Belden announced its second quarter 2018 results today. With Belden’s reporting segment change in the first quarter, the former Broadcast Solutions division has been subsumed into the Company’s $1.3 billion annual revenue Enterprise Solutions division. As a result, there are no directly relevant financial disclosures on Belden’s broadcast activities in the Company’s financial filings.
Management does, however, offer commentary on in its broadcast operations, in particular its Grass Valley subsidiary, and as of the acquisition in Q1 2018, now Snell Advanced Media (SAM). Belden has grouped these activities into a key market segment ‘Live Media Production’ under its Enterprise Solutions division.
During management’s prepared remarks, Belden stated the combined revenues of Grass Valley and SAM were approximately flat on a year-over-year basis. Meaning, when including SAM’s revenue in the prior measurement period, the current quarter was equivalent on a revenue basis. Later in the call management stated SAM contributed revenue of approximately $34 million during the second quarter.
Given Belden’s track record of driving meaningful cost synergies from acquisitions, it wasn’t surprising to hear management cite a combined EBITDA margin of 17%. An increase of 10 percentage points (more than 50% of the total) in margin was obtained based on the progress of integrating and restructuring SAM with Grass Valley.
Belden’s CFO Henk Derksen indicated a $50 million investment is being made (in 2018) to integrate and restructure SAM. The resulting cost synergies are expected to drive a 13% return on total invested capital. Of note, cost reductions will also include the rationalization of manufacturing operations between the two businesses.
Supporting management’s confidence in the return calculation are the above cited EBITDA margin increase and recent debt issuances by Belden. At Belden’s December 2017 investor day, CEO John Stroup referenced two debt financing transactions in the fourth quarter: (1) €450 million of senior subordinated notes at 3.375% and (2) €300 million at 2.875%. These are the lowest long-term borrowing rates in Belden’s history.
Management was asked by analysts about the potential for achieving revenue synergies in the combination of Grass Valley and SAM. The team conceded revenue synergies would take longer and may not be realized until late 2019 or 2020.
One particularly interesting revenue synergy explicitly mentioned on the call is a byproduct of the relative financial size and health of Belden. In the context of the Grass Valley / SAM combined business, Mr. Derksen said, “…we have a balance sheet and we can offer up capital leases to our customers that our competitors can’t. So we feel that’s a significant competitive weapon and we’re currently deploying that strategy and executing upon that strategy.”
A capital lease (as in Henk’s example) will in practice transfer ownership of the equipment to the customer for the majority of the useful life of the equipment. Such an operating expenditure model then has a material financial implication for a technology supplier: The seller still must bear the cost of the bill of materials of the equipment at the time of the sale, but receives the payment over the life of the lease. A combination of (comparatively) lower borrowing costs, larger financial size, and (often overlooked) financial expertise is needed to manage this purchase model.
During the question and answer portion of the earning’s call Belden’s management team provided commentary on the broader broadcast technology environment.
As part of a response to a longer question about SAM, Mr. Stroup commented on the broadcast macro environment as follows,
“…In the back half [of 2018], we’re expecting that the end markets will remain the same. We typically see a bit of a pickup in the second half, as customers begin to be a little bit more aggressive on their capital deployments. But I would say right now I would characterize the end market as stable.”
Responding to a subsequent question from Will Stein at Suntrust, Mr. Stroup added regional commentary on the broadcast market,
“In the second quarter, the performance by region was actually incredibly consistent. And so, for the first time in a while, the North America business was performing the same as our international businesses. They were all about flat on a year-over-year basis.”
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