Ladies and gentlemen, thank you for standing by. And welcome to the CommScope First Quarter 2020 Conference Call. [Operator Instructions].

Please be advised that today's conference may be recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Mr. Kevin Powers, Vice President of Investor Relations. Thank you. Please go ahead. .

Good morning. And thank you for joining us today, and welcome to our first 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 recent 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 first quarter 2019 results include historical ARRIS results reflecting certain classification changes to align to CommScope's presentation.

All quarterly growth rates described in today's presentation are on a year-over-year basis unless otherwise noted. .

I will now turn the call over to our President and CEO, Eddie Edwards.

Eddie?.

Thanks, Kevin, and good morning, everyone. Let's begin with what CommScope is doing to take care of our employees, communities, and our customers. Then I'll discuss the COVID-19 impact on both our industry and CommScope specifically, and how we are responding. .

From the outset of COVID-19 pandemic, the well-being of our team has been our top priority. In addition to rigorous health and safety protocols at our facilities worldwide, we quickly enabled work from home arrangements for many of our employees and introduced a paid leave policy for those directly impacted by COVID-19. .

We are providing wellness webinars and free resources to help employees and their families manage work and their personal lives through this period. CommScope is working with its customers, partners and organizations around the world to provide much-needed communications equipment and expertise to support critical industries.

For example, we assisted the Information Technology Disaster Resource Center with pop-up WiFi centers for emergency health care delivery, equipped school buses with outdoor WiFi access points for distance learning, and donated in-building wireless systems, face shields, and masks to hospitals in China, Europe and the United States.

We are offering free training in the CommScope infrastructure academy to customers and partners, to build product and technology knowledge. CommScope will also keep the Ruckus education and hospitality customers connected, while automatically adding 3 months to all support contacts (sic) [ contracts ]..

On a personal level, CommScope's employees are donating their time and talent to support relief efforts in our communities. Our fundraising is targeting hunger relief with CommScope matching employee donations to select global organizations.

Our employees can use special leave to support COVID-19-related community outreach efforts, including check-ins with retired CommScope employees to offer support. In this challenging time, CommScope continues to fulfill its purpose of creating lasting connections with our customers, partners, our employees and their families. .

Turning to Slide 6. As we consider the impact of COVID-19 and the shelter in place orders around the world, it's hard to imagine how challenging it would have been without digital connectivity.

Prior to this pandemic, we were already seeing global -- growth on a global level as networking technologies have moved from convenient to essential, for both business and personal use. In organizations around the world, many employees are working from home and remain productive, thanks to networking technology.

During the past 2 months, we have seen extreme demands placed on our customers' networks, with the busy periods growing from a few hours at night to most of the day. Given this shift to our remote workforce, we have seen the traffic patterns change to reflect a significant increase in 2-way communication.

This change drives a much greater demand for better latency and upstream capacity. In addition, as organizations continue to adjust to a remote working environment, we're also seeing an increased amount of experimentation in how to do things virtually rather than in person.

Many of these experiments will lead to new ways of collaboration, and those new ways of working will be optimized to make better use of network connectivity. .

CommScope is well positioned to capitalize on this as we provide vital connectivity to our customers. While we cannot predict the full impact of the pandemic on our business, we expect some stability during this uncertain period based on consumers' needs to stay connected and increase their consumption.

When we eventually reach the recovery portion of the curve, we believe network connectivity will gain even more importance due to the changes in how people and organizations connect. .

Now let's move to what we're seeing today in our business, beginning with service providers and starting with cable operators. For the most part, network applications are performing well due to the bandwidth capacity added over the last few years to support 1 gigabit and other services.

That said, the bandwidth surge, particularly on the upstream, has made cable operators aware of the general need to perform plant upgrades over the next several years. In the near term, operators are using traditional tools in enabling some of the existing features to provide additional capacity to better support the bandwidth surge. .

To that end, we observed a steady run rate of CMTS sales through the quarter, which resulted in more license revenue than we expected. In addition, some cable operators have decided to expedite node splits earlier than planned.

Finally, as we anticipated, today's network strain is causing some customers to reprioritize more advanced engineering projects like DAA and virtualization.

In this current environment, there is a focus on the trusted, traditional integrated CCAP technologies, and this places CommScope in a great position to help our customers maintain network performance. .

From a carrier standpoint, the impact of network performance has been less pronounced, with a significant amount of mobile traffic moving indoors, and in turn, to WiFi. This transition to WiFi, this shifts network performance requirements back to the wireline infrastructure.

As a leader in outdoor network connectivity technologies, CommScope is an essential partner to our service provider customers to enable best-in-class connectivity solutions around the globe..

Let's turn now to our Enterprise customers. As a reminder, most of the Enterprise end market sits within our Venue and Campus segment. The year began with a strong order pace in both infrastructure and networking, and we ended the quarter with a strong backlog.

As we look forward, our enterprise business is likely to experience headwinds as businesses continue to control spending, as access to the enterprise facilities remain restricted. To that end, we began to see orders soften as we exited the quarter. This continued into April and May. .

We are acutely aware of the strains on the global economy and the impact that it could have on many of our customers, particularly in the enterprise space. The remainder of the year is impossible to predict, given the evolving pandemic and the impact it's having on various industries. But what is clear is that the networks are being used differently. .

Now let's turn to the impact on our supply chain. During the quarter, we successfully implemented business continuity plans to mitigate significant disruption in our supply chain.

The diversity and resilience of our global manufacturing footprint was evident as we managed temporary shutdowns of our factories in China, India and Mexico to limit the financial impact and maintain supply. Today, most CommScope factories are fully operational, with our global output close to capacity, with Mexico as the exception.

Our Tijuana factory has resumed operations after a temporary suspension imposed by the state of Baja California, and [ Bermuda ] is currently operating at reduced capacity. In addition, although restrictions have been extended for India, we are approved to operate and are ramping operations steadily. .

We continue to maintain rigorous health and safety measures for all CommScope factories and distribution centers to keep our employees safe. We continue to work extensively with both our contract manufacturing and raw material supply base to minimize the negative impact on our distribution centers and manufacturing locations.

We use the flexibility in our supply chain to make appropriate decisions to minimize any customer impact as governments made public announcements in reaction to the needs of their locations. These supply chain partnerships have endured this test, and we work together to mitigate disruption. .

Looking ahead, while our business has proven to be resilient, we have seen strong order rates across certain critical segments. Due to ongoing market uncertainty created by COVID-19 and the associated economic impact, we are not providing specific guidance for the second quarter of 2020, and we are withdrawing our full year outlook.

However, we do expect the second quarter sales and adjusted EBITDA to improve modestly compared to the first quarter. Importantly, this outlook assumes no incremental supply chain disruptions due to COVID-19 and that our factories in India and Mexico continue to ramp as expected. .

accelerating ARRIS acquisition cost synergies where viable; adjusting our operating plan to reduce operating expenses in nonessential areas; reducing capital spending; evaluating what discretionary investments can be delayed until there is more clarity on what the future holds; and optimizing our liquidity position. .

In addition, we have adjusted the size and scope of our Home Networks business as cord cutting continues to accelerate and customers switch to over-the-top services. We expect the actions we have taken in Home Networks will result in approximately $100 million of annualized run rate savings.

We are confident that the enhancements we are making will establish a cost structure that will make us more competitive and efficient as we continue to generate cash despite the challenging top line environment..

While we manage through this new environment, the organization continues to make progress on our core operations. Within broadband, our outdoor cabling and connectivity business had a solid quarter, with the highest order input that we've seen in years. We saw strength in Tier 2 and Tier 3 North American markets led by the rural broadband investments.

Europe is strong across most markets, primarily due to government initiatives driving fiber to the home builds. In Venue and Campus, our "better together" approach is resonating with customers and driving cross-selling wins as we offer a comprehensive set of connectivity solutions with the breadth of our product base.

We've had several significant wins with large venues such as Allegiant Stadium, home of the Las Vegas Raiders. Orders have been placed and installations are underway. In addition, hyperscale data center sales nearly doubled in the quarter, and we're being very aggressive with our R&D investments to capitalize on our continued marketing opportunity. .

Our OneCell solution made significant progress at a Tier 1 North American operator. The Ruckus business continued its momentum as we launched our cloud program and expanded our WiFi 6 portfolio and our DAS group ended the quarter with a strong backlog as numerous stadium projects are in progress, including the home for the 2021 Super Bowl. .

Including with Outdoor Wireless Networks, 5G remains on track with our expectations. We're beginning to see increased demand for integrated antennas, particularly in Europe in connection with mid-band spectrum utilization, as 3.5 gigahertz and sub-6 gigahertz start to pick up.

With a portfolio of solutions that are upgradable to 5G, or are 5G ready, our Metro Cell business remains strong as network densifications continue to enable 5G, and we gain more and more approvals within municipalities. .

Lastly, turning to T-Mobile. We are incredibly excited to see the merger close with Sprint. This is a seminal moment for our industry as the combination creates a formidable North American operator, with an excellent spectral position, and they are poised to spend aggressively to build out a world-class 5G mobile network.

We expect CommScope to be a critical supplier as T-Mobile touches thousands of towers to optimize their network for their current 600 megahertz spectrum and Sprint's 2.5 gigahertz spectrum. All indications point to escalating activity in the second half of the year, and we're ready to get to work. .

I will now turn it over to Alex for financial results for the quarter.

Alex?.

Thanks, Eddie. This morning, I'll begin with a review of our first quarter 2020 financial results, and then highlight our cash and liquidity health. Following this, I'll discuss what we see as the potential impacts of COVID-19 and the proactive and swift measures we're taking in response. .

Turning to Slide 10 and our first quarter results. In the first quarter, net sales declined 18% year-over-year, which includes a 1% impact of unfavorable foreign exchange. As it relates to COVID-19, we estimate a negative sales impact of approximately $70 million due to supply disruptions.

Adjusted EBITDA declined $231.2 million (sic) [ to $231.2 million ], primarily due to lower sales volumes, particularly broadband and Home Networks. In addition, the quarter was impacted by approximately $30 million due to COVID 19. .

Finishing up the P&L, booked net interest expense was $149.1 million and excluding the amortization of debt issuance costs and OID of $6.9 million, net interest expense was $142.1 million. The adjusted effective tax rate in the quarter was 26.3%, in line with our expected range of 25% to 27%.

Adjusted net income in the quarter was $27.2 million or $0.12 per diluted share as compared to adjusted net income of $93 million or $0.48 per diluted share last year. The year-over-year decline in adjusted EPS is primarily driven by higher interest expense and diluted share count. .

Now moving to our segment results on Slide 11. In the first quarter, Venue and Campus Networks net sales were $469.5 million, including a $2.2 million adjustment related to purchase accounting. Net sales declined 6% as growth in North America was more than offset by declines internationally. The results were primarily driven by weakness in non-U.S.

indoor copper, partially offset by growth in DAS and hyperscale. Venue and Campus Networks adjusted EBITDA of $37.7 million grew nearly 87%. The significant growth was primarily from Ruckus profitability improvements as we implemented cost actions to build a leaner operating model. .

Outdoor Wireless Networks first quarter net sales were $348.9 million, a decline of about 11%. Despite lower spending from T-Mobile as expected, year-over-year net sales in North America remained relatively flat.

This was more than offset by declines in macro tower spend outside the U.S., predominantly in Latin America, Asia Pacific and Middle East regions. Adjusted EBITDA of $88.9 million declined 12% year-over-year.

Overall, volume declines and G&A spending increases were partially offset by gross margin expansion from a higher concentration of North American base station product sales. .

Turning to Slide 12, we'll focus on our Broadband Networks and Home Network segments. Broadband Networks net sales declined about 20% to $613.4 million in the quarter, including a $2.8 million adjustment related to purchase accounting. Adjusted EBITDA of $92.7 million was down 32.5%.

The adjusted EBITDA decline was primarily due to lower sales volumes and unfavorable mix. As a reminder, first quarter of 2019 reflected higher network capacity additions and upgrades. These investments began to soften quickly in the second quarter, creating a difficult comparison early in the year. .

Shifting to Home Networks. For the first quarter, Home Networks sales declined about 27% to $601.4 million, which includes a $500,000 adjustment related to purchase accounting. Growth in the broadband gateway and retail business was more than offset by the continued reduction in video sales.

Adjusted EBITDA of $11.9 million declined nearly 67% and was primarily driven by lower volumes, partially offset by favorable component cost, operating efficiencies and other cost reduction acts. .

Turning to cash flow on Slide 13. Adjusted free cash flow was a negative $43.1 million in the first quarter. As indicated in our previous commentary, we expected the first quarter to be seasonally soft and a net use of working capital.

However, I'll add that the diligent inventory management and execution from the team continues to benefit cash flow and helps steel the -- steer the quarter above our expectations. .

Turning to Slide 14. Let's review our capital structure and liquidity profile. As we enter into a period of market uncertainty, and as Eddie mentioned earlier, the company is taking decisive and swift actions to further strengthen our balance sheet and enhance liquidity.

From a liquidity standpoint, we ended the quarter with nearly $400 million in cash and $735 million in undrawn ABL availability, totaling over $1.1 billion of total liquidity.

Subsequent to the end of the quarter, on April 6, we drew $250 million off our ABL revolving credit facility as a precautionary measure to add cash on our balance sheet and preserve financial flexibility. We are currently holding this cash, and the ABL draw has had no short-term impact on our overall liquidity. .

In addition, to better optimize our cash position, we elected to pay the $14 million preferred share dividend to Carlyle in kind, for the issuance of additional preferred shares rather than cash.

As a reminder, we have the option to pay each quarter's dividend, either in cash or in kind, therefore, this is a cash preservation measure that we may also use at our discretion in future quarters.

Carlyle's ownership position in CommScope remains an important component of our capital structure, and we appreciate Carlyle's continued confidence in our long-term business strategy.

In addition to our strong liquidity profile, we're in a solid position to navigate the current environment with what we believe is a derisked capital structure that provides ample flexibility and safety. .

Since the close of the ARRIS acquisition just over 1 year ago, the company has repaid $616 million of debt, $600 million of which went towards the 2021 notes, nearest term maturity. Today, there is only $50 million remaining on the 2021 notes with our next maturity not coming through until 2024.

In addition, our debt stack was structured to be covenant light, meaning we are not subject to financial maintenance covenants. Our ABL revolver contains a fixed charge coverage ratio covenant of 1.0x, which we would need to test only if our ABL were close to fully drawn. .

Our ABL fixed charge coverage ratio was approximately 1.9x at the end of the first quarter, which provides us with very substantial EBITDA cushion above the onetime covenant. From a balance sheet leverage standpoint, we ended the first quarter with net leverage of approximately 6.8x.

I want to emphasize that our financial policy continues to prioritize the use of cash to pay down debt and to delever our balance sheet, and our long-term leverage target remains in the 2.0 to 3.0x range. .

Regarding debt payment plans for 2020, while we currently have ample cash on hand to fully redeem our 2021 notes, we will not be taking this step immediately. Given the significant business uncertainty that we face, considering COVID-19, we believe that maximizing our available cash and liquidity is the most prudent action in the near term.

We will evaluate our debt repayment options throughout the remainder of 2020 and make decisions accordingly as we gain more confidence around business performance and potential liquidity needs. .

Now turning to Slide 15, we'll cover the financial elements of our COVID-19 outlook and the actions we can, and have taken. CommScope has taken decisive action to leverage the resiliency of our supply chain and enhance our liquidity. We are extremely proud of our team and are confident in the strength of our economic model.

We also recognize that the risks associated with COVID-19 are fluid and difficult to predict, with respect to our manufacturing operations and end market demand, particularly in our enterprise businesses.

As we position the business in a dynamic and unprecedented situation, we benefit from a very flexible cost structure, with roughly 70% of our cost basis mostly variable. This gives our team the ability to manage profitability as demand conditions fluctuate and supply chain bottlenecks emerge. .

headcount optimization; freezing of additional hiring; reductions in marketing and travel spend; swift back office rationalization; a comprehensive R&D strategy review; reprioritizing investments; and a review of our overall business portfolio.

Furthermore, we have already reduced our 2020 capital spend outlook by about $20 million, and we are confident that we will exceed our $150 million in total ARRIS acquisition-related cost synergies 12 months ahead of schedule.

You have our commitment that the entire CommScope management team is proactively controlling what we can during the uncertain environment, and we expect to emerge a stronger company as a result. .

Turning to Slide 16, and a few additional thoughts on our near-term outlook. As Eddie mentioned, we're withdrawing our previously announced full year outlook, and we will not be providing guidance for the upcoming quarter due to the uncertainty regarding the COVID-19 pandemic.

We do expect our second quarter net sales and adjusted EBITDA to improve modestly from the first quarter, and this outlook anticipates incremental costs related to mitigating COVID-19 of around $15 million to $20 million.

As we evaluate our near-term outlook, we're confident in our ability to navigate current market headwinds, but we do acknowledge the business drivers will likely vary across our segments. .

We continue to have collaborative dialogue with our broadband networks customers. With the dramatic shift of even more bandwidth demand stemming from the home, network operators are looking to CommScope to help design the solutions for the short, medium and long term. This is evident in the strong order book we see across most major product lines.

In addition, we expect to see continued strength in U.S. Tier 2 and Tier 3 fiber deployments through rural broadband investments. Partially offsetting these positive trends will be operators balancing investment with internal cash flow priorities. .

In Outdoor Wireless Networks, the industry has much needed -- a much need added direction with the completed merger of T-Mobile and Sprint. We stand to benefit from our best-in-class macro tower antenna and accessory solutions.

Outside the U.S., we also remain excited for the building momentum we see in European antenna sales, especially to support 5G investments. Balancing this, the temporary displacement of municipal officials could delay the issuance of permits and impact the steady ramp we have seen in our Metro Cell business.

Additionally, COVID-19 has already started to delay some minor projects in much smaller international countries as well as in the Middle East, where a decline in oil prices is introducing uncertainty for our international customers. .

Our Venue and Campus Networks business continues to benefit from a strong backlog pipeline of stadium and large venue network build-outs. Hyperscale momentum continues with several exciting wins in our data center business, including Deutsche Bank's new data center build in North America.

However, there are some COVID-19-related delays as we are dealing with significant uncertainty with our core enterprise market. The negative impact will likely vary materially by vertical, and we expect the lower order trend that began in late March to persist into the second half of the year.

Regarding Home Networks, while the broadband gateway and modem demand remains relatively steady in the U.S., we're beginning to see signs of softness from international customers due to economic conditions and foreign exchange rate risk. .

For our video business, COVID-19 is furthering our video decline, as new video activations have been impacted from social distancing practices, prohibiting on-site technician activations required for new video subscriptions, and the lack of live sports further reduces demand for new cable video subscription from customers. .

I'll now turn the call back over to Eddie. .

Thanks, Alex. Before we open the line for questions, I want to thank our employees again for their fortitude, creativity, innovation, positive spirit and flexibility in providing essential services during these unprecedented times. Working as a team, we will continue to take swift and decisive actions to strengthen CommScope in the near and long term.

Despite the uncertainties resulting from COVID-19, we remain well-positioned to support network operators globally as we deliver our innovative products that are the backbone of critical communications infrastructure.

The Board and leadership, our team are confident that CommScope will successfully navigate through the current operating environment and emerge a stronger company. .

And with that, we'll now take your questions. And Jimmy, I'll turn it back to you. .

[Operator Instructions] Our first question comes from Simon Leopold with Raymond James. .

I wanted to see if maybe you could elaborate a little bit more on your exposure to various customer verticals, particularly within your Enterprise business. I know historically, the Ruckus business had decent exposure to a vertical, like hospitality, that might be challenged, also to cable.

But overall, help us understand your mix of customers by vertical, operators, financial services, hospitality, et cetera. That would be very helpful. .

Certainly, Ruckus -- the 2 strongest verticals are hospitality and education. I think we talked about some of the things that we're doing for education. I think it's been well advertised in the press that the hotel industry and gaming industry is challenged. So we would be -- we would see impact from that.

Our traditional enterprise, we deal with small, medium, large businesses, all -- and we have a leadership position there. We talked about the hyperscale part of that vertical is strong and almost doubled year-over-year, and so we have high confidence in our position there. So it's in the cabling and the MSO market, we deal with all the customers.

I think we covered in our prepared remarks, the challenge that some of our customers are seeing in getting into the homes, to do installs for video, and so that hurts our video business. We've seen also a heavy demand from the standpoint of throughput and the need to do more traditional CCAP-type installations versus alternative new technology.

And so that's good for us, and we saw that benefit in the quarter. .

So I think the strength of CommScope is its diversity. So we cover the whole spectrum of customers and a lot of what they do. And so we think we're well positioned there as we are on a global footprint from a manufacturing standpoint. Our guys have done a great job.

Our guys and ladies have done a great job during the course of this year, in resilience of seeing challenges across the globe on any given day, we adjust fully the manufacturing footprint of how we're going. .

Maybe just to put a finer point, though. I think Enterprises are less than 20% of your total business versus operators at probably more than 80%-ish ballpark? Are we... .

Let me help. So yes, I mean, Eddie mentioned the power of the diversified portfolio. So just to dimensionalize some of this stuff, you're right, enterprise is about 20%, give or take, of the overall portfolio.

If you break it down further and you think about which verticals are likely to be impacted pretty heavily, obviously, education and hospitality are a couple of verticals that we're watching closely. That's in the low single digits as a percentage of our total revenue.

You think about commercial real estate, that's in the low double digits, kind of, call it, around 10%, 11%. So you really do -- and those are percentage of the total revenue, not of that 20%. So you think about the verticals that are likely to be most impacted by this, they're a fairly small portion of the overall CommScope revenue allocation. .

And our next question comes from Amit Daryanani with Evercore. .

I guess maybe to start off with, I think you guys talked about a $70 million revenue, $30 million EBITDA impact from supply chain inefficiencies or challenges.

Any sense on how do those numbers look into the June quarter as we think about the June quarter expectations?.

Yes. So I can take that. So one thing that I want to make sure is very clear to everyone on the phone is that the impact that we called out, the $70 million and the $30 million is almost 100% supply oriented.

As Eddie mentioned in his remarks, that the order rates and the backlogs have been extremely strong, and our supply chain team has really just done a remarkable job mitigating this risk as individual countries are experiencing challenges and keeping our employees safe and getting people back to work just as quickly as possible in this new environment.

So it's all supply -- supply-related, which is fantastic. .

As we look into the second quarter, the situation is incredibly fluid. Eddie talked in detail about some of the challenges we're dealing with in Mexico, and that's one of the reasons why we've suspended guidance for the year.

So certainly, we would expect some ongoing supply constraints, both in the manufacturing footprint as well as the logistics network. But we're going to mitigate that just the same way we've been mitigating that in the first quarter. .

And then one last, just clarifying comment. I did mention a $15 million to $20 million impact in Q2, we'd already quantified. This is specifically for incremental costs that we've identified. And again, that's based on what we know today, and that certainly could change as we look out into the balance of the quarter and the year. .

Got it. That's really helpful.

And if I could just follow-up, how do I think about your ongoing OpEx run rate given some of the initiatives you're taking on right now? What does the future OpEx run rate look like going forward? And should we expect free cash flow to be positive in the June quarter?.

Yes. So again, in my remarks or maybe Eddie's remarks, we mentioned that we've taken, on an annualized basis, a run rate of about $100 million incrementally out of -- majority of that is OpEx. There's some cost of goods sold. But the majority of that is OpEx.

We're going to continue to take additional action as we respond to the events that are unfolding in front of us. We listed a number of those levers that we anticipate pulling. .

From a cash flow standpoint, Q1 is seasonally our low point. We're continuing to build cash at a healthy clip, and we expect that to accelerate as we get to the back half of the year. Our kind of cadence of the year is more back-half weighted, which was driven by a couple of things.

First of all, it's driven by our expectation at the beginning of the year that network operators would begin to accelerate their investments in the network as we got into the later part of the year. And then obviously, in this current environment, with the supply disruptions, we anticipate those recovering as we get into the back half of the year.

So that's kind of the cadence. In terms of the cash flow, we do expect Q2 to be positive. .

And next question comes from Rod Hall with Goldman Sachs. .

This is Ashwin on behalf of Rod. I was hoping you guys could quantify the impact of COVID-19 supply constraints on broadband networks profitability. And sort of related to that, can you comment about the gross margin trend in broadband networks and how you see that developing in Q2 here? And I have a follow-up. .

Yes. On the COVID impact, on broadband specifically, we're not actually breaking it down at the segment level. We've given the 70 and the 30 number in aggregate. I will say that broadband was one of the segments that was impacted. They manufacture the Access Technologies piece of that business in one of our Mexican facilities.

And so they were impacted later in the quarter. .

That being said, their order input has been extremely strong. And Eddie's remarks, he mentioned network operators accelerating some of their node splitting activities for network operators that don't want to interrupt the network physically. We're in conversations with how they increase capacity virtually, through increased licensing revenue.

We're working with customers to deliver that on a very flexible basis so that we can get them the network capacity they need as quickly as they need it. .

So we feel pretty good about the outlook for demand in the broadband, and we're just managing some of these supply disruptions. From a kind of margin trend standpoint, the mix of that business matters pretty significantly, to the extent operators are using more licenses as opposed to physical nodes, that would trend the mix higher.

And that is certainly a trend that we see unfolding in this environment. .

Okay. And my next question is on your DAS and OneCell growth.

I'm not sure if I heard this but can you quantify the growth in your distributed antenna systems and OneCell solutions? And maybe comment on how you see growth out -- in the rest of this year, particularly as it relates to Tier 1 North America operators?.

Look, we aren't going to talk about the rest of the year as we're not giving guidance. But OneCell has now been approved fully at one of the Tier 1 North American operators. We have multiple -- simultaneous multiple locations in the works, in the high 30s to 40s of active deployments today.

And so all the expectations that we have for this business are coming to fruition. I think that the people that use it and the people that are testing it see that it is as advertised. And we think we'll be a leader in the indoor portion of the business for wireless communication. .

It's good that with Ruckus, it's all interactive. We can bid over the same backbone and have a both licensed and unlicensed capability. But we have high expectations for what OneCell will bring us. .

And our next question comes from Jeff Kvaal with Nomura Instinet. .

I'm hoping that you can frame for us as to the best that you can, what we should be expecting for free cash flow either over the course of the year or maybe more generally, on what the run rate was? We know, of course, that you suspended the $400 million target.

But I mean, underlying that, it was kind of a $600 million run rate before that, if you correct for the $200 million pull in into 2019.

Can you give us some of the variables, or how we might frame our thinking about free cash flow either for this year or on a longer-term run rate?.

Sure. So I guess the way I'd answer your question is, we do expect cash to ramp through the balance of the year. So our cash generation profile will accelerate, will be positive in Q2. And then that will accelerate likely in Q3 and Q4. That would be our normal pattern. .

We continue to aggressively manage the balance sheet, and so we've taken inventory turns down. We're very disciplined on our receivables and our payables. We're actually actively negotiating with suppliers to tighten terms so we've been very proactive on managing the balance sheet. We did take down our capital spending by about $20 million.

So that's obviously a source of cash. And we picked the Carlyle dividend, which is another source of cash. So our history has always been to deliver very strong cash flow despite what's going on in the top line of the business. .

Some additional steps that we will take as needed is remove additional costs from the business to the extent we have to do that in respond to a soft top line environment. Obviously, the core driver of cash is going to be the annualized EBITDA number. I mean that's really what underpins that cash generation.

We obviously haven't undertaken any guidance for the full year. So I can't give you specifics on how we expect that to develop, but we do expect it to strengthen as we go through the year. .

Okay. And then secondly, it sounded as though you were suggesting that some of the cable operators, in particular, are thinking differently now about how they design their networks over a multiyear time frame.

And I'm wondering if that means you are more optimistic, perhaps, about growth in the former Network & Cloud business than you might have been, again, over a multiyear period. .

Yes. We've made advancements in our virtualization technique that we think is more economically beneficial to our customers. We also have the ability not to disrupt their business while a lot of this is done. We have a huge installed base. I think that everyone recognizes that, and we plan to exploit that to the best we can.

So we feel like we're making headways there. .

And our next question comes from Meta Marshall with Morgan Stanley. .

Great. Realizing we're kind of at the tail end of FirstNet, but it appeared some other kind of suppliers in the space have been noting kind of additional pauses.

So any change in behavior we should be thinking about the FirstNet business throughout the year? And then maybe just how you guys think about the USF extension plan to kind of help for rural broadband? And when we could potentially see some upside from that?.

I think, Meta, we had talked about, I guess, 3.5 years ago as to what we saw as the life of FirstNet, and I think it happened pretty much as we expected. This is sort of the tail end of their initial build, and we enjoyed a lot of revenue from that.

And so that will be a smaller portion of what AT&T's business would be this year, but they are still spending money, maybe not at the same pace. .

But to -- the second part of your question was a little mumbled. I couldn't -- or muffled. I couldn't hear it. If you could repeat it, please. .

Just the FCC's plan to kind of extend the USF for the additional $9 billion for rural broadband.

And just how you see that kind of playing out over the next couple of years?.

Oh, for rural broadband. Yes, that's a big part of what's happening today in the market for fiber. There's a lot of demand for fiber, higher or middle level fiber counts in the rural environment. We are well positioned there as a lot of our competitors as well.

That's going to be a strong business for the next several years as they continue to build out the rural environment. So that is a good part of our business. And I think I said in my remarks, it was a driver in the network cable and connectivity part of broadband during the quarter. .

And our next question comes from Sami Badri with Crédit Suisse. .

So my question is on T-Mobile and Sprint, and given the deal's recent closing, and considering some of the dynamics that we've seen in the telecom industry, do you expect T-Mobile and Sprint, and the anticipated demand uptick, to be noticeable in 2Q 2020? Or is this more of a back half 2020 dynamic that we should be looking out for?.

Well, we're not guiding as to when that's happening, but we do have orders. And the ramp should come in the second part of the year at a good, steady, growing pace. We're well positioned with T-Mobile. We've been a supplier of theirs for years. And so we look forward to their deployment of both the 600 and 2.5 gig frequencies that they have.

So it's -- they'll have a dynamic business there, and we look forward to helping them build it. .

Got it. And then my follow-up has to do with your demand slide on Page #16 of the slide deck. You highlighted the hyperscale data center pipeline is strong, but it is seeing some supply constraints then. I was hoping you could elaborate.

Are those constraints predominantly from CommScope's factories and any kind of supply-related issues? Or is that more tied to industry slowdown and municipality permitting slowdowns for construction or development of sites? Can you just give us more color on what's actually going on there?.

Our factories are -- we have a lot of factories that participate in that. I think our demand is good there. We've seen a continued build from most of the hyperscale folks. The footprint that we have and the build that we've talked about in the past on multi continent, simultaneous builds is still going on.

And so we continue to see good demand in that portion of the Enterprise business. .

And our next question comes from Shawn Harrison with Loop Capital. .

Alex, I was hoping if you could just put a finer point on terms of the cost savings, in terms of $100 million of cost saves or cost out within the Home Networks business. And then also the commentary of taking other costs out of the portfolio.

I want to make sure that I'm not kind of double counting what's coming out of Home Networks versus some of the response stuff. And that's maybe temporary related to COVID-19. .

Yes, sure. So the $100 million is almost entirely headcount-related costs. What we did was predominantly twofold. The first was basically downsized the U.S. video R&D footprint pretty dramatically. So it was about 60% or so of the U.S. R&D footprint.

Some of that will be replaced in lower-cost locations, but the vast majority of that is coming out of the business. The second thing we did was take a look at non-core projects. So projects that weren't directly supporting some of our largest customers and curtail some of that spending.

We also took a hard look at some of the marketing -- some of the marketing spending and a little bit of the sales spending that we were doing. But like I said, the vast majority of that cost takeout was within kind of the R&D footprint for the Home Networks business. .

In terms of additional levers that we can -- that we are looking at and we can pull. Obviously, in the quarter, we completed a pretty large-scale migration to a shared services footprint within the finance organization. So the team did a really good job moving from some of our U.S.-based back-office support to our operation in Goa, India.

And then we also moved some of our European accounting and finance support to our operation in Taiwan, and the team accelerated all of those activities in the wake of this work. We're doing a lot of work on system optimization. .

Obviously, in this environment, sales -- I'm sorry, not sales, travel expense is down dramatically. That's typically about $100 million annualized spending bucket, which will be something materially less. We're looking at all of our marketing spending pretty aggressively. So those are the types of actions that we're taking. .

The last piece is, of course, in this demand environment, we're taking a hard look at our R&D spending to make sure that the projects that we're investing in are projects that generate ROI and the sort of puck hasn't moved on us here. So the other thing that I'll point out about the $100 million that we've referenced is that's a run rate savings.

That's not reflected in the 2020 P&L. The incremental 2020 P&L is, I would call it, roughly $30 million, $35 million of that. So hopefully, that gives you some clarity. .

That's great. And then, Eddie, I was just hoping to get your perspective on cyclicality, particularly related to the Enterprise business. I know in past cycles, it would maybe take 12 to 15 months where you would -- you'd start to see some initial slowing and then maybe materially slows 12 to 15 months thereafter.

Is -- has the portfolio changed? Or are there new technologies that maybe alleviate some of that pressure as you go into '21, potentially?.

I think what we've seen is -- is what I said earlier in the remarks is that we had strong demand and finished with a strong demand. At the end of the first quarter, we saw things in April starting to slow down, and we saw that continue in May. A lot of commercial real estate is a big part of what that business is.

And that's not the most attractive thing today. And so we see some softness there. .

Copper is not a growing business. It's also impacted by the commercial real estate part, also. The hyperscale part is exciting, and we started from behind, and we're getting much more of a position in that. And so we're happy with that. But it is a very economic-oriented business.

People spend money, and a lot of that business environment spend money when their things are good. And right now, things are challenging. And so I think that there's a lot of spend on hold or slowed. .

But what we saw at the end of the quarter, and I think from our distribution partners, they had good backlog. And maybe we'll eat through some of that, and we'll see how long this pandemic lasts, and -- as things then turn around. But we have a global business.

Some parts of the market are reacting a bit differently, but it is a challenged part of what the portfolio is right now. .

Next question. .

And our next question comes from Steven Fox with Fox Advisors. .

Just a couple of questions. Eddie, just a follow-up on that. When we think about commercial construction, and your products going in, I assume we're still thinking that ongoing projects get completed at some point this year. And then we're -- we should be more concerned with what the backlog looks like next year.

And along those same lines, obviously, there's a lot of puts and takes in terms of where you benefit and maybe where you get hurt a little bit.

But is there any math we could do around, as maybe work and social norms transfer from office to home, what the net effect could be on CommScope over, say, a 12- to 18-month period?.

I'm not sure we can tell you how to do math on -- that would be somewhat similar to guidance, I guess. But we haven't seen any cancellations of any orders that have been placed or anything like that. The business that goes into a lot of the Venue business that is in concert with our wireless business is pretty robust.

People are still building, and I guess under the assumption that attendance at sport venues will continue. So that part is still out there and viable. .

So no order cancellations to date that I know of. And it's just -- it has slowed in the last 6 weeks after exiting the quarter with a strong book, and we're out there. It's hard to go call on customers when you can't get in their building. And so we're having to adapt to that. .

Yes. I'll just try to give you a couple of numbers to do the math if you want. So as you think about people shifting to a work from home environment or a more virtual environment, as Eddie mentioned, we're seeing significantly increased demand on the network, particularly in terms of increased need for lower latency and more upstream capacity.

So that's driving network capacity additions. And we think those network capacity additions will persist because people are going to continue to work more in this virtualized environment.

That portion of our business is about 40 -- roughly, call it, 40% to 50% of our business is tied to those types of network capacity additions, whether it's on the wireless or the wireline side. So that ought to help you. And then on the project point, it is true, none of our projects have been canceled. I wanted to make sure that was clear. .

And our next question comes from Samik Chatterjee with JPMorgan. .

I just wanted to start off with the Outdoor Wireless Networks and more focused on the densification efforts here. You talked about strong sales continuing from Metro Cells, but at the same time you're seeing lower cellular usage as people are staying home.

So I'm just wondering what -- in your discussions, what's driving service providers to stick to their densification plans for this year, particularly given the lower activity? And then I have a follow-up. .

Well, I think the densification is something that's necessary for the -- for 5G to work in a better environment. They are -- a lot of it's our poles business that is continuing to grow. I think we mentioned that there is some push back from a standpoint of getting approvals in some areas. But it is still a vibrant business.

We have a very good position in there, a fully functional cell tower, looks like a lamp post. And so those things are happening. I don't think that people are stopping to build for the future.

I think that they see the dynamics of having a more robust, lower latency network is critical in the environment from a work for home, as you have people dispersed in a whole different way. We're going to see this environment change, I think, for the future after this passes. We'll see where people work and what their needs are.

So I think a more robust network is absolutely critical. And I think that our Metro Cell products support that. .

Got it. And if I can just follow-up on the -- you mentioned, and kind of -- you're seeing a benefit here as network upgrades are being done by the cable customers and that's benefiting your Broadband Networks group. Just wondering if you have any visibility of how long do you think this kind of tailwind persists.

Is this more kind of a pull forward of the spending plans for the year? Or is there a more sustainable kind of upside that you can see coming out of this?.

Could you repeat your question? I couldn't hear you. .

Sure. So my question was on the network upgrades that are benefiting you in the Broadband Networks group, as more bandwidth gets kind of enabled.

And so how long do you think that persists in terms of like, is this more of a pull forward of the customer spending plans for the year? Or is there more sustainable upside to this?.

I can -- I'll take that. .

I think -- let me -- I have a couple of things. One is we have a huge installed base. We have a lot of devices that are in the field. And so part of that is selling the licenses that go with what's already been installed. Also, our solutions today, more traditional CCAP splitting, disrupts the network much less than other applications.

So we see a benefit from that. And I think, thirdly, I talked about, we have made advancements in our virtualization product. So I think that as the market opens back up and continues to be in demand, we'll see a benefit from that. .

And I think, Alex had something he wanted to add. .

No, I think you hit all the high points. I personally don't see this as a pull forward in demand for all the reasons Eddie mentioned. And then on top of the reasons that Eddie mentioned, to my earlier comments, I think you're going to see a fundamental shift in the way the networks get used, which benefits us for the long term. .

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Eddie Edwards for any closing remarks. .

Okay. We thank you for attending today, and I want to -- I appreciate your questions and your continued interest in CommScope. .

I want to reiterate the appreciation that we have for our people, the resilience that we've seen, the herculean efforts of our people to serve our customers well, and to minimize this disruption that we see. We also wish all the people on the call, good health and stay safe. .

We'll talk to you next quarter. Thank you very much. .

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect..