Jennifer Crawford - CommScope Holding Co., Inc. Mark A. Olson - CommScope Holding Co., Inc. Marvin S. Edwards - CommScope Holding Co., Inc..

Rod Hall - JPMorgan Securities LLC Shawn M. Harrison - Longbow Research LLC Amir Rozwadowski - Barclays Capital, Inc. Jess Lupert - Wells Fargo Securities LLC Vijay Bhagavath - Deutsche Bank Securities, Inc. Mark Delaney - Goldman Sachs & Co. LLC George C. Notter - Jefferies LLC Steven Fox - Cross Research LLC Kulbinder S.

Garcha - Credit Suisse Securities (USA) LLC Simon M. Leopold - Raymond James & Associates, Inc..

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the CommScope Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference may be recorded.

I would now like to turn today's conference over to Jennifer Crawford, Director of Investor Relations. You may begin..

Thank you, Huey. Good morning, and thank you for joining us today to discuss CommScope's second quarter 2017 results. With me on the call are Eddie Edwards, CommScope's President and CEO; Mark Olson, CommScope's Executive Vice President and CFO; and Phil Armstrong, CommScope's Senior Vice President of Corporate Finance.

You can find the slides that accompany this review on our Investor Relations website. Now to our housekeeping items. On slide 2, you will find our cautionary language related to forward-looking statements.

During this conference call, we will make forward-looking statements regarding our financial position, plans and outlook based on information currently available to management, management's belief, and a number of assumptions concerning future events.

Forward-looking statements are not a guarantee of performance, and are subject to a number of uncertainties and other factors, which could cause the actual results to differ materially from those currently expected.

For a more detailed description of factors that could cause such a difference, please see our second quarter 10-Q filed earlier this morning and other SEC filings. In providing forward-looking statements, the company is not undertaking any duty or obligation to update these statements as a result of new information, future events or otherwise.

Please note that all dollar figures and percentages are approximations. In addition to GAAP information, we will provide certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors.

Detailed reconciliations of GAAP to adjusted measures can be found in the appendix to our slide presentation. Slide 3 is our agenda for this morning.

Mark will review the details of our second quarter results, review segment performance, discuss cash flow and capital structure, review our capital allocation priorities, and then provide our outlook for the third quarter and full year 2017. Eddie will then provide closing comments before we will open the line for Q&A.

To make sure everyone has the opportunity to ask a question on today's call, we request you ask one question and return to the queue for any additional questions. I will now turn the call over to Mark.

Mark?.

Thank you, Jennifer, and good morning, all. Turning to slide 4, you see the details of our second quarter results. Revenue declined 10% year-over-year to $1.17 billion. Sales declined in all major geographic regions, and foreign exchange rates negatively affected revenue by less than 1%.

Orders were $1.07 billion in the quarter, which provided a book-to-bill ratio of 0.91 times. Our book-to-bill in the Mobility Solutions segment was 0.85 times, while the book-to-bill in the Connectivity Solutions segment was 0.95 times.

Weakness in indoor networks solutions, fewer large projects in the Asia-Pacific region, and cautious service provider spending drove lower sales in orders during the quarter compared to the year ago period. For the quarter, operating income was $138 million.

Non-GAAP adjusted operating income, which excludes amortization of purchased intangibles, integration and transaction costs, restructuring costs and other special items, declined 17% to $242 million. The decline in operating income was primarily driven by lower sales volumes and unfavorable mix of products sold.

Despite the disappointing top line results, we were able to maintain 40% gross margin and over 20% adjusted operating margin due to cost reduction measures, as evidenced by the approximate $32 million year-over-year decline in operating expenses.

The reduction in operating expenses reflected the benefit of cost reduction initiatives and lower incentive compensation expense. In addition, lower intangible amortization offset higher restructuring charges within operating income. Net income for the quarter was $55 million or $0.28 per diluted share.

And non-GAAP adjusted net income was $119 million or $0.60 per diluted share. I'll now discuss our second quarter performance in each of our segments, starting with the Connectivity Solutions segment on slide 5. Connectivity Solutions sales declined 7% year-over-year to $726 million.

Revenue declined in both our indoor and outdoor network solutions businesses. Modest growth in the Europe, Middle East and Africa region or EMEA was offset by lower sales in the U.S., Asia-Pacific and Latin America. Foreign exchange rate changes negatively affected revenue by less than 1% from the year-ago period.

Our outdoor network solutions business, which is primarily Fiber-to-the-x and about 45% of segment sales, declined mid single-digits. Modest growth in EMEA was more than offset by declines in Asia-Pacific, U.S. and Latin America.

Sales were affected by fewer large projects in Asia-Pacific, as well as industry competitive dynamics and consolidation, which impacted North American service providers' spending patterns.

We believe that the reduced threat from non-traditional competitors has provided the opportunity for traditional service providers to deploy fiber connectivity at a more measured rate.

For example, within our outdoor fiber, cable sales grew at a double-digit pace, and consistent with the market, our outdoor fiber connectivity sales were weaker than anticipated. And we believe that this may largely be the result of timing related to certain service providers passing more homes than they are currently connecting.

We believe these connections will come in time, and we are well positioned to benefit from that service provider spend. Our indoor network solutions business, which primarily serves the enterprise market, is about 55% of segment sales. Revenue declined mid-single digits led by lower copper sales in the U.S.

While indoor network solutions sales remain challenging, we made progress improving our market decision with multi-tenant and hyperscale data center customers, which I'll discuss on the next slide.

Then turning to segment profitability, Connectivity Solutions' operating income in the quarter declined 19% from the prior year to $75 million, while non-GAAP adjusted operating income declined 13% year-over-year to $146 million.

Results were impacted by lower sales volumes and unfavorable mix of product sold, partially offset by the benefit of cost reduction initiatives and lower incentive compensation expense. Let's talk about the progress that we've made in the data center market on slide 6.

As we discussed last quarter, we are continuing to see a shift from enterprise-owned data centers to multi-tenant and hyperscale data centers. While we have historically been stronger in the enterprise-owned market, we are actively developing new solutions to better support the specific needs of the new hyperscale and cloud data centers.

The world's increasing consumption of data, combined with the trend of businesses and service providers outsourcing their data center facilities rather than owning and managing them, has resulted in significant growth in multi-tenant data centers.

To address this shift in the data center market this quarter, we formed the Multi-Tenant Data Center Alliance as part of our partners network. Members will be able to offer optimal network infrastructure solutions for customers who need to deploy this technology in multi-tenant environments.

The Alliance deepens relationships with our partners, and helps enable enterprise customers to transition to cloud computing with CommScope's trusted partners and leading solutions. We are proud that Equinix became the first member to join the Alliance, and we're pleased with the support and success we have seen to date.

The evolving hyperscale data center architectures are also driving demand, but require higher capacity networks with increased density, lower latency and a clear migration path to 25-gig, 40-gig and 100-gig solutions. To meet these challenges, a data center's optical infrastructure must be flexible, future-ready, and easy to manage.

We recently announced our new high-speed migration platform, which uses modular building blocks to support the growing speeds and densities that new applications and architectures demand. We have seen early market excitement about the new platform. We will continue to identify opportunities to innovate and meet the evolving demands of our industry.

We expect to introduce additional new products for the data center market in the second half of this year. Most recently, we completed the previously announced acquisition of Cable Exchange, a privately-held, quick-turn supplier of fiber optic and copper assemblies for data, voice and video communications.

Cable Exchange provides a variety of fiber optic and copper cables, trunks and related products used in high-capacity data centers and other business enterprise applications. The company, which was founded in 1986, specializes in quick turn delivery of its infrastructure products to customers from its two U.S.

manufacturing centers located in Santa Ana, California and Pineville, North Carolina. This highly complementary acquisition deepens our capabilities in supporting the growing market for high-capacity, multi-tenant and hyperscale data centers operated by the world's largest technology and retail companies.

Together with Cable Exchange, we expect to enhance our service to the data center market. We are thrilled to welcome Cable Exchange to the CommScope family, and we intend to operate it as a standalone business within the Connectivity Solutions segment. Let's look at our Mobility Solutions segment results found on slide 7.

Mobility Solutions sales declined 15% year-over-year to $448 million. Sales declined in all major geographic regions. Despite higher sales in India, sales in the Asia-Pacific region declined due primarily to fewer large projects in Southeast Asia compared to the year-ago period.

We also saw continued cautious spending at certain North American wireless operators. Foreign exchange rate changes had a negative impact of less than 1% on Mobility sales compared to the year-ago period.

Industry consolidation, M&A activity, technology changes, regulation, and timing of regional spending patterns all contribute to the ongoing volatility that we've seen in the global wireless market. As many of our peers have noted, wireless is a dynamic market.

Mobility Solutions segment operating income declined 31% year-over-year to $63 million, and non-GAAP adjusted operating income decreased 22% year-over-year to $96 million or 21% of segment sales.

Both operating income and non-GAAP adjusted operating income were impact by lower sales volumes and the unfavorable mix of products sold, partially offset by lower incentive compensation expense. Turing next to slide 8, I'll discuss our cash flow and capital structure.

During the second quarter, CommScope generated $87 million of cash from operations, invested $18 million in capital expenditures, and paid $17 million in integration and transaction costs primarily related to the BNS acquisition. Adjusted free cash flow for the quarter declined year-over-year to $86 million.

The lower level of cash generation was primarily due to lower performance of the businesses and the prior-year benefit generated from the extension of vendor payment terms.

Turning to our capital structure on the right side of the slide, at the end of the second quarter, our net leverage ratio was 3.8 times, and as a reminder, we have no debt maturities until 2021. During the quarter, we refinanced our 2022 term loan to reduce the interest rate margin.

We eliminated the LIBOR floor and reduced the spread by 50 basis points, which will reduce cash interest cost by about $5 million annually. And at June 30, our weighted average effective interest rate was 5.36%.

We also invested $41 million toward the completion of the stock repurchase program announced earlier this year, which was designed to reduce dilution from our equity-based awards. Let's turn to slide 9 to discuss our capital allocation priorities.

As we've consistently stated, since our IPO in 2013, our priorities for cash are, first, to reinvest in the business through R&D, CapEx, and M&A activity; second, to reduce debt until we reach our target range of two times to three times net leverage; and, third, to return capital to shareholders.

We're investing about $200 million on R&D and about $70 million in CapEx annually. We acquired Airvana in October of 2015 for about $45 million to enhance our small cell portfolio. We just acquired Cable Exchange for about $120 million to enhance our data center portfolio.

We accomplished all of this by – while reducing our debt by $815 million in under two years. We continue to believe that reducing leverage benefits all stakeholders, and we expect to reach our goal of approximately $1 billion of debt reduction post the BNS acquisition by the end of this year.

In addition, we're pleased to announce that our Board of Directors has recently authorized the repurchase of up to an additional $100 million of our stock. The intent of the repurchase program is to enhance stockholder value and returns.

Given the expected near-term volatility in results compared to a positive longer-term outlook, we believe that a stock repurchase is prudent. Based on these priorities and our current outlook, we now expect to end the year with net leverage of about four times. Turning to slide 10, I will discuss our third quarter and full-year 2017 guidance.

In the near-term, we expect cautious spending patterns to continue at certain North American service providers due primarily to industry competitive dynamics, consolidation, and delayed signing of certain expected network upgrades. As you know, the large service provider projects in both of our segments are difficult to forecast.

Consolidation discussions can cause uncertainty in the market and temporarily defer spending on network upgrades. Additionally, spending on various parts of the networks happens at different times. Finally, competitive dynamics in the service provider market have allowed customers time to plan their network deployments in a more cost effective manner.

We now believe these deployments will occur in a more sustainable base over a longer period of time. In the interim and as I mentioned earlier, we have taken incremental actions to manage costs, including lowering incentive compensation; cutting selling, general and administrative expenses; and reducing our workforce.

And so for the third quarter, we expect revenue of $1.1 billion to $1.15 billion, GAAP earnings per diluted share of $0.20 to $0.25 based on 197 million weighted average diluted shares, and adjusted earnings per diluted share of $0.50 to $0.55.

For the full year, we now expect revenue of $4.5 billion to $4.6 billion, GAAP earnings per diluted share of $0.87 to $0.99 based on 198 million weighted average diluted shares, and adjusted earnings per diluted share of $2.15 to $2.30, and cash flow from operations of greater than $500 million.

And with that, I'll turn it over to Eddie for his closing remarks.

Thank you, Mark. While we expect the industry environment to remain challenged for 2017, we're focused on our solutions, our customer relationships and cost structure.

The bulk of our 2017 call down is due to North American service provider spending, which we believe has been impacted by industry consolidation and competitive dynamics among service providers. We have also seen weaker international conditions than expected primarily due to the timing of certain large projects.

We continue to believe no material FirstNet shipments have occurred to-date. However, we are well positioned to benefit from the deployments once they begin. In our North American outdoor network solutions business, we have seen volume growth in fiber cable, but fewer homes have been connected than we expected.

We believe that this is yet to come through a more sustainable bill cycle over a period of time. Our conviction has not changed around the fact that consumer demand requires service providers to push fiber deeper into their networks and operators to densify their wireless networks.

On the commercial solutions front, we have made progress during the quarter. We completed our first OneCell deployment by a Tier 1 network operator for Vodafone at Liberty Stadium, a multi-purpose venue in the UK. The results were impressive.

At its first live event attended by 27,000 concert goers, the OneCell solution handled 162 gigabits of throughput over half a million connections during the concert. But OneCell solution was implemented in just 10 weeks from the start of planning to the go-live, including five weeks only for installation.

We are proud of the dedication of our team and believe this is a great step to our OneCell commercialization. Additionally, we have made progress in our indoor network solutions business with the introduction of our high speed migration platform and the acquisition of Cable Exchange, as Mark has talked about.

We are pleased with the way high-speed migration has been received by our customers, and are excited to welcome Cable Exchange into CommScope. Cable Exchange is well respected for their delivery capabilities and customer relationships, and we are thrilled to have them on board.

And finally, we continue to focus on successfully completing the integration of BNS, and look forward to completing the vast majority of our international ERP implementation in the fourth quarter of this year.

While the industry remains challenging, CommScope remains strong, and we're controlling what we can control to ensure the company is positioned for continued success. We're taking action to drive new solutions and actively manage cost.

We will also continue to adjust our operations to adapt to customer spending patterns and technology migrations as we have successfully done many times before. Despite the short-term slowdown in spending, we're confident in our ability to extend our track record of value creation and expect solid growth in 2018.

And with that, I'll turn it back over to Huey to start our Q&A..

Thank you, sir. Our first question will come from the line of Rod Hall with JPMorgan. Please, go ahead. Your line is now open..

Yeah. Hi, guys. Good morning, thanks for taking the question. So, I guess, I wanted to focus on 2018, because we understand that there's always a lack of visibility in telecom spending and obviously, that's kind of playing out here, but you guys are talking about growth in 2018.

I wonder if maybe you could – I know you won't want to guide for it, but could you give us color on how you expect that to develop? Do you believe that some of the timing of these revenues pushes out into the first half of the year? Do you think that Mobility or Connectivity drive that more? Can you just talk us through kind of how you see 2018? And then I have a follow-up to that on Mobility.

I just wanted to see if you could talk a little bit about FirstNet visibility. You said you don't have any orders yet.

Do you expect that still to be happening in Q4, the same way you did last quarter, or are plans there still changing and maybe that revenue is pushing out into the early part of next year or so? We appreciate it if you could comment on both of those things. Thanks..

Yeah, sure. Thanks for your question, Rod. And I'll address the first part, and then Eddie will discuss FirstNet. To your point, we have just begun our 2018 planning cycle, and so it is too early for us to call 2018 at this time.

But as we've commented, we do expect to return to year-over-year revenue growth next year albeit off of what is now a lower call for 2017. The international markets are still a concern for us as we look into 2018, but we do have wins at our back in North America. We believe in both of our segments.

So if we just talk through for a minute maybe by segment or major product area. Within the wireless business in North America, FirstNet clearly is a tailwind as we move into next year, and Eddie will provide some further color to that. Outside the U.S., we talked about the lumpiness in some of the Southeast Asian project activities.

And so, we do see international generally moving in a positive direction, but it is too early for us to be optimistic about growth in the international market there.

Within the Connectivity Solutions business, in our fiber indoor portfolio, you've seen us make nice progress to that during the quarter, you will see more of that in the second half of the year. We believe that, that is a long-term growth market. As we had commented last quarter, we are playing a little bit of catch-up there.

We're pleased with our progress. We have a little bit more to go, but we're very confident of how we're achieving good position in that market. The copper side of the market indoors, we have described that as a non-growth business. We continue to adhere to that.

It is a good profit generator and it's very cash flow generative for us, but not a growth market looking forward. And then the key variable for us is in the U.S. FTTx market. We're enthused about the long-term fundamentals. We do see the MSO starting out a little bit slower than what we had expected.

We see them now coming out of their planning and moving more into ramping as we move further into 2018. The pace of that is still yet to be determined. And then we've commented from the carrier side of the FTTx deployments, we do see more homes being passed and connected right now. And we think that the connections will come in time.

So those would be kind of our high-level views by industry and market as we look ahead into 2018..

Okay. And the case of FirstNet, as we've talked about this several times before with you guys, we have always thought it would begin in earnest in 2018. We do have a very small amount of revenue in Q4, yet to have an order, and we believe there are no orders up there.

We have sold a very small handful of antennas that are multi-purpose that could be used for testing for different applications. They now have seven opt-ins, I guess, as of yesterday. And so they're starting to fill up, so they could make decisions as to when to start deployment, and that could change.

But we're well-positioned with this carrier, and the application of FirstNet and what that would mean in antennas and other apparatus that we sell along with antennas on the towers, we believe that we will be a material participant in that. We have continuing approvals of our antenna designs, there will be more than one.

And so we have continually worked with AT&T to make sure that the designs are being integrated. We have a very good relationship with the engineering staff among all the territories, and you will have different applications as you go through the country.

So we see a tailwind in 2018 and 2019 as we expect FirstNet deployments, as well as additional second deployments to occur at the same time. We've said before, we think this is a several hundred million dollar benefit to us over the life of the build.

It would be three to five years, something in that area, heavily weighted toward the first part of it. Some of the applications though can be served with our traditional antennas, so with a few minor modifications, and so we'll see that as well.

But – so we feel good about what we have stated as the timing of – all subject to change due to customer preferences. We don't control that, but we're standing here ready to support them as necessary..

Great. Okay, guys, thanks. I appreciate all that color..

Thank you, sir. Our next question in queue will come from the line of Shawn Harrison with Longbow Research. Please, go ahead. Your questions, please..

Morning, everybody. Just either on the Connectivity side, mainly focused on fiber wireless. Is any of the weakness you're seeing tied to share loss or maybe lower than anticipated participation either in some of the Connectivity side of fiber being rolled out or just in some of these wireless deployments? And then I have a follow-up..

So, as Mark has said, in the rollout of what we're seeing today, fiber cable is not the primary product that we provide in these rollouts, it is the Connectivity part. Connectivity is a lag to the cabling, and so we would normally see a lag.

And so what he said also in his prepared remarks is that based upon the order rate and position that we have with some of these rollouts, we believe less is being connected than we had originally assumed.

So we don't anticipate or see that there's been any share loss, from constant standpoint, our relationships with the customers, whether it be an MSO or a service provider, in the rollouts..

And, Shawn, again, when you bifurcate the market, we'll call it between carriers and MSOs, we have seen a somewhat slower start to these deployments by certain of the larger MSOs, a market that we are very well positioned in.

And so we do expect that – the usual, come out of the planning stages and begin to ramp here as we move throughout the second half of 2017. And we look forward to the growth opportunities in 2018 and beyond in that market..

I have the same question though on the wireless side of it, be it either with FirstNet or the other U.S. carriers in terms of just the slowness that you're seeing there.

Is there any share dynamic that is a headwind?.

No, we meet regularly with all of the major U.S. carriers. We know specifically what we sell through them, and we know generally what the share dynamics are, and we think that they're virtually unchanged from that standpoint. These build-outs go in fits and starts.

And so, that's something that we have to adapt to, and I think those of us who have followed us over the last several years have seen big ramp-ups and big ramp-downs, and slowness and then high speed. So we adapt to that. We don't see any significant, material or really small share change in that marketplace.

We have said in the aspect of FirstNet that we would expect to share that probably equally with another carrier – another provider. That would be less than what we see in our other antenna business, but that's something that is a special project and I think handled outside of the normal course..

And as my follow-up, on the Connectivity side, there were a lot of issues that came up last quarter, either be it share loss in the enterprise market as you consolidated brands or the lead time issues on the fiber side.

Could you discuss where you're at in, I guess, correcting both of those issues now that we're in early August?.

Okay, we talked about share loss in several aspects, I think, last time. One was in certain geographies, Asia-Pacific being one, where we have lost share. And in many cases, we would expect that loss to be permanent because it's at margins that we don't find attractive generally.

I think in most cases of share in general, the service-oriented, call it, share loss we think are virtually corrected, and we're seeing those customers return back to us as we talked about our expectation would be.

So our customers found alternatives for a period of time, they're working through that, and we don't see any long-term damage as related to the service-oriented challenges that we had. So that's fully what we expected, it's happened with other people in this marketplace. And there is some loyalty for long-term relationships that we have there.

So, we're comfortable with that..

And, Shawn, just for clarity, what we had called out last quarter was some modest share loss within the Tier 2, Tier 3 providers within North America. And when you step back and look at our Q2 performance, we have seen a growth year-over-year in that market with the Tier 1s.

So to Eddie's point, when these things occur, it typically does take a couple of quarters to regain the confidence of customers that you weren't able to ship on time to. That was an item that we've been very transparent about last quarter, we think the impact in Q2 has been immaterial..

That's very helpful, Mark. Thank you..

Thank you, sir. Our next question will come from Amir Rozwadowski with Barclays. Please, go ahead. Your line is now open..

Thanks very much, and good morning, folks. I was wondering if we could touch upon some of the cost savings initiatives that you folks have put into place. If we take a look at the near-term guidance, there is an implication that margins will continue to face some pressure in the near-term.

Just trying to understand sort of the size and scope of some of these initiatives, and how we should think about it playing out in terms of the cost structure going forward..

I'll cover a few and I think Mark can add to that. As you know, we make about 85% of what we sell. That is impactful if the volumes start flowing through the factories. So we have had to adjust, in some cases, some of our factories around the world, not all, depending upon the products that are made at certain of them.

That's something that we have done all of our life. And it's something that, as you have seen, Amir, the ability of us to ramp up and then to ramp down, is something that makes us maybe different than some of our competitors. So we continue to do that. We've had a general look at our fixed costs and have made some adjustments there.

We'll continue to review the size of our company relative to – I mean, the cost of our period expenses relative to the size of the company and adjust as appropriate. So that's an ongoing nonstop thing that CommScope does. It's something that's embedded into our – or bred into our beliefs, and so we'll continue to do that..

Yeah. And, Amir, as far as the cost actions that – I believe you're referring to those that are incremental to our $70 million of additional synergies for the year. And you're right, you can see that at least initially reflected in the $32 million reduction in operating expenses versus the second quarter of last year.

I think I commented in my prepared remarks that we have cut SG&A, we have reduced the workforce, and we have curtailed incentive compensation. There are incremental actions that we have taken during the quarter that haven't manifested themselves yet on the P&L, and you'll see the impact of those in the second half.

The other thing to keep in mind from an overall margin standpoint is we have called softness in the U.S. service provide market that we'll alter the mix a bit between North America and the international markets. We do generate generally higher gross margins in North America. So that will put a little bit of pressure on gross margin..

Great. And then just one follow-up on – in terms of FirstNet.

I mean, what are sort of the stages here going forward? And sort of as we're tracking the potential progress and the opportunity set, what should we look for? It sounds like testing and spec-ing gear has already been taking place, or is it, at the very least, is in process? Is the next phase sort of working with some of the turf vendors? Is the next phase waiting to see sort of the states that opt in? Just trying to assess what data points investors should look for in terms of the potential progress to getting to that sizable opportunity..

I think, Amir, what you said is exactly what is happening. The acceptance for the antenna designs is almost there. We're still working – we and others are still working on the finalization of those. We both have tweaks to designs. And there could be a few smaller companies that would participate with specialty antennas.

It will depend upon whether it's in a rural or urban venue as to maybe the speed of deployment. They could do some rural maybe quicker. And so, we're in touch. That's the benefit of having coverage as we have. We're in touch with all of those engineering districts to see what is going to be needed.

And as the op-in – we would expect as the opt-ins continue, that they would take advantage to start deploying in some of the areas as opposed to waiting till the finalization of it all. But we would be in contact with AT&T on a ongoing basis as to what their needs are. There is a time lag between ordering and delivery.

So we need to make sure of what their expectations are so we can certainly meet or exceed their demands..

Thanks very much for the incremental color..

Thank you, sir. Our next question in queue will come from the line of Jess Lupert with Wells Fargo Securities. Please, go ahead. Your line is open..

Hi, guys. A couple of questions, maybe just first, I was hoping you could help us understand to what extent the North American Mobility weakness is largely due to the large U.S.

carrier deploying FirstNet and some of the associated delays, or if it's become more widespread, and perhaps how confident you're feeling about your revised outlook for the second half of this year.

And then just secondly, on the indoor business, last quarter, you had mentioned a number of integration issues with respect to the ERP consolidation, the rebranding of some products, I think there were some manufacturing issues.

I was hoping to understand where you are with these factors, are they resolved, still presenting challenges, and how are you thinking about that indoor business as we work through the next couple of quarters? And what gives you optimism that new products, Cable Exchange, can positively move the needle next year? Thanks..

Sure, Jess. If I could, and maybe I'll just frame it briefly, but again, of the call down that we have made for the full year, about half of that comes from each of the two segments. About two-thirds of the total comes from North America, from service providers.

Within the wireless segment, the call down there is much more related to softness that we see in the international markets, much less so as far as service providers. The impact of timing around FirstNet, we had addressed that in our updated outlook at the end of Q1. And so what we see is more of the impact of M&A and cash conservation in the U.S.

market from a carrier standpoint. With respect to your second question around the impact of some of the integration challenges that we had talked about, we see those largely behind us. In Q1's results, we had indicated about a $15 million charge or expense, if you will, one-time, related to ramp-up in efficiencies.

Our capacity ramping is virtually complete, at least at this point in time. So we have worked through that. Within the enterprise market, we did call out some share loss, in particular in some of the international markets, we have pointed to brand confusion.

And we have worked hard during the last quarter and a half, a lot of activity with business partners to clarify those brands. In some of the international markets where margins are low or negative, we have relinquished that piece of business.

But while there still may be a little bit of work to do in that enterprise market with respect to integration challenges, we feel that we've made very good progress and that most of that overhang is now behind us.

And I think one thing that demonstrate that, the buying patterns of our customers, meaning how often they order as opposed to ordering in bulk, has changed to what is more typical. So their expectation of delivery is now being met. And so their need to order in bulk and build up inventory of their own is not there anymore.

And so that's a much better process for both of us..

And if I could just quickly follow up on the international Mobility piece.

Can you help us understand where you're seeing most of the incremental weakness there? Is that just project timing in Asia or is that more spread where we're maybe feeling better, worse?.

Yeah. Mark said in his comments that it's the – year-over-year, is the absence of large projects. We had large projects last year in the Philippines and Vietnam that are not recurring. That's the nature of this business in that part of the world, that it's not a repeating revenue kind of thing.

It is big project oriented, and we haven't had one of those in this time period, so that will naturally make the comparison challenging..

And maybe just to add to that, Jess. We have seen, I'll call it a continuation of healing in Europe. Still not yet back to a growth profile, but certainly moving in the right direction. And then in India, we did see growth in that market in the second quarter. We expect to see growth again in the third quarter.

But in the aggregate, it's the softness in Southeast Asia. Over the last four or five years, we have had the benefit of at least one to two large projects each year.

We will point to at least three countries that are in the pipeline right now, Indonesia, Malaysia and Thailand, all of which are either in the planning stages or in early deployment stages. But not yet to the point where it has generated meaningful revenue for us..

Thanks, guys..

Thank you, Jess..

Thank you. Our next question will come from Vijay Bhagavath with Deutsche Bank. Please, go ahead. Your line is open..

Yeah. Hey, good morning, Eddie and Mark..

Good morning..

Good morning..

Yeah. Hey, I'd like to get your thoughts on how should we think of growth rates for fiber and your corporate cables business heading into next year. And where I'm coming from is, could we anticipate fiber getting ahead of copper in terms of growth rate heading into next year? So, we see a net positive single-digit growth for Connectivity next year.

Are we thinking this correctly? Thanks..

Yeah. Sure, that's a good question, Vijay. And the answer, unfortunately, is going to be it depends.

When you look at our most recent performance, and I think you're referring to our outside plant business as opposed to fiber in the aggregate, including indoor, is that correct?.

Yes..

We have seen a higher rate of growth. As we had commented, our fiber cable sales, not only in the second quarter, but in the last several quarters, has been growing at a nice double digit rate. The meaningfulness or the sizing of fiber cable within our total portfolio though, that is a fairly small component.

Connectivity, the apparatus that goes at either end of the cable, that is the bulk of our outside plant portfolio. And so that has been growing more slowly than what we had anticipated.

The positive for us is given that we do have coax cable in the portfolio as well, MSOs, we think, will take advantage of their installed networks to maximize their investment, and to use both coax and fiber cable as they begin to deploy.

The fiber cable growth for us, at least over the near-term, has outstripped the connectivity primarily because of the rate at which homes are being passed versus connected. And so, we'll have to see how that plays out into 2018, at some point, that will shift. The carriers are not laying the cable without plans to connect it.

And so, those connections, we believe, will follow the timing of it, though it'll be tough for us to call..

And I think, Vijay, as Mark has said before, in fiber cable for the outside plant, it's primarily the MSO market that we support. It is not the big builds that have been recently announced that – we do support those customers, but it's more on the connectivity side..

Yeah. Perfect. A quick follow-up, if I may. Any update on design wins at these major cloud companies? These are the big spenders for fiber. Thanks..

On relationships?.

Design wins with hyperscales..

Well, as we've talked about, I think, on every call since BNS, we had one hyperscale customer. We still have one major hyperscale customer, but we are seeing revenue build at the others. I think Cable Exchange brings us an entry into most of them, if not all. And so we're excited about that.

The enthusiasm raised since this announcement of this small company has been surprising to us. And we think the technology that CommScope has, along with the agility and delivery speeds that Cable Exchange can bring, married together is going to be a unique growth opportunity for us.

We think that over time, these larger people like to have multiple suppliers. So, we think there's an opportunity for us over a period of time to make some progress and growth in that marketplace..

Thank you..

Thank you, sir. Our next question will come from the line of Mark Delaney with Goldman Sachs. Please, go ahead. Your line is open..

Yes, good morning. Thanks for taking the questions. I guess, first, just something to clarify a bit more specifically on the cadence of the OpEx cuts. Mark, I know you talked about $35 million down year-over-year in the last quarter and some new opportunities as you go forward.

But is that sort of $35 million in decline year-over-year, should we expect similar rates of declines for the next couple of quarters? I guess, that was part one.

And then, I had a – a second question is, if I'm looking at your full year revenue guidance properly, it seems like the sequential decline implied in the fourth quarter is down low single-digits sequentially.

And I know it's obviously coming off of a low base for the September quarter into December, but that'd be a more benign December Q-on-Q decline than what you've seen in most recent years.

So could you just help us understand the thought process behind the 4Q implied revenue guidance and how much visibility you have into fourth quarter revenue at this point? Thank you..

Yeah, I think your interpretation there, Mark, is correct. We would call as far as year-over-year growth or decline, the third quarter is a low point. And we do expect to see growth beginning again in Q4. And so you do see a somewhat atypical sequential ordering pattern there in 2017.

As far as the expense reductions, again, the synergies, those are intact as we have been talking about them now for some time, those will continue. The reductions that we have put in place earlier in the year, you see those being reflected in our Q2 results.

There are incremental actions that we have taken that aren't yet reflected in the P&L, which you will see here in the second half, and we will continue to manage both our P&L expenses, as well as our cash flow generation until we get through this low period and we're back into a growth cycle here next year..

If I could just follow up, Mark, on the 4Q's seasonality and kind of being better than normal seasonality, is that entirely just the lower starting point or is there any specific projects that you guys have line of sight to?.

Well, as Eddie had talked, Mark, we do expect FirstNet activity to begin at some point in the fourth quarter. Some of the work here that we've been discussing is project-related.

Fairly difficult to call exact timing, but, look, when we take our full year outlook down by $350 million, we're going to make sure that we've taken all those things into consideration..

Thank you..

Thank you. Our next question will come from the line of George Notter with Jefferies. Please, go ahead. Your questions, please..

Hi, thanks very much, guys. I guess, I wanted to go back to the fiber connectivity business. So you're talking about the rate of homes passed versus homes connected, there's a differential there. Also, as we came out of the Q1 numbers, you guys were talking to an inventory correction that was going on, on fiber connectivity.

I guess, I'm trying to understand if we're talking about the same thing here in terms of homes passed versus connected, or there's a different influence that's new that popped up this quarter. So if you can just clarify that, that would be great..

Yeah, George, the inventory that we had talked about in Q1 was the fact that lead times had extended, not only for us, but for the industry, as demand exceeded supply generally.

And whether it was ourselves or others that are serving the market, everybody was in a capacity ramp mode, and lead times, in some cases, for us had extended out to the 16-week plus timeframe. And so, you had customers that were placing orders well in advance of when they otherwise would for certain products.

As supply and demand have caught up with each other as we moved through the second quarter, those lead times have come in. And so, the inventory that we had referred to in Q1 was, again, an imbalance that we think has been largely corrected at this point.

So we don't have significant amounts or anything unnatural at all as far as our Connectivity products accumulated in a channel to our knowledge..

I think and the answer to your question about Connectivity going forward, we know where we play in that market. And so, we're not seeing the same rate of growth that you would see in the fiber cable that has been talked about for the larger projects.

So our deductive reasoning is that there's not as many connected fiber to the home or node or whatever that has been typical, and that we're seeing more homes passed than we are seeing connected..

Got it. Okay.

So you're saying that cable operators and telcos are pulling fiber-feeder cables out into their outside plant networks, but not yet connecting homes to the same degree?.

Yeah. The rate of deployment versus the rate of shipment on that product set is difficult for us to gauge, and that is a, say, fairly small part of our portfolio, George. Whether or not the cable is being shipped but not deployed is something that is not in our wheelhouse to gauge that precisely.

But everything we're talking about here is compared to our expectations. As we had come into the year, our expectation was that there would be more of a ratable deployment of the connectivity as the fiber cable itself was being deployed. And we aren't seeing that ratio as we had expected coming into the year..

Got it. Okay. Thanks very much..

Thank you, sir. Our next question will come from Steven Fox with Cross Research. Please, go ahead. Your line is now open..

Thanks. Good morning. Just one question.

Just broadly speaking on the Connectivity business, can you just sort of talk to why you think you're holding share as opposed to maybe losing share in certain pockets? And the reason I'm asking is because if you look at some results from like Anixter, Belden, et cetera, there's been some talk of some constraints around contractors, which you haven't brought up.

And also, you've seen some better trends around Connectivity, I think, on the outdoor side. So I'm just curious if you can just provide some assurances around what you think is going on with your market share in Connectivity. Thanks..

I think, Steve, this is Eddie. I think in the large customers that we serve, we understand where we are. On the – the partner networks that we have are extensive. We've sort of gauged them as to shortages of capacity and they – what they tell us is they don't see anything on materiality, so not sure as to that comment..

Okay. But overall, I guess, you're fairly confident based on what you're seeing that there's not any kind of share shifts that you have to address as well on Connectivity. Just to get that on the record..

We see nothing of – that's meaningful..

Okay. Fair enough, thanks..

Thank you, sir. And at this time, we do that time for two more questions. Our next question will come from the line of Kulbinder Garcha with Credit Suisse. Please, go ahead. Your line is open..

Thank you. I think you've kind of touched upon this a little bit during the call, but I want to be clear. In terms of a return to growth in each business segment, Connectivity, you have more visibility, will come sooner, I think. Is that right? And that is – but it's still not going to be by the end of this year.

Mobility, the trajectory improves as we go through this year and drop of returns in 2017. That's just the timing of kind of how growth looks in each segment. Then the second question I had was on the approach to growth given the weakness, I'm kind of surprised that there isn't a $100 million or $200 million new program as such.

Is that something that's going to be communicated later or is it going to be more incremental? Or if you could let us know how you're thinking about that, that would be helpful. Thanks..

Let me answer the last part of that question first. We constantly look at our cost structure. I think that's the way we maintain 40% gross margin and 20% operating income. That's not something that we wait. We have expectation that the market recovers and that we're going to need a company that is substantially the same as what we are today.

We impacted the variable part of that as much as we can to not lose capacity or to maintain capacity at a level that is flexible, and we'll continue to do that. So I think – we've gone through a lot in the integration of cost cutting. We instituted another level of it about six weeks ago.

We'll continue to look at our cost structure to make sure it is matched right with our business as it evolves. So I think that's something that – a close focus of how we operate our business..

And then I think, Kulbinder, back to your first question, I had commented previously that we did see growth in our outside plant through Connectivity sales to the Tier 1 service providers in the U.S. on a year-over-year basis. We had talked about within that, our fiber cable growing at a double digit pace. And the Connectivity, we believe, will follow.

The exact pace of that, again, we were wrong coming in the year. We thought it would be more ratable. So we do expect there to be a catch-up period. We don't believe that the carriers are laying the cable without plans to connect it. The other side is the MSO market, which has been slower to start.

We believe that they are still, in some cases, in their planning cycle; in other cases, in the early stages of deploying. We expect that to gain momentum moving into 2018, and we are very well positioned in that market..

Thank you..

Thanks, Kulbinder..

Thank you. And our final question will come from the line of Simon Leopold with Raymond James. Please, go ahead. Your line is open..

Great. Thanks for taking my question. I wanted to ask about two topics. First, the easier one, I think, is just trying to get a sizing of this Cable Exchange business. You did mention the approximate size of the deal, but just trying to figure out how much revenue we should expect to come from that business.

And then the other question, trending question I'm interested is understanding a little bit about what's going on with your small cell/DAS business. I've made the assumption it's not wedded to FirstNet, that it wouldn't necessarily correlate with that particular project as much as cabling and antennas might.

So, is that correct? And if you could give us some idea of the contribution and trend for small cells, I think you've said it would be between 25% and 30% of Mobility. Just want to get a better understanding of where we are and where we're going. Thank you..

Hey, Simon, I'll answer your first question. The approximate annual revenue for Cable Exchange is about 1% of CommScope's consolidated sales..

Okay. In the case of, I would say, DAS, the DAS business, in which we believe is served by what the – some of the tower guys who talk about small cell, as I said earlier, we participate, if it's a DAS, in the full complement of all the plumbing and concealment and all of that, that would be necessary.

In the case of a small remote radio head, we would do concealment and the plumbing. And it's complicated as to deployment by zoning and siting and power and all those sorts of things. So that will be at a pace – that's not something that we do normally, like that would be the pace that the operator can deploy yet.

In the case of what we would call small cell, that is an indoor product primarily, although our first deployment of it was in an arena, which is mostly outdoor, but they're all protected. So, that is different. Neither of these are related to what FirstNet would be.

In our perspective, FirstNet is a government sponsored safety oriented deployment so everybody can have access to cellular coverage during emergencies. It will be covered by antennas, as well as other plumbing or apparatus type products that we sell. And it's not just the antennas to us, it's all the deployment that goes up the tower..

Great. Thanks for taking my questions..

Okay..

Thank you, sir. And with that, I'd like to turn the program back over to Eddie Edwards, President and CEO, for any additional or closing remarks..

Thank you. While our second quarter results and outlook do not meet our expectations, we still firmly believe significant opportunity lies ahead, and that CommScope has strong earnings power and cash flow characteristics.

As a market leader, we intend to adjust our business as needed to adapt to customer spending patterns, as well as technology migrations. We will also continue to focus on driving new solutions and adjusting our market strategies to reinvigorate our indoor network solutions business.

We thank you, again, for taking the time to joining us on our earnings call today. We appreciate your continued interest in CommScope. Thanks..

Thank you to our presenters and thank you to all of our participants for joining us today. We hope you find today's conference informative. This will conclude the program. You may now disconnect..