CommScope at UBS Global Technology and Services Conference - Final
Corporate Participants
* Ted Hally CommScope - EVP and Chief Commercial Officer
Conference Call Participants
* Amitabh Passi UBS - Analyst
Presentation
AMITABH PASSI, ANALYST, UBS: Okay, I think we will go ahead and get started. Thank you for attending our 2010 conference.
My name is Amitabh Passi. I am the covering analyst at UBS for CommScope. And it's my pleasure to welcome them back again this year.
Presenting from the Company will be Ted Halley. He is the Executive Vice President and Chief Commercial Officer for CommScope.
TED HALLY, EVP AND CHIEF COMMERCIAL OFFICER, COMMSCOPE: Thanks, Amitabh. Good morning, ladies and gentlemen, and want to thank the UBS team and Amitabh for inviting us and giving us the opportunity to present to you today.
The forward-looking statement looks worth reading. But all I would say is my presentation is going to be very forward-looking, looking out into the future and opportunity in the future. So of course there are risks with projecting and predicting the future. So any of you who want to follow us, please look up our latest SEC filing.
For my presentation, I'm going to give you a quick overview for those not familiar with CommScope, a very brief overview. I'll then talk a little about our various business segments, looking at the market opportunities going forward and the three main segments that we operate in and hopefully there would be a few minutes for questions afterwards.
CommScope is a global corporation, with some 11,500 employees in locations throughout the world. We have got factories, manufacturing facilities and R&D labs in all our markets; in the Americas obviously, Europe and Asia, particularly India and China. And we have research teams and engineers around the world, all addressing the needs of our customers in the various segments.
We see ourselves as solution innovators in everything we do. Very proud to have a portfolio of over 3000 patents in all the businesses that we run, and that number is increasing. So we see innovation and product improvement and solution improvement as a key strategy going forward.
I'm not going to deal at length with any of the financial performance of the Company, other than to say our '09 sales were $3 million. You can see roughly, we operate in three broad segments, wireless being the biggest, which is made up of WNS, which is Wireless Network Solutions.
That's really the active side of our wireless business. And then ACCG, which is the (inaudible) which is the cable, microwave, [cabinet] and cabling systems. They together represent about over 60% of our '09 revenues. And enterprise, which is the second-biggest segment, addressing data centers and structured cabling solutions in the enterprise, over 20%. And finally, the really legacy business in CommScope has broadband which represents about 16%, which addresses the CATV market segment.
One thing we're very proud of is our operational performance over the years, and you can see here our cash flow has grown from operations throughout the years, and that represents our ability to manage through any particular business environment. I just [want to realize] that one of the strengths of CommScope is continuous cash generation.
Now I'm going to focus a little more on the product segment and describing the opportunity for each of the business segments over the next 20 or so minutes. If you look at the -- for those of us who like network diagrams, this is really meant to kind of illustrate where we operate.
And all I would say is at a very, very high level; whether you are at work, whether you are on the go, moving around on mobility or at home; there's some parts of CommScope probably in the network providing that service to you. I would say it would be a tough job not to find a CommScope presence in any of those solutions that offer you service at home or on the go or at work.
And at the highest level, we strive to develop and deliver vital connectivity solutions for communications infrastructure in each segment we operate in. And the network diagram here really illustrates where our strength is.
We don't provide the core switching in any of these networks. We generally will provide access to. So if you're at work from your desk, connecting you to the data center in your enterprise. If you're at home on the Internet, you may be going into one of the data centers that provides your application when you're surfing the Web. And certainly in mobility, we provide the infrastructure, the ecosystem that allows you to get onto the network when you're making a call or browsing, using data applications in a wireless or mobile scenario.
So I'm going to focus a little more now on each of the segments, and I have a couple of charts here on our biggest segment, the wireless one. And really I'm going to talk more about the future, but a couple of comments in terms of immediately what is driving this business.
And you'll see a common theme. It's data, data, data; is driving the growth in all of the segments. So I'll come back and repeat those again.
But I think the CTO of Verizon was quoted recently as saying, you know, there's so many statistics, I thought this one was a really simple one to grasp and get the enormity of what is going on in terms of data applications. And he said, "Over 100% increase per annum for the next five years."
So on a compound rate, that's just a huge growth. Probably like a lot of estimates, there's more and more devices. That's probably in five years time, we look back and say; well, that was a conservative estimate.
I don't think anyone argues that that's what's driving it. And we call that the mobile Internet has finally arrived.
It's not just e-mail. People -- we want access to everything the Web has to offer, whether you are a consumer or a business user in the enterprise. And the best way to get that of course is in the wireless world.
And CommScope provides a variety of solutions. With our acquisition in late '07 of Andrew, we provide a complete RF subsystem. So carriers around the world have to build base stations essentially to provide access onto the network to allow you to make your calls.
And you can see here, the diagram here really illustrates the most comprehensive range of products, from cabling to filter products, combiner products, cabinets at the bottom of it. We work with the global OEM. This is an ecosystem will that allows the base station to function on the site.
And I will talk a little more about waves of technology and why we see that as opportunity, and what is the next coming wave. So the next couple of charts will really cover that.
So if I go on to it, you can see in this chart, some industry leaders like to talk about tsunamis. To me, a tsunami is bad news because it washes everything away.
I think in our industry, and this has been true of the wireless industry since it started going digital in the early 90s. You have seen waves of technology come in, and they're actually overlapping.
And the good news there is you see some regions in a 2G growth stage, other regions about to go into 3G. And like here in North America, you're seeing a lot of activity in going to 4G, where virtually all the major carriers have made strong position statements on what technology theyr'e going to adopt, when they're going to launch it.
And the exciting thing for us is each of these technologies requires products and solutions sets to work. So, our expectation in North America, is we're seeing growth this year and we will see that growth continue into the next year, as the major carriers in the US revamp their networks and either launch 4G before the end of the year, or in fact then go to a 3G plus, and have an LTE-ready network, which means they can position themselves to launch 4G services rapidly in a competitive market. So a very exciting marketplace right now, one of which we are enjoying and we supply equipment to all the major carriers in North America.
I was going to talk about some of the other markets where there's waves. On the last chart, you saw me talk about India, a very good market for us traditionally, very high buildout.
In India, they have been adding 10 million to 17 million, I think was the highest number per month, new subscribers, but in a 2G environment. Now India has had a security challenge which it's resolving in the first half of the year.
So revenues for that market slowed down dramatically. We expect that issue is being resolved, and should be resolved by the second half of the year where we will continue to service the market with 2G products.
The exciting thing in India is they have also just completed a 3G license option. All the successful vendors are existing customers of ours, or virtually all of ours. And they will be preparing themselves for a 3G network rollout, presumably first of all in the metro centers.
It's primarily going to be driven by the large population and the users, business users in that environment. We expect that spectrum to become available to them probably either at the end of the third quarter or the beginning of the fourth quarter.
So again, they will start to roll this out in a wave. You know, you can't roll out a network in one quarter. It's going to take you a long time, from 12 months to 18 months, as the market matures.
We would expect that you'll see in India, continuing to add 2G users as a huge rate in world terms, but now start to migrate some of their user base over to 3G services and raise the ARPU level and the use of smart phones and (inaudible) devices etc. is going to continue in that market. So we have a good presence there and we expect to benefit from that level of investment going forward.
So as I say, these waves go on -- and I'll kind of talk about some of the other territories here. I'm going to spend -- China, quickly, last year they launched 3G. We saw big spike in revenue.
We expect two of the major vendors will go out to tender in July for [ORS] site equipment to further grow their 3G. We're supplying equipment to them on an ongoing basis, and we think we've got some good solutions for them taking that forward.
And we really see China now starting to mature as a 3G base. the iPhone for instance, China Unicom have taken up. Everyone was skeptical at first because the price of iPads, or iPhone I should say, started in China at $1000.
It's now more of a norm, and a lot of these metro areas and people in China want these devices and are using them today. So we see sustained growth in China, but it's a wave of 3G, and China hasn't yet talked about 4G. So they are just beginning to position themselves for 4G.
Europe, on the final wave, Europe today is a mature 3G market. It's our second biggest single market. We don't see any sign of all the news you read about defaulting countries.
That's not really affecting our business. It's a mature market. These networks are growing at a mature rate, low level of growth rate.
Right now Europe is starting to go into LTE trials, and I think from various major carriers in Europe, they see the LTE rollout in some cases only beginning in 2012. Vodafone has been talking publicly about their plans.
So that wave will probably be a small ripple this year and next year, as trials go ahead, they look at the equipment they've got, and then they would expect to go commercial probably in a timeframe a little later than the US. That may all change in a competitive market, but that is our expectation.
So I hope that kind illustrates how we see the markets, but also how we see our business in wireless, essentially being these tidal waves coming in and some of them overlapping. It's all good news because generally speaking, the waves add to themselves. So technology breakthroughs are good news for us.
I'll go very quickly through these. Today, a cell site tower looks like the one on the left. It's fairly basic, a lot of metal, a lot of (inaudible) with the base station down at the bottom. That's been a very nice business for us today.
But as LTE comes in, this 4G, you start to add elements. So in today's environment, they're adding new antennas, they may put in a new cabling system. But essentially, they're reusing the existing infrastructure.
And for any of us with an engineering background, that's very good in the initial stages of service offering, reuse your existing infrastructure, add more things to it to get the service going. But ultimately if LTE is to be successful, and really deployment of these devices will have to become a lot more elegant, a lot more of them closer together to meet the traffic demands.
Really what I'm trying to illustrate here is, we are active in the US and in other markets in LTE trials. We're learning a lot about the technology, but we do expect over time to evolve our products to be more elegant, more cost competitive for the user and we're tending to look at it's more of a complete solution set than a whole range of simple devices that you all plug and play together.
So we see the future of an evolving LTE kind of scenario. You've got an artist's impression of a much more aesthetically pleasing device, but there should be a lot more of those in the future as 4G rolls out over the world, to get service that you would all expect.
So this next chart kind of illustrates that. Right now, we're in this phase one, where really the number of sites etc. is pretty modest and some of the carriers have talked about their plans ultimately and they're only LTE in certain markets.
But this will be successful just like 3G was. In the beginning, there was a learning curve, devices have to be available to support the service. The infrastructure has got to be there first to allow the devices to work. So you get this kind of snowballing effect and then the device manufacturers start to incorporate the technology.
And if the tariffs are correctly done and there is an incentive, you start to see a rapid ramp up which means more cell sites and finally, what we think is the global mobile Internet, starts to mature. Now this doesn't happen in six months.
I mean, I've been around two of these waves and typically from start to finish, you are talking about a decade, when you go back and look at it. So that's why we are so excited about this as an opportunity.
This is a wave that's going to build and build. It's not a tsunami. It just doesn't come in in one day and ebb and cause a lot of destruction. So we can manage the situation well, but it's very exciting for us, and our engineers are furiously working and building the technology to get these trials going.
Now I do want to just mention one -- this is keeping kind of in tune with what's going on in the world. As you know, the World Cup soccer event is happening, starting I think this weekend. America is playing England and might win, so please watch it.
You know, what's good about this today is we also have a part of our business today that is RF applications. We call it wireless innovations.
This is how do you get RF into public venues. So 10 of the venues in the World Cup are supported by CommScope Solutions, Andrew Wireless Solutions, and they are going live as we speak.
You ask, why you want it at an event? I think what you find at these events now, people are taking their smart phones and taking photographs and taking videos, and then instantly e-mailing them home.
This is a new phenomenon. It's like a wireless twittering, if you like. I'm here and it's exciting. All of that drives traffic on the networks. That's why these people running the stadium realize they've got to put the infrastructure in now.
So we're celebrating that, but also here in the US, as you know, AT&T has announced that they're going to cover over 400 public events arenas over the next period, and we are working with them on providing -- one of several vendors supporting them. But we've actually cut over the first couple of those, handed them back to them.
It's a very exciting area and it's for the same reason. People want to celebrate at these events and then the messaging home. So that specific application area actually is a very strong area of our business, and we're taking advantage of it and enjoying the fruits of that.
So on wireless, I'll move on a little bit to enterprise. Second biggest segment, very exciting. We had a great first quarter, and the growth drivers here I have to say is data, data, data.
We've got several things listed here, but what's happening in the enterprise environment is two things. One, those enterprises who are building major data centers, because they are either offering service to their customers or they're just building data centers for their own internal applications, some of the big Fortune 1000 companies. And that is our strongest growth area right now.
And we see that growth rate sustained going into next year. Very exciting, you know, how many server functions can you put in in so many square cubic feet. They're becoming more efficient, they're looking for structured cable solutions to connect all these.
And CommScope is the leading vendor in many of these areas. So we are seeing that, but we're also seeing many of the Fortune 1000 now beginning to upgrade their networks.
So within the building, the office environment, we are also seeing upgrades continuing to grow at a good rate. I have to say, for this venue, one of the interesting statistics was the finance sector used to be our number one sector, and it dropped to number three, which I guess is no surprise since there wasn't a lot of CapEx internally.
But we're actually seeing growth within our finance segment now, which is also a good indication that the CIO's putting in infrastructure to prepare them for the future data applications in the banking and finance area. So maybe that's a leading indicator.
I know everyone's a little nervous with the market economies around the world. But I see these things as leading indicators. So a little bit about what we do there.
We have launched one major initiative I want to talk about, and it's called Wired for Wireless. We see the mobile Internet now coming into the workplace. And as I look here, I see someone using a tablet here. I don't know if it's wirelessly connected. But I bet you it is, he's nodding at me, it is.
Well you're talking to the right people. We can help with connectivity, either from the hotel here or in your business environment. And we think Wired for Wireless is an opportunity going forward.
Because frankly, a lot of enterprises, you don't have the service internally. It might work outside the building, but when you go back home to your own office, depending on how much infrastructure is in, you might find that on a basic cellular basis, you don't get service inside.
So Wired for Wireless is really a proposition of bringing what I just described in these public venues inside into the enterprise. We have just launched that in the first quarter, and we think at a lower incremental level, the building owner or the enterprise owner can easily prepare his network for the new mobile Internet user. That is the enterprise.
Okay, one final chart on our third segment. This is the legacy part of CommScope. It services the CATV segment. Traditionally that has been a mature market with growth rates that are quite modest, mainly kind of a maintenance mode.
But going forward in that too, you have the ongoing challenges of migrating their networks to meet the needs of this convergence. So the data user, the Internet provider, that element of their business is a significant part of their business now.
And as you are seeing the convergence of both applications, video on demand, etc.; they are looking at architectures that will meet the needs, and you're seeing the start of looking at hybrid fiber type solutions where they've got bottlenecks in their network and they need to upgrade. And again, CommScope is reinvigorating a whole range of products in that area to match the hybrid fiber needs of those customers going forward.
Lots of challenges there in the regulatory environment as you know. A lot of talk about net neutrality and what challenges they meet that may impact this. But we think that convergence strategy in the CATV, MSO service provider; also they're looking at mobility applications as well.
So as CommScope address all these segments, we're able to bring all that technology to this customer segment, and that is one of the exciting things because we think as they make decisions to branch out into mobility, which some of them have, then we can take advantage of the opportunity that is offered to us as a Company.
So that's a quick overview, how we see the market environment. It's obviously testing time. But through all that, I hope I demonstrate to you that you have to take a longer view than the next quarter when you're looking at technology momentum.
And all I would like is one word to leave you with is data, data, data; the mobile Internet. This is a space that CommScope is well placed to meet. It's a global phenomenon, it's happening to varying degrees in different continents, in different countries within the continents.
But those waves are going to happen, and it's over the next five or six years, this is loads of opportunity. One market recession isn't going to stop this wave, it's inevitable.
So we think we have a sustainable competitive advantage, in that we operate in all these segments. We think all of them are looking at convergence as an important part.
We're now better organized [to meet] all our product divisions serve each of the market segments. That is relatively new for CommScope. We launched that in January.
Geographically, we are a global company. We are in all the major markets with labs and with factory facilities, so we can meet the global demand. And we believe that we are well positioned to take advantage of all these opportunities that are surely going to come at different paces and different rates in different markets. Thank you.
Questions and Answers
AMITABH PASSI: I think we have a couple of minutes for questions if anybody has any.
UNIDENTIFIED AUDIENCE MEMBER: (Inaudible question - microphone inaccessible)
TED HALLY: Well you can look at it as an opportunity, or it's a time for kind of rationalization. But in general, some of the big players, when they consolidate, we benefit from more business with them.
They perceive us as having critical mass. As these operators get big, it's important that they have suppliers that can meet their worldwide needs, but meet them fast and dependably.
So that's on the positive side. So sometimes it's a great thing. But I always have a personal instinct.
Deregulation is also good, because having new types of business models come in, stimulate the whole thing into activity, like the 4G activity, which -- now you have devices which are stimulating and driving. We now have tools we can use to drive traffic. So overall, I would say we welcome it, but it has its challenges as these companies have to rationalize their operations, etc.
UNIDENTIFIED AUDIENCE MEMBER: (Inaudible question - microphone inaccessible)
TED HALLY: Consolidation (multiple speakers) what have you seen recently? Generally in our segment, there hasn't been a lot of consolidation. In fact, you could say CommScope is the biggest one, with the acquisition of Andrew two years ago. This is now in the, what I would call the connectivity space.
AMITABH PASSI: Okay, I think we are out of time. We'll have a breakout session in room 404.
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