Commscope Holding Co Inc (COMM) Q1 2021 Earnings Call Transcript

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Commscope Holding Co Inc (COMM -13.71%)
Q1 2021 Earnings Call
May 6, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day. Thank you for standing by. Welcome to the CommScope First Quarter 2021 Results Call. [Operator Instructions]

I will now like to turn today's call over to Russell Johnson, Vice President, Treasurer, Investor Relations. Please go ahead, sir.

Russell Johnson -- Vice President, Treasurer and Investor Relations

Good morning, and thank you for joining us today to discuss CommScope's First Quarter 2021 Results. With me on today's call are Chuck Treadway, President and CEO; Alex Pease, Executive Vice President and CFO; Morgan Kurk, Executive Vice President, CTO and Segment Leader for Broadband Networks; and Bud Watts, Chairman of the Board. You can find the slides that accompany this report 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 Chuck, I have 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. All quarterly growth rates described during today's presentation are on a year-over-year basis, unless otherwise noted.

I'll now turn the call over to our President and CEO, Chuck Treadway. Chuck?

Charles L. Treadway -- President and Chief Executive Officer

Thank you, Russell, and good morning, everyone. 2021 is already shaping up to be a very exciting year of progress at CommScope. We are putting in place a broad transformational agenda and are beginning to feel the impact of these efforts in our results. This morning, we released our results for the first quarter of 2021, and I'm pleased to report that our consolidated business showed strong performance, led by sustained momentum in our Broadband Networks segment. In our core business segments that will remain after the separation of Home Networks business, sales up 11% year-over-year and adjusted EBITDA was up 25%. And just one month ago, we announced two critical components of our CommScope next initiative. First, that we intend to spin-off our Home Networks business into an independent, publicly traded company. And second, that we've had -- that we have taken initial steps to optimize our company's cost profile and free up resources to reinvest and grow.

Today, I will provide you with more insights into our broader plans for transforming CommScope into a growth-oriented, profitable technology leader. And I hope that you will share our excitement about the company's future. But first, I'd like to provide more detail on our first quarter results. I'm now turning to slide three. On a consolidated basis, during the first quarter of 2021 revenue grew almost 2% year-over-year, and we achieved adjusted EBITDA of $290 million, a 25% increase over the first quarter last year. In the core, post-spin off business segments of CommScope, namely Broadband Networks, Outdoor Wireless Networks and Venue and Campus Networks, our Broadband segment stood out with very impressive revenue and profit performance during the quarter, up 29% and 93%, respectively.

The Broadband segment has benefited from a number of industry trends, such as the continued node splitting activity of cable operators to relieve uplink pressure on their networks and the accelerating trend of fiber deeper that we see in service provider network upgrades and government spending on the rural broadband. In addition, this segment has been investing for future growth. We are developing cutting-edge technologies, such as Remote MAC-PHY, and advanced optical networking as well as making significant fiber cable and connectivity capacity investments that will benefit CommScope for years to come. In our Outdoor Wireless segment, as we expected, the first quarter got off to a slower start, especially when compared to the strong first half of 2020. By way of reminder, several North American operators invested heavily in the most recent C-Band auction. And are actively planning their investments and deployment strategies for this newly acquired 5G spectrum.

While this 4G to 5G transition has resulted in lower current spending by these operators as compared to last year, demand for the key macro components supplied by CommScope should increase in the future as 5G rollouts expand and benefit our Outdoor Wireless segment. We are also making traction in Europe with operator trials for our new integrated passive/active antenna technology that is an ideal solution for managing the transition to 5G. In addition, Europe and Asia Pacific saw Outdoor Wireless sales growth of almost 29% and more than 100%, respectively, during the first quarter. Our Venue and Campus segment continues to feel the effects of the COVID-19 pandemic during the first quarter due to its exposure to commercial real estate and ongoing secular declines in our in-building copper portfolio. In addition, our DAS and Small Cell business was soft during the quarter as some large public venue projects that occurred in 2020 did not repeat.

Even with these headwinds, segment performance during the first quarter was steady versus the prior year, with particular strength in RUCKUS growing more than 15%. As we look forward, we are not yet seeing a full rebound in new build real estate activity, but we are encouraged by the signs that the rising level of COVID-19 vaccinations is freeing up enterprise network spending, and our copper business has largely stabilized relative to the double-digit declines we experienced in 2020. In addition, we are seeing significant stimulus dollars continuing to flow into education and healthcare, both of which benefited our RUCKUS business unit during the first quarter. Additional tailwinds include continued strong pipeline of hyperscale data center projects as well as sustained interest among venue operators of airports, casinos and hotels in upgrading their in-building and venue licensed and unlicensed coverage through our next-generation Era DAS platform, OneCell and RUCKUS product portfolios. Finally, an update on our Home Networks business.

We are running on a schedule toward our target date of completing the spin-off by the end of Q1 2022, with the team making excellent progress on the work required to cleanly separate this business from our core businesses. Against the backdrop of that work and despite healthy demand from our Home Network products during the quarter, our ability to supply in recent months has been severely constrained by the semiconductor chip shortages that have made global headlines this year. While it is difficult to forecast when these supply constraints will be resolved, this is a transitory issue. Because demand during the quarter exceeded our ability to ship products, Home Network products ended the first quarter with more than $1 billion in backlog, which is more than twice our average in 2020. We also secured key customer wins in DOCSIS 3.1 gateways, IP streamers and international video set-top boxes, and have made significant progress in our Wi-Fi 6E on and low latency technology development.

Despite the transitory supply challenges, the significant size of the Home Networks backlog, combined with the proactive cost management steps we have taken in this segment, bodes well for the future profitability performance of the Home Networks segment once silicon supply normalizes. Before I finish my remarks on the quarter, I would also note that CommScope, like many other global companies, has begun experiencing significant price increases across a variety of inputs and components, including copper, steel, resins, freight and semiconductor chips. I want to emphasize that as a company, we'll be working hard to utilize all available levers to offset the impact of these inflationary forces on our business. Now turning to slide four. I'd like to shift gears and provide you with some additional context around where we are and where we are heading with our CommScope NEXT initiative. As I've communicated before, CommScope NEXT is about three vectors of performance improvement: growth; cost efficiency; and portfolio optimization.

I want to emphasize that these three vectors are not separate efforts, but are interrelated and mutually reinforcing. As we reposition the company to fully realize the growth potential inherent in our core markets, we are looking for opportunities to invest in both underpenetrated regions and customers as well as high potential vertical markets and technologies. Fueling this investment will be a portion of the resources we liberate by streamlining inefficient processes, cutting unproductive spending, eliminating redundant processes and realizing manufacturing efficiencies. As a team, we have aligned around a set of near and intermediate-term priorities, and we are already beginning to see some early progress, which I will describe later. As we get the flywheel in motion to drive EBITDA improvement, we will continue to reinvest, ultimately driving the shareholder returns that are more in line with our true potential. Now turning to slide five. I'll share some details about actions we are taking to free up growth capital through cost efficiency. After taking the cost actions that we communicated to you in April, we are now poised to widen the aperture to include areas, such as procurement and operations.

The focus on just one example that of indirect procurement, CommScope's annual spend in this area is approximately $1.2 billion, more than half of which is discretionary. But we are not enjoying the full benefits that can accrue to a large-scale focused purchaser, as evidenced by the fact that 20% of our indirect spend is inefficiently dispersed across more than 13,000 vendors. We are undertaking a multifaceted effort to attack this opportunity and one facet that we kicked off just yesterday is a pilot -- is a new pilot program of cost control towers. At our Claremont and Catawba, North Carolina manufacturing facilities. Cost control towers are a proven method for empowering employees with an owner's mindset to rigorously challenge every dollar in the budget. Once proven out at Claremont and Catawba, we will implement this program broadly to reduce noncritical spending on a companywide basis.

In addition to our efforts around cost, we have recently kicked off the first phase of CommScope NEXT growth agenda. After working at CommScope for just a short time, it was clear to me that CommScope has a long history of acquiring businesses, but has struggled to achieve consistent organic growth. This has to change. To turbocharge our growth efforts. We must become a market-driven company and get closer to our existing customers and expand our existing customer base so that their voice and needs directly inform our strategies and portfolio decisions. The first step we are taking for our core spend businesses is to transfer most of our sales and marketing resources directly into Broadband, Outdoor Wireless and Venue and Campus business segments. This will give every core segment a dedicated go-to-market team equipped with an end-to-end sales toolkit. including marketing, pricing, partner engagement and sales training and enablement.

And it will create an environment where segment level decisions around R&D and product development are directly linked to the customer value chain. Our new sales structure will also include a key account manager component that will allow us to expand our deep relationships with existing distributors and large service providers. Our key account managers will also broaden our reach to include many untapped service provider markets outside the United States. We will also refocus our sales efforts on select verticals, such as education, healthcare and hospitality, where we know that our networking products and our solutions offer a unique value to our customers. And we use our most innovative technologies, such as our OneCell radio access point and our RUCKUS cloud and analytics applications to develop tailored and vertical market solutions for sales teams to offer that to their customers. These are just some of the ways in which CommScope NEXT will drive a new level of efficiency and growth for our company. Taken together, we expect these actions to deliver an annual run rate of at least $500 million in adjusted EBITDA improvement within the next three years, split roughly equally between incremental growth and cost efficiency.

As the plan begins to crystallize and results materialize through our financial performance in future quarters, we will share these success stories with you. In addition, at our planned Investor Day later this year, we will be prepared to lay out more detail regarding our expectations about the timing of results being reflected in our financial performance as well as our timeline for getting leverage much closer to our long-term target. Although, we are just getting started on this multiyear journey, and we still have much hard work ahead of us, our views around the potential benefits that we can drive through CommScope next are starting to take shape. With a clear and ambitious road map laid out, our entire team is energized by the opportunities in front of us.

I'd now like to turn the call over to Alex to provide further details on our first quarter results. Alex?

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

Thanks, Chuck, and good morning, everyone. I'll start with a review of our consolidated financial results for the quarter on slide seven. During the first quarter, net sales increased 2% to $2.07 billion, led by another quarter of impressive performance from our Broadband Networks segment. Orders for the quarter were very strong at $2.83 billion, yielding a book-to-bill ratio of 1.37, which represents a significant increase over the Q1 2020 ratio and demonstrates the robust demand we are seeing in many parts of our business. While this high backlog gives us confidence about our revenue prospects throughout the balance of 2021, I would caution everyone that we are experiencing many of the same supply constraints as other technology and manufacturing companies. We're also seeing relatively sharp increases for a range of important inputs and components, including copper, steel, resins, semiconductor chips and freight.

That said, we're working very hard every day to source the inputs and components that we need to meet both rising demand and our customers' expectations. We're also committed to using all available levers to offset as much of the inflationary impact as possible in order to maintain strong margin performance. Adjusted EBITDA of $290 million increased 25%, adjusted EBITDA margins of 14% improved 260 basis points and adjusted EPS of $0.36 per share increased 200%. This significant improvement in profitability was driven largely by a volume increase at Broadband Networks, but also by continued cost actions designed to preserve profit margins in our Home Networks segment. As you know, earlier this month, we announced our intent to spin-off our Home Networks business by the end of Q1 2022. Once the spin has been executed, CommScope RemainCo will consist of three core business segments.

Broadband Networks, Outdoor Wireless Networks and Venue and Campus Networks. In light of the spin-off announcement, I would also like to provide you with additional perspective of how these three core business segments performed during the first quarter on a consolidated basis and ex Home Networks. Core CommScope net sales increased 11% during the quarter to $1.58 billion. Core adjusted EBITDA increased 25% to $273 million and adjusted EBITDA margin of 17.3% improved 200 basis points from the prior year. Orders for core CommScope were also strong, totaling $1.88 billion and yielding a book-to-bill of 1.18. This extremely strong performance in our core RemainCo business clearly shows the potential of the spin-off to drive a new level of shareholder value at CommScope. It also underscores that post-spin, CommScope will consist of a cohesive and well integrated set of businesses with magnified exposure to powerful technology trends, such as 5G, broadband architecture evolution, Wi-Fi six and 6E, indoor LTE coverage and private networks.

Turning to slide eight. I'll move to our segment highlights. Beginning with our Broadband Networks segment. Net sales of $791 million grew 29%, primarily driven by the strength in North America and all international regions, except for Europe. Within the segment, our Network Cabling & Connectivity business saw a significant increased demand for fiber cable enclosures, and our Access Technology business also experienced strong sales of optical nodes and head-end optics. Adjusted EBITDA of $179 million grew 93% over the prior period, driven primarily by the significant increase in sales volume. Based on the quarter's results as well as our forward-looking view, we continue to see very favorable momentum for the major product lines within our Broadband Networks segment. With 5G fast becoming a reality, service providers are investing to drive fiber deeper into their networks, not only to serve today's burgeon and customer demand for speed and capacity, but also to prepare for the next wave of MSO and telco competition for existing and new home subscribers.

Likewise, we are benefiting from multiyear government-backed programs to bridge the digital device, such as the rural digital opportunity fund and we are closely tracking discussions within the Biden administration to allocate additional stimulus funding for expanded broadband access. In addition, our cable operator customers are contending with shifting consumer usage patterns that have generated unprecedented pressure on the upstream portions of their hybrid fiber-coaxial networks. During the quarter, operators worked to relieve this pressure through continued node splitting activity and upgrades to head-end optics. We believe there are new network upgrades in the DOCSIS network, inclusive of amps and taps, which will also drive this business in the future. And our video systems business benefited from yet another 5G-related tailwind during the first quarter, as we scored significant new project wins for C-Band spectrum reclamation. To take advantage of the favorable demand environment, we have been actively investing in our broadband network segment, and we'll continue to do so.

Through the balance of this year and into next, we will bring -- be bringing on new production lines for fiber cabling and connector products with the anticipated payback on some of these investments being as short as six to nine months. Our Broadband segment is experiencing periodic tight supply of certain inputs, components and raw materials. But fortunately, this segment has less natural exposure to the most highly challenged supply chains, such as that for semiconductor chips. And to date, we have managed the periodic supply stresses relatively well. Turning to slide nine for our Venue and Campus Networks segment. Net sales of $470 million were essentially flat from the prior period as declines in North America were offset by growth in nearly all of our international markets. Within the segment, strong growth within RUCKUS was offset by moderate declines from the remaining product lines. Adjusted EBITDA of $20 million declined 47%, primarily due to unfavorable mix and the impact of input cost inflation, mainly copper.

While we have been able to pass a significant amount of copper price increases through to enterprise customers, there is some degree of lag in this process that is unavoidable. Nonetheless, we expect these inflationary impacts to be more normalized in future quarters. While our Venue and Campus segment came under pressure during 2020 due to COVID-19's impact on commercial real estate, during the first quarter, this situation improved as developers resume construction activity on many suspended projects. While this trend is encouraging and it helped our Venue and Campus segment end the first quarter with substantial backlog, there is still significant uncertainty on the scope and timing of a full recovery in new build real estate activity. Our RUCKUS business also benefited during the quarter from continued strong federal spending on E-rate and healthcare programs to bring broadband services and networking equipment to schools and medical facilities.

Our AI, cloud and analytics offerings are also gaining traction with enterprise customers, and we expect continued momentum in the RUCKUS business' COVID vaccination rates increase and as enterprise clients begin to bring employees back to their offices. During the first quarter, our DAS and Small Cell business declined and our hyperscale fiber business was modestly weaker year-over-year as both of these business lines faced a tough comparison against the first quarter of last year when some larger venue upgrade and data center projects were under way. Both of these business lines can experience some quarter-to-quarter lumpiness, driven by major project timing, however, we are continuing to see a strong pipeline of new venues and data center projects coming up for bid, which gives us confidence for the remainder of 2021 and beyond. We continue to see our Era DAS, OneCell and Wi-Fi portfolios as critical components of future enterprise and carrier networks as 5G spectrum utilization increases and the need for integrated indoor coverage solutions grows.

Turning to slide 10 for our Outdoor Wireless Networks segment. Net sales of $323 million declined 8%, driven primarily by North America and the Middle East and Africa, partially offset by growth in all other international regions. Within the segment, sales declined in both our macro tower and metro layer solutions, this softness was expected and largely timing driven as our Outdoor Wireless sales were more first-half weighted in 2020, but should be more second-half weighted during 2021 due to the expected ramp of 5G macro tower spending later this year. Adjusted EBITDA of $74 million declined 17%, primarily driven by lower volumes. During the first quarter, CommScope saw continued strength in 5G-related orders from T-Mobile as this important customer continues to move aggressively to deploy at 600 megahertz and 2.5 gigahertz spectrum. We anticipate C-Band-related 5G spending on CommScope products by other major North American carriers to accelerate later this year and thereafter.

However, in the shorter term, we're seeing a lower spending levels from these carriers than we experienced during the first half of 2020. As the race to 5G progresses, CommScope offers a broad portfolio of products and solutions that carriers will need to support comprehensive upgrades to their macro tower infrastructure. Telco carriers recognize CommScope as a leading provider of everything on the macro tower except radios. This does not include only base station antennas supporting 5G frequencies, but also a wide range of complementary products and solutions that will be critical to operators, as they manage the added complexity of 5G tower configurations. These solutions include HELIAX, coaxial and fiber cabling, power shift power management, cabinets and steel reinforcements, which, together with our passive and active antenna solutions provide a complete toolkit for 5G tower upgrades. CommScope also continues to innovate around 5G use cases, as demonstrated by our integrated active/passive antenna solution in partnership with Nokia.

We now have over a dozen trials of this product ongoing with European, Middle Eastern and Latin American customers and we anticipate that this hybrid solution will gain interest among U.S. carriers as a unique and cost-efficient tool for managing the 4G to 5G transition. I would add that after several quarters of softness, our metro cell business is starting to pick up as municipalities begin to clear some of the COVID-related backlog of zoning and permitting applications for the metro layer densification projects that will also be required to provide seamless 5G connectivity. Turning to slide 11 for our Home Networks segment. Net sales of $489 million declined 19% in across most regions. Despite healthy demand for both video and broadband gateway products during the quarter, the Home Networks' revenue decline was driven almost exclusively by an acute shortage of semiconductor chips. Adjusted EBITDA of $16 million increased 38% from the prior year despite this topline decline.

This improvement in profitability was primarily driven by the significant cost optimization actions taken over the past 18 months to better align the segment's cost structure to its recent revenue performance. The combination of strong demand and constrained ability to ship products led to a sharp growth in backlog during the quarter, which has risen to more than two times historical averages, the highest level since we acquired the business in 2019. We believe that these supply chain difficulties are transitory and that we will eventually convert this backlog into sales. However, our current view is that we may not see a return to a fully normalized silicon supply environment until early 2022. Given that we have been very proactive in taking costs out of the Home Networks business, we're confident that the segment will show improved financial results once the silicon shortage subsides. Within the video business unit, Home Networks continued to score wins with new and innovative IP streamer products. This is particularly true in international markets where we've had success during the first quarter with new orders for streaming devices in Europe and Zebra processes in the Asia Pacific region as well as traditional set-top wins in key Eastern European countries.

For the broadband gateway business, Home continues to build on multiple DOCSIS 3.1 gateway wins in the highly strategic Latin America market and is also gaining traction for the XB7 platform with North American syndication players. Turning to slide 12 for an update on our cash flow. For the first quarter, cash flow from operations was a use of $124 million and adjusted free cash flow was a use of $135 million. As a reminder, the first quarter is typically our weakest cash flow performance quarter due to multiple seasonal factors. Comparing to the prior year, cash flow was impacted, most notably, by a higher annual bonus payout for CommScope employees as well as increased tax and interest payments during the first quarter of 2021. Working capital was a net use of cash of approximately $123 million during the quarter, primarily driven by increased accounts receivable and inventory. However, for the full year, we expect net working capital to be a source of cash for the company as the first quarter's AR and inventory build converts to cash and as we continue to find additional efficiencies within inventory and extend the vendor payment terms. Turning to slide 13 for an overview of our liquidity and capital structure.

During the first quarter, our cash and liquidity remained strong as it had been throughout the year. We ended the quarter with $326 million in cash and no outstanding draws under our ABL. Our total available liquidity for the quarter was over $1 billion. Given that the first quarter is seasonally our weakest cash flow quarter of the year, we did not repay any debt during the quarter beyond the $8 million of required term loan amortization. With the year-over-year growth and first quarter adjusted EBITDA, the company ended the first quarter with a net leverage of 6.7 times, a significant improvement from the 7.1 times at the end of the year. Note that a partial driver of this leverage improvement was our inclusion in pro forma adjusted EBITDA of significant additional projected cost savings related to our CommScope NEXT cost efficiency initiative. Inclusion of these cost savings, reflecting cost actions, already taken as well as specific planned future actions, is also in line with our loan compliance reporting practices.

We remain committed to our longer-term goal of significantly reducing leverage and expect to provide additional insight into our path and timetable toward this goal as we further refine our CommScope NEXT strategy around cost efficiency and growth. Finishing up on slide 11 for an update on 2021 demand trends in our end markets. For our Broadband Networks segment, the trends of operators driving fiber cable and connectivity deeper into their networks is showing considerable staying power for the balance of 2021 and beyond and addressing pressure on uplink capacity and downlink throughput through node splits in the access layer continues to be critical in network performance. Customer demand in our converged network solutions unit is holding steady. And we're seeing continued opportunities for our video systems business portion and areas such as a reclamation of C-Band spectrum and ad insertion. Expanding our capacity to produce fiber optic cable and fiber connectivity remains a top priority for us.

And we are committed to directing additional capital investments where necessary to meet the high and growing demand. And as previously mentioned, we expect our Broadband segment to benefit significantly from stimulus spending under the Rural Digital Opportunity Fund in the second half of this year. Within our Outdoor Wireless segment, we maintain our expectation that the release of new mid-band spectrum through the C-Band option will drive significant 5G spending by the major U.S. telco carriers to upgrade thousands of macro cell towers across the U.S. We expect continued good business with T-Mobile spending for 5G deployments, and we believe that 5G build-outs by other major U.S. carriers will expand from an initial focus on OEM radios and active antennas to a more balanced procurement strategy, including passive antennas and ancillary tower equipment, areas of strength for CommScope, all this starting later in 2021.

Meanwhile, our funnel of international opportunities, particularly for our integrated active and passive antenna solution, in collaboration with Nokia, is showing considerable promise and will be a significant focus as we roll out the international growth component of CommScope NEXT. Our Venue and Campus business is showing encouraging signs of returning to growth and generating meaningful profit as commercial real estate developers regain confidence and as structured cabling markets stabilized from last year's steep declines. It is still too early to forecast a full-scale recovery in new build real estate activity by the end of 2021. We're confident that government spending on education and healthcare will support momentum in RUCKUS sales during the balance of the year. RUCKUS orders were stronger in the first quarter, and we see this trend continuing for the remainder of 2021.

Through CommScope NEXT, we're pivoting to refocus the Venue and Campus segment on key vertical markets, such as education, healthcare, federal and hospitality, where our Connectivity and Networking Solutions provide a uniquely compelling value proposition, and we expect these efforts to begin showing results by the end of 2021. While we did not win large-scale projects for data center fiber and our large venue upgrades utilizing our DAS and Small Cell solutions during the first quarter. We continue to see a healthy pipeline of smaller projects coming up for bid that should benefit these businesses during the balance of 2021. Wrapping up with our Home Networks business. We have seen a healthy resurgence of customer demand for this segment's video and broadband products. However, as we noted, we expect silicon supply constraints to have a material impact on Home Networks revenues throughout 2021 and potentially into 2022.

As we work through these transitory supply chain issues, our goal will be to continue to optimize the cost profile of the home business as well as to move forward rapidly with our plan to spin-off Home Networks into a stand-alone publicly traded technology leader. Before turning the call over for Q&A, I just want to echo Chuck's earlier comments about the longer-term potential of CommScope NEXT. It is the goal of CommScope NEXT to transform our company into a higher growth and more profitable enterprise with a tightly focused technology portfolio. We are energized by our vision of adding at least $500 million of annual run rate adjusted EBITDA from cost efficiency and growth, and we believe that our employees and our shareholders should be as well. Well, the hard work of this goal is just beginning, you should know that we, as a management team, have no greater priority than being successful in this operation.

And with that, we'll open the line for Q&A. Operator?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Meta Marshall with Morgan Stanley.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks, and congrats on the quarter. I guess a couple of questions for me. Can you give a sense on the supply chain shortages you're seeing and just whether it's giving you more visibility from customers for the year? And just how that frames kind of your outlook for how the year developed and then just maybe more context on ability to pass some of the cost increases that you're seeing on to customers? Does it kind of vary meaningfully by product? Just any context there would be helpful.

Charles L. Treadway -- President and Chief Executive Officer

Okay. In terms of supply chain shortages, the main one that we're experiencing is in the Home business with our silicon products. And we actually have to work with our customers there. And obviously, there's allocations, and there's opportunities to expedite, and we're working with our customers to help pay for that, and we're communicating directly with them on those types of opportunities to make sure we get the supply there. If you think about the other businesses, it's kind of a start and stop. I mean, we seem to have a problem in the day and we get it resolved in the next day. We're able to work through it pretty well. We have a pretty large supply base. We are seeing some inflationary effects. And -- but I would say we're not really shut down by any component shortages other than silicon. And I wouldn't even say we're shut down. It's just -- we're just not getting the supply we need. And in terms of inflationary effects on the other products, many of our customers, we have contractual relationships where there's formulaic opportunities to raise price, depending on what's going on with the inflationary components of the product.

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

Meta, the only other thing I'd add, Chuck obviously mentioned the semiconductor issue, I mentioned in my remarks, capacity constraints within our fiber cable and fiber connectivity. Those are internal constraints, and we're making investments in the factory that will begin to come online in the later part of the year. And that -- those investments really are meeting the significant increases in demand that we're seeing. So that's the only other supply chain issue that I'd mention, but that's obviously fully within our control, and we're taking steps to unlock it.

Meta Marshall -- Morgan Stanley -- Analyst

Great. I guess I was asking more from a perspective of have your customers kind of shared order trajectory over the year to assure that you have supply chain.

Morgan C.S. Kurk -- Executive Vice President, Chief Technology Officer and Segment Leader, Broadband Networks

So yes. Some of our customers have worked with us to give us a longer-range output, and in some cases, actual orders to follow for some of these more critical components. As an industry, we're all trying to project out what those things will be and manage that supply chain, appropriately. So I think it's a work in progress. But certainly, we've gotten closely with our customers on that.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks.

Operator

Your next question is from the line of George Notter with Jefferies.

George Notter -- Jefferies -- Analyst

Hi, guys. Thanks a lot. Maybe just to kind of expand upon that prior question. Is there -- do you have any sense for how much cost inflation you're seeing in the business? Is there a dollar value you can kind of put on that? And then how much of that are you able to offset with price increases? It'd be interesting to kind of see what that inflation component is translating into in terms of the EBITDA of the business?

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

Yes. It really depends on what element you're looking at. In the semiconductor space, it's sort of in the mid-single digits. In terms of percent, freight is probably quite a bit higher than that. In ocean freight, it's close to 70% inflation, air freight, a little bit less in sort of the 14% zone. Copper, obviously, you've seen substantial increases in copper prices, which you can tell, if you just look at the LME index, similarly with steel. So it really depends. I think one of the things that is important to consider is that a number of our products have a fairly -- while the commodity input is important, it's a lower percentage of the overall value-add of the -- our product. So it's not -- wouldn't be fair to say that the price of our product is going to increase directly in line with the price of whatever the underlying commodity is. And that's really the negotiation that Morgan was talking about is helping our customers understand what these inflationary effects are, working with them to mitigate those through a combination of productivity actions and pricing and preserving our margins. So that's sort of how we're managing the profitability picture.

George Notter -- Jefferies -- Analyst

Got it. Okay. I assume when you roll it up, there is a negative net impact on EBITDA. Is that fair to say?

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

We're going to -- these impacts, George, are impacting every single player, not only in the technology space, but in the broader manufacturing space. And both our competitors know that as well as our customers. And I think we have every expectation that we'll be able to offset this pressure.

George Notter -- Jefferies -- Analyst

Great. Thank you very much.

Operator

Your next question is from the line of Jeff Kvaal with Wolfe Research.

Jeff Kvaal -- Wolfe Research -- Analyst

Good morning. Thanks for taking the question. I would like to delve into the new constructs around the cost reduction plans and EBITDA growth forecast. I'm wondering if you could help us frame kind of where you are measuring that $500 million from over how long should we get it or sort of in what stages should we get it? And are we going to see all of it? Or should we expect that you'll reinvest some of that $500 million? And so the overall EBITDA isn't going to be $500 million higher by the end of the three years, but despite somewhat less.

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

Sure, Jeff. So let me kick it off and then others on the team may want to pile in. So to start with, CommScope NEXT is $500 million -- what we've said is at least $500 million of EBITDA improvement. 50% of that coming from growth, 50% of that coming from cost. So to the extent we have greater cost savings than that $250 million, we may choose to reinvest those in incremental growth, or we may choose to bring those to the bottom line. Those decisions haven't been made, but we are committing to $250 million in cost-related EBITDA improvement and $250 million in growth-related EBITDA improvement. Those savings are net of headwinds. So the way to think about modeling it is if you take our our TTM EBITDA, you back out the impact of the Home Networks actions that we've taken. You add your $500 million on top of that, that gets you to a new run rate.

And then over and above that, we do expect some cyclical recovery in the market. So this is -- these are actions that we take above and beyond just normal market recovery. So hopefully, that gets you to an EBITDA number. And then in terms of timing, what we've said is this is a three year aspiration. And obviously, the cost actions we started in April. So those are already in flight. There's more actions that Chuck referred to around procurement. Both on the indirect side and the direct side. There's actions being taken on manufacturing efficiency. And then the investments that we're making in growth, both in new markets and in verticals will likely be farther out in that three year time horizon. So maybe I'll pause and see if Chuck would like to add anything on top of that and ask you if that answers your question.

Charles L. Treadway -- President and Chief Executive Officer

I think you said everything.

Jeff Kvaal -- Wolfe Research -- Analyst

Let me follow-up, briefly. And just to say, do you have a sense of what year one or year two might look like? Like the cost reductions might be heavily weighted to the front end of your timeline, for example.

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

We've not provided and we're not undertaking to provide that level of detail at this point. I think it's reasonable to expect when we get to our Investor Day at the end of the year that will give you some indication on kind of the velocity of how this materializes in the P&L, but we're not at that level right now.

Jeff Kvaal -- Wolfe Research -- Analyst

Thank you all.

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

It's OK, operator. I thought Jeff had a follow-up question. I didn't hear him.

Operator

Your next question is from Samik Chatterjee with JPMorgan.

Joe Cardoso -- JPMorgan -- Analyst

This is Joe Cardoso on for Samik. The decline in metro cell or metro and macro cell solutions, which is not much -- it doesn't give much surprise, given the reasons you highlighted. However, curious to hear if you can provide any additional color around how that opportunity in wireless plays out in the second half of the year and what your large customers have communicated to you in terms of the deployments there?

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

Yes. So I'll let Morgan pile on. What we've said -- we said this last -- at the end of last year is there are two North American operators, in particular, that spend heavily on C-Band spectrum. We anticipated that, and it actually exceeded our expectations. There's a natural pause right now as those operators basically are developing their strategies for how to light up that spectrum. And again, we fully expected that. That's what they communicated to us, and that's, in fact, what we're seeing. We expect that their spending will ramp. And in fact, we're seeing a lot of their orders coming in now already in the second quarter. So that spending is ramping just as anticipated. And we do expect a stronger second half for outdoor wireless than we saw in the first half. The -- a couple of other points that I'd make. The first is, one of the reasons that the year-over-year comp is difficult is because we saw exactly the opposite trend in 2020, where the operator spending was actually a very front-end weighted because they were trying to get their investments behind them to focus on C-Band.

So you're lapping a tougher comp with 2020. And then last point I would make, last two points. The one is on the margin. The reason the margin picture looks the way it does is because of this North America mix versus some of the rest of the world where we actually did see growth. And then finally, I think it's really important for those on the call to understand within the outdoor wireless networks is much more than just base station antennas. So as the spectrum gets deployed, there's need for new power solutions. There's need for reinforcing the infrastructure with steel, there's need for new cabinet solutions. All of that is product that we provide in this space.

Morgan C.S. Kurk -- Executive Vice President, Chief Technology Officer and Segment Leader, Broadband Networks

Yes. So I'll just add on to Alex's comments. So we do have of a EBTR strategy, everything but the radio and that applies between as to 5G as well as it did to 4G. In the rest of the world, the mid-band spectrum has been available for a longer period of time. So that the start-ups of spectrum usage, dense urban area coverage and then moving out toward less dense areas has occurred. So we have a pretty good road map of what's going to happen in the United States. And we're very comfortable with the product portfolios we have on a going-forward basis that we will be able to take advantage of that. Both by integrating the active antennas, where they are being used with passive antennas in an effort to improve the ability of putting things on towers, reduce weight, wind loading, etc, as well as for the non-active antennas, which we expect will be a significant portion of the market. So from our perspective, this is going along according to plan. In terms of the metro cell market, specifically, that was caused -- there was a decrease in new site builds last year due to permitting and other events, and we expect that, that to shall -- will mitigate as the years go on, and we will continue to take advantage of that market as well.

Joe Cardoso -- JPMorgan -- Analyst

Got it. And then for my second question, you mentioned the benefits from our -- of materializing in the second half of this year. But just curious to hear your thoughts around your positioning for government stimulized plans in other regions of the world, like by the U.K. or the European Commission? And what are expectations around the scale and timing around those?

Morgan C.S. Kurk -- Executive Vice President, Chief Technology Officer and Segment Leader, Broadband Networks

Yes. So I'll take that one as well. So the RDOF funding in the United States is rather significant. It's meaningful in the rest of the world, but not of the same scale. However, we are positioned in similar position. These RDOF fundings are really, for us, based on providing fiber connectivity to the various places that they're improving. In Europe, there are places such as U.K. and Germany that are building out much more heavily than places that have already built out, say, Spain, as an example of that. And we believe we're well positioned for all the things that you need to build this network that is not the active gear. At the moment, we really don't participate in the active gear portion of this. This is a network. In terms of when this is happening, it is an ongoing piece of business, and it's more fragmented than in the United States. So you won't see an enormous burst, but you'll see a specific country or specific customer that will go on a major build. And in fact, we're seeing one of them right now.

Joe Cardoso -- JPMorgan -- Analyst

Got it. Appreciate the color. And thanks for the question.

Morgan C.S. Kurk -- Executive Vice President, Chief Technology Officer and Segment Leader, Broadband Networks

Thank you.

Operator

Your next question is from the line of Rod Hall with Goldman Sachs.

Rod Hall -- Goldman Sachs -- Analyst

Yeah. Thanks for the question. I have two for you. One is on the cash flow and the working capital, Alex. I just -- I noticed your accounts receivables up a lot. I guess that's related to the backlog. But I'm curious whether that is likely to be a drag on cash flow as we look forward? Or is this kind of a one-off adjustment to this new normal level of receivables. So I wonder if you could comment on that and then I have a follow-up.

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

Okay. No. So our cash flow is typically weak in the first quarter. It actually strengthens as we go through...

Rod Hall -- Goldman Sachs -- Analyst

Just to be clear on that, just to jump in, it's quite a bit weaker than normal seasonality. That's why I asked the question.

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

So it's typically weak in the first quarter. And yes, there is some timing-related impacts on AR, just related to collections activity. So there's nothing unusual other than just the timing of collections. The other thing that typically happens in the first quarter is we have cash taxes. And then we also have bonus payments. So bonus payments for our annual incentive plan this year were quite a bit larger than they have been in the last couple of years, which is creating a bit of a headwind. And then the final issue is around inventory.

So because of the significant backlog as well as some of the components shortages, we have much more kind of in-process inventory. And then on freight because there's been some bottlenecks in the ocean supply chain. We've got a little bit more in process inventory on the ocean. But in general, what I would say, and you actually kind of mentioned this, the fact that we're seeing working capital growth is completely reflective of a significant demand environment, which as we work through the backlog and as we deliver the product, that's going to convert into EBITDA and ultimately into cash.

Rod Hall -- Goldman Sachs -- Analyst

So do you think -- I mean, it feels like a lot of this was one-off in nature, though, and probably doesn't -- I mean, we shouldn't expect continued increases? Or do you think we should be kind of anticipating a little bit of that early in the year and then it writes itself later in the year? Or how do we think about the trajectory here?

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

Yes. So you will see cash flow ramp fairly significantly through the remaining quarters. So we don't anticipate being a use of cash for any of the remaining quarters. That being said, we are seeing a strong demand environment, particularly in the Broadband Network segment. And as I think Chuck mentioned in his remarks, we do believe this is sustainable demand and part of the beginning of 5G-related spending as well as cable MSOs upgrading their networks. So I wouldn't say the demand environment is more of a onetime event. I think we do see that as sustained. But certainly, the bump in inventory and the collections activity is more onetime in nature.

Rod Hall -- Goldman Sachs -- Analyst

Okay. And then I just wanted to ask on millimeter wave deployments in Europe, what you guys are seeing. Can you give us any color on just kind of what you're seeing there, how much you would expect in the next year and so on?

Morgan C.S. Kurk -- Executive Vice President, Chief Technology Officer and Segment Leader, Broadband Networks

Sure. I'll take that. On the millimeter wave side of the world, I think the answer is not much. Most of the operators in Europe are really focused more on that mid-band spectrum than any sort of high-band spectrum, and we expect that will continue.

Rod Hall -- Goldman Sachs -- Analyst

Okay. Great. Thank you, Morgan.

Morgan C.S. Kurk -- Executive Vice President, Chief Technology Officer and Segment Leader, Broadband Networks

Welcome.

Operator

Your next question is from the line of Sami Badri with Credit Suisse.

Sami Badri -- Credit Suisse -- Analyst

Hi. Thank you. I just want to go back to the CommScope NEXT strategy and the $500 million of EBITDA, how should we be thinking about timing for this? Is this going to be following us over three years? Or is this going to be weighted upfront or even back end? Just to understand how is it going to hit the income statement?

Charles L. Treadway -- President and Chief Executive Officer

Right. We had a similar question earlier. What I would say -- I'll take this one instead of Alex. What I would say is what we're doing right now is we're building the plans. We have a clear line of sight on where we want to go and where we're going to target. Now we're building the plans to do that. And obviously, we did take some cost out in April that we shared with you in our last call. But in addition to that, we have to build all the plans up, and then we have to have execution plans to implement them. And as we're building them, by the time we get to our earnings, let's say, our Investor Day, we'll be able to share with you more details on how those will roll out in time. But right now, those plans are still being built and we're looking forward to sharing with you later in the year on that during an Investor Day.

Sami Badri -- Credit Suisse -- Analyst

Got it. And then one other follow-up is you called out RDOF benefits in your Broadband Networks segment, but does RDOF have benefits into other segments as well in your business?

Morgan C.S. Kurk -- Executive Vice President, Chief Technology Officer and Segment Leader, Broadband Networks

So yes, they do. It's less direct than the broadband segment, but certainly, RDOF funding has been used, not just for providing a fixed line to rural homes, but being able to provide this via wireless. So there is an opportunity there for us as well, and that attaches in a lot of cases to to the fiber. And part of RDOF funding went to satellite as well. And after those satellites get to the ground, there is some opportunity for us to take those signals and play there as well. So yes, this is a very important program for CommScope throughout and impacts all of our businesses.

Sami Badri -- Credit Suisse -- Analyst

Thank you.

Operator

Our next question is from the line of Simon Leopold with Raymond James.

Simon Leopold -- Raymond James -- Analyst

Thanks for taking the question. First, maybe a quick one and then more of a trending one. In terms of a quick question, there were a lot of questions earlier that were qualitative around input costs. I guess, just simply put, do you expect your gross margin in the June quarter will be higher or lower than what we just reported in March when you net all these factors? And then I've got a follow-up.

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

Yes. Look, Simon, there are a lot of things that go into gross margin at the risk of stating the obvious. We do see improved demand in Outdoor Wireless, which will drive a favorable -- in North America, which will drive favorable mix. We have substantial volume and continued Network Cable & Connectivity and Access Technologies deployment, which will drive scale in the Broadband segment to improve margins. We are seeing strong growth in RUCKUS through education, hospitality, healthcare, that has substantial gross margins in RUCKUS. So that flows through quite nicely. So the mix impact has a significant effect on margin. I tried to be as clear as I can be in a public setting that we're going to work to offset absolutely as much as of the inflationary impact as we can. So I think it's reasonable to expect that, that gross margin would be consistent with what we've seen in the past. And I think that's probably about as much detail as I can give, given our guidance strategy.

Simon Leopold -- Raymond James -- Analyst

Okay. I appreciate it. I had to try. So on the trending question. I wanted to see if we could talk a little bit about how 5G wireless architectures might be different for your business, specifically. The increase in massive MIMO and integrated antennas. I certainly heard you in terms of your partnership and work with Nokia. So I'm not ignoring that. But just wondering how the mix of increased integrated antennas and massive MIMO can affect CommScope's, everything but the radio strategy?

Morgan C.S. Kurk -- Executive Vice President, Chief Technology Officer and Segment Leader, Broadband Networks

Yes. So I think I'll take that, Simon. So with every generation of wireless, there is a continued push to integrate. We saw this in 4G, some of the OEMs have products that did this and they participated in the early days of the market. And by mid-days of the decade, those products when kind of out of favor. We think this is different this time that active antennas are an important portion of the 5G rollout. However, it is not the only portion of the network. And many of the problems of putting an active antenna on a tower, very similar to the problems, putting a passive antenna on the tower, namely wind loading and weight and we are critical to doing that. We're critical to putting the various antennas behind the other antennas or within the other antennas that exist on the tower and so while we will participate in some portion of the actual active antenna itself, and we are trying to participate with more OEMs.

We will participate with many of the operators in integrating the passive and the active solutions together, in a way that makes it possible to roll these out to all the cell sites that they're going on. In addition to the antenna itself, which we tend to focus on a lot, there are advantages to CommScope when you do go to these active antennas, and I'll just give you a very simple one. An active antenna consumes a lot more energy than its predecessor because it has many more transceivers than its predecessor. That power needs to come from somewhere. And for example, our powership technology becomes almost mandatory in an active antenna networking system versus a passive antenna and a traditional radio, where it is not required at all. So there's additional business opportunity when active antennas are used for CommScope. So we think there'll be a mix, both active and passive antennas in 5G. We think it will be different from 4G. And I think -- we think we'll participate in all the phases of this.

Simon Leopold -- Raymond James -- Analyst

Great. Thanks. That's very helpful. Thank you.

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

Youre welcome. Operator, we probably have time for one more question if there's any more in the queue, and then we can take everything offline.

Operator

Your final question comes from the line of Amit Daryanani with Evercore.

Amit Daryanani -- Evercore -- Analyst

Thanks. So I see to the line. I guess, Chuck, I have -- there are two questions, I'll ask them both to you at the same time. The $500 million cost reduction plan, I guess, post-spin. Do I assume that $120 million of that, that will be used to offset the Home Networks spend and the remaining is for core CommScope? Is that fair? Or is this entire $500 million per core CommScope? And then secondly, you touched on procurement optimization that you're starting to undertake. Is that what will result in the entire $250 million savings? Or is there more things like ERP and real estate optimization you can do to get to that number? So just more details on what is driving the $250 million piece of cost optimization.

Charles L. Treadway -- President and Chief Executive Officer

I'll start with your cost optimization piece. Is direct and indirect material will be a significant part of it. But obviously, we also had a reduction enforced that was announced where we said we would cover the cost. We would cover the reduction of EBITDA from the Home Networks business with that, plus allow us to invest with this money. So if you think about the cost, it's direct, indirect. It's structuring. I would also think there's going to be opportunities to unlock more savings through our operations. We're working with our teams to start a grassroots effort to look at opportunities to improve productivity, to increase capacity because demand continues to grow, and we're hoping we're going to get some leverage from that. So that's also another piece of it. So I guess your first question was more related to -- you kind of broke up a little bit in the beginning, I couldn't...

Amit Daryanani -- Evercore -- Analyst

No, the $500 million EBITDA expansion plan, right? Do I think of it as $120 million will offset the Home Networks spend and $380 million flows through to core CommScope or is it all for core CommScope, I guess.

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

So I -- so just to clarify what we said. So we said that the $500 million, $250 million and $250 million is net. And so the way to think about it and we also said that we are going to more than offset the loss in EBITDA from Home, which is what Chuck mentioned. And so the way to think about just doing the math is take our trailing 12 months, and then you can subtract the Home Networks trailing 12 months EBITDA, then you can add $250 million in cost, you can add $250 million in growth. And then you can assume some level of just cyclical market recovery above and beyond that. And that should give you a waterfall to what exactly we're saying. Perfect. Well, I'll let Chuck just close up with some closing remarks.

Charles L. Treadway -- President and Chief Executive Officer

Yes. Look, we'll keep everybody. Thank you so much for your interest in CommScope. We appreciate your questions and your support. We look forward to talking to you again soon. Thank you.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Russell Johnson -- Vice President, Treasurer and Investor Relations

Charles L. Treadway -- President and Chief Executive Officer

Alexander W. Pease -- Executive Vice President and Chief Financial Officer

Morgan C.S. Kurk -- Executive Vice President, Chief Technology Officer and Segment Leader, Broadband Networks

Meta Marshall -- Morgan Stanley -- Analyst

George Notter -- Jefferies -- Analyst

Jeff Kvaal -- Wolfe Research -- Analyst

Joe Cardoso -- JPMorgan -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

Sami Badri -- Credit Suisse -- Analyst

Simon Leopold -- Raymond James -- Analyst

Amit Daryanani -- Evercore -- Analyst

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