These forward-looking statements are generally identified by their use of such terms and phrases as “intend,” “goal,” “estimate,” “expect,” “project,” “projections,” “plans,” “potential,” “anticipate,” “should,” “could,” “designed to,” “foreseeable future,” “believe,” “think,” “scheduled,” “outlook,” “target,” “guidance” and similar expressions, although not all forward-looking statements contain such terms. This list of indicative terms and phrases is not intended to be all-inclusive.
These statements are subject to various risks and uncertainties, many of which are outside our control, including, without limitation, risks related to the ARRIS acquisition, our dependence on customers’ capital spending on data and communication systems; concentration of sales among a limited number of customers and channel partners; changes in technology; industry competition and the ability to retain customers through product innovation, introduction and marketing; risks associated with our sales through channel partners; changes to the regulatory environment in which our customers operate; product quality or performance issues and associated warranty claims; our ability to maintain effective management information technology systems and to implement major systems initiatives successfully; cyber-security incidents, including data security breaches, ransomware or computer viruses; the risk our global manufacturing operations suffer production or shipping delays, causing difficulty in meeting customer demands; the risk that internal production capacity or that of contract manufacturers may be insufficient to meet customer demand or quality standards; changes in cost and availability of key raw materials, components and commodities and the potential effect on customer pricing; risks associated with our dependence on a limited number of key suppliers for certain raw materials and components; the risk that contract manufacturers we rely on encounter production, quality, financial or other difficulties; our ability to integrate and fully realize anticipated benefits from prior or future divestitures, acquisitions or equity investments; potential difficulties in realigning global manufacturing capacity and capabilities among our global manufacturing facilities or those of our contract manufacturers that may affect our ability to meet customer demands for products; possible future restructuring actions; substantial indebtedness and maintaining compliance with debt covenants; our ability to incur additional indebtedness; our ability to generate cash to service our indebtedness; possible future impairment charges for fixed or intangible assets, including goodwill; income tax rate variability and ability to recover amounts recorded as deferred tax assets; our ability to attract and retain qualified key employees; labor unrest; obligations under our defined benefit employee benefit plans requiring plan contributions in excess of current estimates; significant international operations exposing us to economic, political and other risks, including the impact of variability in foreign exchange rates; our ability to comply with governmental anti-corruption laws and regulations and export and import controls worldwide; our ability to compete in international markets due to export and import controls to which we may be subject; the impact of Brexit; changes in the laws and policies in the United States affecting trade, including the risk and uncertainty related to tariffs or a potential global trade war that may impact our products; costs of protecting or defending intellectual property; costs and challenges of compliance with domestic and foreign environmental laws; the impact of litigation and similar regulatory proceedings that we are involved in or may become involved in, including the costs of such litigation, risks associated with stockholder activism, which could cause us to incur significant expense, hinder execution of our business strategy and impact the trading value of our securities; and other factors beyond our control. These and other factors are discussed in greater detail in Part II, Item 1A, Risk Factors, of our Quarterly Report on Form 10-Q for the three months ended March 31, 2019.
Such forward-looking statements are also subject to additional risks and uncertainties related to the recently acquired ARRIS business, many of which are outside of our control, including, without limitation: the risk that we will not successfully integrate ARRIS or that we will not realize estimated cost savings, synergies, growth or other anticipated benefits, or that such benefits may take longer to realize than expected; risks relating to unanticipated costs of integration; the potential impact of the acquisition on relationships with third parties, including customers, employees and competitors; failure to manage potential conflicts of interest between or among customers; integration of information technology systems; and other factors beyond our control.
Although the information contained in this press release represents our best judgment as of the date of this release based on information currently available and reasonable assumptions, we can give no assurance that the expectations will be attained or that any deviation will not be material. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date made. We are not undertaking any duty or obligation to update this information to reflect developments or information obtained after the date of this report, except as otherwise may be required by law.
Kevin Powers, CommScope
News Media Contact:
Rick Aspan, CommScope