CommScope tweaked its guidance for Q1 2020 over growing concerns about how the outbreak of the new coronavirus is affecting the global supply chain and the company's manufacturing capacity in China.
CommScope's revised guidance anticipates an approximately $60 million hit on profits, equating to more than $100 million in revenues. CommScope's wider-than-normal guidance range for Q1 2020 now anticipates revenues between $1.9 billion and $2.1 billion and non-GAAP adjusted EBIDTA of $180 million to $260 million.
The issue for CommScope is that portions of raw materials and products are sourced directly from mainland China and affect a significant amount of the company's international shipments of products manufactured in China. There's little impact there for CommScope products for the US, as the company has already moved production for that piece out of China to sidestep US tariffs on goods coming from China.
Speaking on CommScope's Q4 earnings call today, company EVP and CTO Alex Pease noted that CommScope factories in China are operating at about 40% to 50% of capacity, but slowly ramping up to more normal staffing levels. He anticipates volumes recovering throughout the year.
"China is a significant piece of our manufacturing footprint," Pease said. "We're trying to factor that into our guidance the best we can based on what we know today…and actively working on contingency plans to mitigate that."
The good news is that CommScope's factories in China are, to date, not located in "problem areas" dealing with coronavirus outbreaks, Eddie Edwards, CommScope's president and CEO, said.
"We have a supply chain that is very strong in China that supports a lot of our businesses that are all over the country," Edwards added. "We're no different than any other player in the market."
Lower cable spending drives down sales in Q4
The cable business of CommScope, which wrapped up its $7.4 billion acquisition of Arris last April, continues to face headwinds, though the company does expect network spending to perk up this year as cable operators chew through deployed capacity.
A sore spot is the consumer premises equipment (CPE) business, which saw net sales drop 25%, to $824 million in Q4 versus the year-ago period. The decline was driven by weak spending by tier 1 carriers and cable operators and exacerbated by ongoing pay-TV subscriber losses.
The network and cloud unit also saw sales dip 32%, to $366 million, in Q4, again due to lower cable operator spending across multiple regions. Pease said CommScope believes this segment bottomed out in 2019. CommScope expects a "modest recovery" in cable infrastructure spending in 2020, though not at the high levels seen in 2018.
CommScope noted it expects to complete another major release of vCore, its virtualized platform for cable networks, and will be ready to deploy it in the early part of 2020.
Among other segments, CommScope said mobility solutions sales dropped 6%, to $366 million in Q4, impacted by a pause in spending tied to the still-pending merger of T-Mobile and Sprint.
Total Q4 sales were $2.3 billion, ahead of Wall Street's expectation of $2.28 billion. CommScope shares were down $1.65 (11.42%) to $12.84 each in afternoon trading Thursday.
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— Jeff Baumgartner, Senior Editor, Light Reading