Why Is CommScope (COMM) Down 42.4% Since Last Earnings Report?

A month has gone by since the last earnings report for CommScope (COMM). Shares have lost about 42.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is CommScope due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

CommScope Q4 Earnings Beat Estimates, Revenues Up Y/Y

CommScope reported decent fourth-quarter 2019 results, with the bottom line and the top line surpassing the respective Zacks Consensus Estimate. That said, the Hickory, NC-based communications equipment company’s GAAP net loss significantly widened on a year-over-year basis.

Net Loss

On a GAAP basis, net loss for the December quarter was $450.5 million or loss of $2.32 per share compared with a net loss of $23.2 million or loss of 12 cents per share in the year-ago quarter. In the reported quarter, the company recorded $376.1 million of goodwill impairment charges related to ARRIS reporting units. In 2019, net loss amounted to $973.2 million or $5.02 per share against net income of $140.2 million or 72 cents per share in 2018.

However, fourth-quarter adjusted net income came in at $106.6 million or 46 cents per share compared with $99.8 million or 51 cents per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 12 cents.

Revenues

Quarterly net sales increased 117.3% year over year to $2,298.7 million owing to a contribution of $1.33 billion from the ARRIS acquisition (which was completed on Apr 4, 2019). The top line surpassed the consensus estimate of $2,287 million. It should be noted that on a combined-company basis, net sales declined 19.2% year over year. The downside indicates lower results across all segments and geographic regions. The decline was mainly due to lower sales to cable operators. For 2019, net sales surged 82.7% year over year to $8,345.1 million owing to the contribution of $4.03 billion from the ARRIS acquisition.

Quarterly Segment Results

Net sales in Connectivity Solutions were down 9.1% year over year to $605.9 million due to lower sales volume to cable operators and carriers. Sales declined in all geographic regions. Operating income declined 24.9% to $28.9 million primarily due to lower sales volume.

Net sales in Mobility Solutions totaled $365.6 million, down 6.4% year over year due to a pause in spending related to the pending merger of two large telecommunications customers. Sales declines in the Asia-Pacific and CALA (Caribbean and Latin America) regions were partly offset by increases in the EMEA (Europe, Middle East and Africa) and the North America regions. Operating income increased 116.5% to $23.5 million driven by lower impairments, restructuring charges, transaction and integration costs and intangible amortization expense.

Net sales in Customer Premises Equipment (CPE) came in at $823.6 million, down 25.1% year over year on a combined-company basis due to reduced cable operator spending. Sales declined in the North America, CALA and EMEA regions, slightly offset by increased sales in the Asia Pacific region. Operating loss was $174.8 million, negatively impacted by a goodwill impairment charge of $192.8 million.

Net sales in Network and Cloud (N&C) were $366.1 million, down 31.8% year over year on a combined-company basis due to reduced cable operator spending. Sales declined in all geographic regions. Operating loss was $166.4 million, negatively impacted by a goodwill impairment charge of $142.1 million.

Net sales in Ruckus equaled $137.5 million, down 9.1% year over year on a combined-company basis. The metric was primarily impacted by a reduction in service provider spend. Sales declined in all geographic regions. Operating loss was $50.5 million, affected by a goodwill impairment charge of $41.2 million.

Other Details

Overall, gross profit was $736.2 million compared with $381.7 million in the year-ago quarter. Total operating expenses increased to $1,075.5 million from $332.4 million. Operating loss was $339.3 million against an operating income of $49.3 million in the prior-year quarter’s figure. Adjusted EBITDA was $323.6 million compared with $196.6 million in the year-earlier quarter, up 64.6%.

Cash Flow & Liquidity

In 2019, CommScope generated $596.4 million of net cash from operations compared with $494.1 million in 2018. As of Dec 31, 2019, the wireless and broadband network technology company had $598.2 million in cash and equivalents with $9,800.4 million of long-term debt compared with the respective tallies of $458.2 million and $3,985.9 million a year ago.

Q1 Outlook

Owing to the uncertainty regarding the impact of the coronavirus, CommScope has provided a wider-than-normal guidance for first-quarter 2020. Given that a portion of its raw materials and products are sourced directly from mainland China, and a significant amount of its international shipments are manufactured in China, the company is factoring in almost $60 million of negative impact in first-quarter adjusted EBITDA guidance.

For first-quarter 2020, CommScope expects revenues between $1.9 billion and $2.1 billion. Adjusted EBITDA is projected in the range of $180-$260 million. The company anticipates loss per share of 88-89 cents, based on 195 million shares as well as non-GAAP earnings per share of 3-18 cents, based on 236 million shares.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -91.25% due to these changes.

VGM Scores

Currently, CommScope has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise CommScope has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.