Jennifer Crawford - CommScope Holding Co., Inc. Alexander W. Pease - CommScope Holding Co., Inc. Marvin S. Edwards - CommScope Holding Co., Inc..

Amir Rozwadowski - Barclays Capital, Inc. Vijay Bhagavath - Deutsche Bank Securities, Inc. Gausia Chowdhury - Longbow Research LLC James E. Faucette - Morgan Stanley & Co. LLC George C. Notter - Jefferies LLC Simon M. Leopold - Raymond James & Associates, Inc. Jeffrey Thomas Kvaal - Nomura Instinet Jim Suva - Citigroup Global Markets, Inc..

Good day, ladies and gentlemen, and welcome to the CommScope First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. I would now like to turn the conference over to Ms.

Jennifer Crawford, Director of Investor Relations. Ma'am, you may begin..

Thank you, Bridget. Good morning and thank you for joining us today to discuss CommScope's first quarter 2018 results. With me on the call are Eddie Edwards, CommScope's President and CEO; Alexander Pease, 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 beliefs, 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 first 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. Alex will review our first quarter segment performance, discuss cash flow and capital allocation priorities, and provide our outlook for the second quarter and full-year 2018.

Eddie will then discuss the progress we have made on the path to 5G before we open the line for Q&A and then provide closing comments. To make sure as many people as possible can 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 Alex, who as many of you know, joined us at the beginning of April, succeeding Mark Olson who recently retired. Alex brings to us nearly 20 years of financial and operational experience across a range of industries, including serving as CFO at two publically owned companies. I'll turn it over to you, Alex..

Thank you, Jennifer and good morning everyone. Before I get started, I want to publically thank Mark for building such an exceptional finance team.

As I've gotten around the organization in my first few weeks, it's clear that I'm inheriting a function that has been extremely well run and joining a leadership team that has done and will continue to do great things for this company and for our shareholders.

I look forward to meeting many of you in the coming months and at our upcoming Investor Day on June 13 and sharing much more about my early perspectives. Moving on to our results.

As you may have seen in our press release this morning, we delivered first quarter results at the high-end of our expectations, with particular strength in our Mobility Solutions products as operator spending begins to build from what we saw last year.

While there are certainly some challenges emerging in the balance of the year, which we are going to discuss. And the business is healthy and we believe that the strategies we put in place in the last few years are gaining traction. If you turn to slide 4, you can see the details of our first quarter results, which were in line with our expectations.

Revenues for the quarter declined about 1% over – year-over-year to $1.12 billion, as growth in the Europe, Middle East and Africa or EMEA and Asia-Pacific regions was more than offset by lower sales in the U.S.

Net sales in most international regions increased primarily driven by the 2.4% favorable impact with foreign exchange rates as compared to the prior year period. While foreign exchange rates positively impacted our sales, they had the opposite impact on cost, given our large manufacturing presence outside the U.S.

Orders were $1.22 billion in the quarter and our book-to-bill ratio was 1.09, above both the year ago period and the three-year average for the quarter, signaling good momentum heading into Q2. For the quarter, operating income was $104 million.

Non-GAAP adjusted operating income, which excludes amortization of purchased intangibles, integration and transaction costs, restructuring costs and other special items declined 13% to $189 million, or 17% of sales, down approximately 220 basis points from prior year, driven by a number of factors that I will explain in a minute.

Gross margins also compressed approximately 320 basis points year-over-year to 36.7%. The declines in both operating income and non-GAAP adjusted operating income were primarily driven by a combination of lower sales volumes, reductions in certain selling prices and higher material costs.

While we did show a $27 million improvement in the operating expense, or 13% year-over-year, this did not fully offset the headwinds I just mentioned.

Net income for the quarter was $34 million or $0.17 per diluted share, and non-GAAP adjusted net income was $95 million, or $0.49 per diluted share, which was at the top end of our expectations for the quarter. Moving on to the segment performance for the quarter. Let's begin on slide 5 with our first quarter results for the Connectivity Solutions.

Connectivity Solutions sales declined 1% year-over-year to $674 million. Broad based international growth was more than offset by declines in the U.S.

The international growth was driven by the 2.4% favorable impact from foreign exchange rate changes as compared to the prior year period, which would imply a negative 3.4% growth rate on a constant currency basis.

To provide some color on the individual pieces of the business, our outdoor copper business continues to perform well, gaining market position in this important but declining portion of the market. We also saw good performance in bookings in our outdoor fiber and coaxial cable products.

Although, our traditional indoor fiber business remained slow, as the enterprise market continues to transition to more cloud-based and hyperscale data centers, we're encouraged by a number of active and promising conversations with key customers, and are optimistic that we are increasingly well positioned for the future of this growth market.

Connectivity Solutions operating income increased 13% year-over-year to $53 million. GAAP operating income improved largely due to lower integration costs. Non-GAAP adjusted operating income decreased 5% year-over-year to $109 million, while adjusted operating income margin decreased approximately 70 basis points to 16.1%.

Higher input costs and lower fixed cost leverage were partially offset by improvements in manufacturing efficiencies, synergy capture and benefits from cost reduction initiatives.

In addition, while we took targeted pricing actions to offset inflationary effects of commodity costs, primarily in the enterprise market, we have found it challenging to maintain these pricing levels internationally and remain competitive.

While sales growth has not accelerated as fast as originally contemplated, we do expect modest top line growth in the Connectivity Solutions segment, as our investments in technology, Cable Exchange and key customer partnerships begin to gain traction, particularly in our indoor fiber business at hyperscale, cloud and multi-tenant data customers.

We also anticipate growth in our outdoor fiber business, as operators continue to push fiber deeper and deeper into their networks. Turning to slide 6 and first quarter results for Mobility Solutions.

Segment sales for the quarter declined 2% year-over-year to $447 million, as growth in India and the EMEA region was more than offset by declines in the U.S., as expected. The international growth was primarily driven by the 2.5% favorable impact from foreign exchange rate changes compared to the year ago period, implying an organic decline of 4.4%.

Sequentially, Mobility Solutions sales increased 5%, as operator spending continues to ramp up, and we're seeing a growing backlog, particularly in our North American markets. Our book-to-bill in the Mobility Solutions segment was 1.16, with particular strength in the U.S.

As you may have seen, AT&T announced a number of leasing agreements with certain tower companies, giving us another positive signal that we may be entering a longer term build cycle. We expect meaningful revenue related to FirstNet deployments beginning in the second quarter.

In the quarter, our Mobility Solutions segment GAAP operating income was $51 million and non-GAAP operating income was $80 million. The adjusted operating margins compressed by approximately 430 basis points to 17.9%. The bulk of this compression was driven by lower leverage on fixed costs as volumes were weaker year-over-year.

But we also saw foreign currency effects, as much of our product is manufactured outside the U.S. Both GAAP and non-GAAP adjusted operating income were also impacted by unfavorable geographic and product mix. Offsetting these headwinds were benefits from a range of cost reduction actions undertaken throughout 2017 and into the beginning of this year.

Moving on to cash flow and capital structure on slide 7. During the first quarter, CommScope generated $35 million of cash from operations and invested $14 million in capital expenditures. First quarter 2018 cash flow from operations was impacted by two primary issues.

Number one, as we reported in February, we received a $60 million customer payment in late 2017 that was not due until the first quarter of 2018. And secondly, cash payments for interest were $15 million higher year-over-year, due to the change in timing of interest payments related to the refinancing actions taken in 2017.

On the right side of the slide is just a reminder of our priority utilization of cash, which remains consistent with the company's historical strategy. Most of you are familiar with these. First, we'll invest and reinvest in the business through research and development, CapEx and M&A.

Next, we'll reduce debt until we reach our target net leverage range of two to three times. And third, we'll return capital to our shareholders. Before I get to guidance, I wanted to provide a bit more color on the North American market dynamics, as this is a large driver to both our top and bottom line outlook.

Looking ahead, we expect large North American telecommunications companies and cable operators to continue to deploy cutting edge solutions to meet the increasing demand for bandwidth. This includes fiber deep investments, metro cell network densification, and improved spectrum management.

All of which CommScope is uniquely positioned to support through both our existing product lines and our ongoing innovations. At the same time, there's a focus at each one of these operators to lower their total cost of ownership, drive down installation costs and increase efficiency.

These plans are creating increasing price pressure across the entire supply chain and CommScope is no exception.

That being said, we are in the enviable position of having the best technology, a highly efficient supply chain, and a culture of continuous improvement that will enable us to be a critical partner in all areas of their business, as our entire industry makes the transition to 5G and all of the potential that it represents.

More specifically, as we move through 2018 and 2019, we are engaging as never before with these large North American customers to lower their total cost of ownership.

While this will create short-term margin pressure, our goal is to drive incremental sales opportunities and a deeper spirit of partnership in order to strengthen our industry-leading position. That being said, this shift will create a set of challenges even as it unlocks potential longer term opportunities.

These challenges and opportunities include targeted price pressure on certain products, increased demand for speed to market and innovation, accelerating opportunities for most of our – for some of our most innovative solutions, solutions such as metro cell, fiber-to-the-home, and cutting edge OneCell in-building Cloud RAN small cell.

It also provides opportunities for broader collaboration up and down the supply chain, manufacturing, and value engineering to drive cost reductions across the entire business. Unfortunately, as with any dislocation of this nature, it will create some transitory challenges.

Overall, we expect an approximate 1% to 1.5% of incremental pricing pressure for the remainder of 2018 and full year of 2019, on top of the typical 1% to 2% that we have experienced historically.

This will lead to some level of short to medium term margin compression on a percentage basis, although we are confident that it will also lead to incremental revenue, and an increase in absolute margin dollars that would otherwise not be acceptable.

As a reminder, with our strong returns on capital and relatively high fixed cost business, incremental growth is significantly more accretive to shareholder value than maintaining a certain margin percentage at much lower volumes.

Over time, we will collaborate with both our customers and our supply chain partners to mitigate this impact, but it will have an impact on our 2018 outlook for both Mobility and Connectivity, as you will see shortly. Turning to slide nine, I will discuss our second quarter and full year 2018 guidance.

For the second quarter, we expect revenue of $1.21 billion to $1.26 billion, GAAP operating income of $151 million to $166 million, non-GAAP adjusted operating income in the range of $230 million to $250 million, GAAP earnings per diluted share of $0.31 to $0.34 based on 196 million weighted average diluted shares, and non-GAAP adjusted earnings per diluted share of $0.63 to $0.68.

On the right side of the slide, we outline our full year 2018 guidance. We continue to expect revenue in the range of $4.675 billion to $4.825 billion.

However, we now expect GAAP operating income in the range of $545 million to $590 million, non-GAAP adjusted operating income in the range of $870 million to $920 million, GAAP earnings per diluted share in the range of $1.20 to $1.32, based on 196 million weighted average diluted shares, and non-GAAP adjusted earnings per diluted share of $2.33 to $2.48.

And cash flow from operations of more than $550 million. This guidance reflects the price actions by North American operators that I had mentioned previously, as well as higher input cost not just in copper but also in steel and aluminum, as well as higher freight and foreign exchange headwinds.

Before I turn the call over to Eddie, I want to reiterate the sentiment that I shared at the beginning of the call. This is a fantastic company in a stage of the business cycle that has significantly more tailwinds than headwinds. And my confidence in our ability to continue to drive significant shareholder value is high.

That being said, we operate in a highly dynamic marketplace with significant volatility and a high level of concentration with certain key customers and investment trends. While we have proven our ability to manage this effectively over time, this will require short-term adjustments that I know were not expected by anyone on this call.

I'm confident in the future of CommScope and the reality of the opportunity in front of us and I'm looking forward to working together with this remarkable team as we work to drive growth and enhance the operational performance of the company. With that, I'll turn the call over to Eddie for a few comments before we start the Q&A..

Thank you, Alex. Before I share my comments on the quarter, I want to take this opportunity to welcome Alex to the CommScope team. We're very pleased to have someone of his caliber take on this role.

And now while Alex covered the results, let me just say that we recognize and are not pleased with the immediate impact these price reductions are expected to have. We are focused on realizing further significant cost reductions over the short and long-term and capitalizing on the additional opportunities to showcase our world class solutions.

At the same time, we're taking action to position the company to meet the needs of our customers in the 5G world by continuously innovating and by becoming faster and more agile. As you can see on slide 10, we have made significant progress in our portfolio during the first quarter to enhance our solutions for the transition toward 5G.

This progress includes collaborating with Nokia on a Massive MIMO integrated antenna, which enables diverse densification in support of mobile data traffic growth and the evolution to 5G. And joining the fixed wireless access market with the introduction of a new integrated antenna solution based on Open RAN, open interface specifications.

Open interface allows wireless operators to mix and match radio access network or RAN hardware from multiple vendors to more flexibly address varying requirements. We're also pleased with our OneCell progress, as it was deployed at 5TONIC, an international 5G technology research and innovation lab.

In addition, increased momentum with European and North American operators give us increasing confidence that OneCell has a very bright future.

Other progress in the beginning of this year, including successfully completing Spectrum Access System or SAS interoperability testing for the Citizens Broadband Radio Service spectrum in the U.S., with multiple equipment suppliers, including Ericsson. We also teamed up with Nokia to reduce active DAS complexity.

Our new Era DAS C-RAN solution removes the need for the radio heads normally needed to feed an active DAS and consequently reduces the space and power requirements of an active DAS, in turn saving our customers' money.

As you can see by the progress we made in the first quarter, we have maintained our focus on innovation to enable our customers to transition to 5G as effectively and economically as possible. We have the same focus on innovation in our Connectivity Solutions business as outdoor and indoor networks transition to fiber intensive architectures.

In the outdoor market, as previously noted, we expect stronger growth in the second half of the year as service providers and major MSOs continue to deploy fiber and fiber connectivity deeper into networks. Our scalable modular solutions help these customers cost effectively migrate their networks.

In the indoor market, we continue to execute on our High Speed Migration platform and quick turn capabilities. Our investment in these new capabilities has positioned us better with hyperscale and multi-tenant data center customers.

While we started from the small base last year, we have shown growth at four of the five hyperscale players and have a number of important trials or pilot projects underway. We expect to accelerate this progress as we move through 2018. And with that, we will now turn the floor open for questions and turn the call back over to Bridget..

Thank you. Our first question comes from the line of Amir Rozwadowski with Barclays. Your line is open..

Thank you very much and good morning, folks..

Good morning..

Morning..

I was wondering if we could just touch upon sort of the updated outlook for the year.

Just as a point of housekeeping, how much of the revised outlook was impacted by some of the higher input costs versus the pricing impact that you folks had mentioned? And then if we think about the pricing impact, can you walk us through sort of what has changed since you last put out your guidance in sort of mid-February in terms of the negotiations with the carriers and so forth? And how sort of that pricing change took place? Thank you..

Sure, Amir, let me take that and then I'm sure Eddie will want to pile on as well. So, in terms of the first part of your question, how much of the revised outlook was pricing versus input costs? I would say, fairly, the majority of the impact was what we saw in the pricing actions that Eddie described in his remarks.

There's also been some inflationary effect. As we mentioned, we anticipated the copper inflationary effect at the beginning of the year. But, as you know, as we got into the year and the tariffs were announced, we also saw inflationary effects on both aluminum and steel start to manifest in our markets.

So that certainly had an impact on our guidance as well. The third thing that impacted the guidance was a bit of the softness that I described in the Connectivity segment, and some of the impact that that had on, essentially, our margin structure and the absorption rates given the fixed cost nature of the business.

So that's really how the guidance breaks down.

And remind me, what was the second part of your question?.

In thinking about sort of when you folks had given guidance in February, what has changed in terms of pricing negotiations with carriers? Just trying to understand how sort of the development occurred, where these new pricing plans have been put into place?.

Yeah, Amir, I think what we saw is a certain of our customers changed their schedule of when we normally have these talks, and we made the decision. And this is something over the course of both 2018 and 2019 that we expect to see.

We made the decision that we wanted to strengthen our position with these customers in North America, and we basically forward priced the selected products. And, as Alex said, we expect a 1% to 1.5% incremental price erosion through the coming two years. We do expect accelerated opportunities on some of our products like OneCell.

And we would expect to see them introduced at a faster pace in some of these carriers, in metro cell, as well as fiber-to-the-x. We have to do a lot of work in cutting cost and make sure that we offset this.

And we think over this same period of time, we have a pathway to doing probably something greater than two-thirds recapture, through redesign of our products and collaboration with our supply chain. So we have demonstrated that ability in the past. So it's – we fully expect to start immediately and recover this two-thirds plus through end of 2019..

Thank you very much for the incremental color..

Sure..

Our next question is from Vijay Bhagavath with Deutsche Bank. Your line is open..

Yeah, hey, good morning, Eddie. Yeah, Alex, looking forward to....

Morning..

...working with you. Just a two-part question here quickly. On the margin front, Eddie, Alex, like to get your thoughts on product innovation and where I'm coming is things like fiber connectors, for example or even 5G antennas, multiband antennas.

You think anything you could do in terms of product innovation, product mix, if that could help you to improve margins in the near term? And then the second part is on hyperscale cloud in particular.

What are the sales initiatives and perhaps product initiatives you have in place to get one or more of these hyperscales? And where I'm coming from is, every cloud CapEx data point we are hearing is strong and its up into the right. Thanks..

Yeah, I'll talk about maybe the wireless side a little bit. During the course of the last year, we've developed something over 60 different new antenna types that introduced innovation, not just in FirstNet, but around the globe. We expect to accelerate that innovation, and do our best to try to curtail cost so we can see margin expansion come back.

I think that we have demonstrated in the past that we have the ability to do that. Not just in the wireless business, but also in the connector basis.

We have a connector excellence program that's well underway that we expect to take cost and improve efficiency of our customers, to be able to deploy fiber connectivity into the fiber-to-the-x deployments..

Perfect. Thank you..

Okay. Thank you..

And I guess, Ajay (sic) [Vijay], the last part of your question was around the hyperscale and things we're doing in hyperscale to gain traction in that market. And I guess what I would point to most readily is the investment last year in the Cable Exchange business, which clearly gave us a different level of focus in that market.

We're encouraged by a number of the customer conversations that are ongoing. Historically, those customers have relied on really a single supplier as they've been kind of defining and scaling their business model.

And what we're seeing is, they're reaching a level of scale now where they're interested in introducing a secondary source of supply for some of their most critical components. And we feel pretty confident that we're well positioned to take advantage of that trend.

Obviously, that's a bit slower to develop, but we feel as though that's going to be a growth platform for us going forward..

Yeah, you know, Ajay (sic) [Vijay], I think the conversations that we had, as Alex has mentioned, have gone very well. We know that we're in place to have trials in the very near term. We're certain of the hyperscale customers. They appreciate the global footprint that CommScope has, I think, better than anyone in the marketplace.

It was embryonic from our standpoint prior to the BNS acquisition, we had no position in this market and we inherited one customer and we have now increased that coverage, as Alex said, with the acquisition of Cable Exchange. So, I think this is the next step, although a bigger one.

And we fully expect the trials to go well and us to gain a place in that market..

Yeah, thank you. Good luck with all that..

Our next question is from the line of Shawn Harrison with Longbow Research. Your line is open..

Hey, good morning, this is Gausia Chowdhury calling on behalf of Shawn. How does the potential merger of T-Mobile and Sprint effect CommScope? And does guidance reflect any of that sales risk? And then, also it appears that CommScope – you're seeing – you're going quicker with these concessions on pricing to AT&T and Verizon than maybe to peers.

So, just wondering on the rationale, if I'm hearing correctly, is there more volume upside? Is that guaranteed?.

That would be our aim. I think nothing is guaranteed but that would be our expectation and aim. We are a primary supplier in each of the markets. In the wireless and Connectivity business. And I think actions taken, we're one of the first people that these people talk to, to make sure that they can have a good base of support.

So as I said, it is our expectation to partner and strengthen the relationship that we have with our North American base. In response to your T-Mobile, Sprint, we are also, in what we sell, a primary supplier to both of them.

If – I read their press release and they say business is usual for the next 18 months, or until the merger is consummated or determined, we do believe that the 600 megahertz of deployment that T-Mobile is underway with will continue. And we would expect that at a similar pace to what is planned.

In the case of Sprint, I think, as you know, they have not been a large spender over the past two years. And what we've seen this year is an increased spend. I think that could have been anticipated to continue maybe at the same level, due to positioning themself for the merger. There will be a consolidation as they talked about of some 35,000 towers.

I think CommScope is positioned better than others because of the sophistication of our design and technology in the antenna market. And we stand ready to serve to develop new antennas for whatever their need may be..

Thank you..

Yeah..

Our next question is from Meta Marshall with Morgan Stanley. Your line is open..

Hi, this is James Faucette calling for Meta Marshall. Just a couple of follow-up questions. First, on the pacing of 5G interest.

Where are you seeing the most interest and how do you expect that to start to rollout and impact your business? And then secondly, are you seeing any pickup in fiber-to-the-home connections? And how would you expect that those could benefit your business if and as those improve. Thanks..

Okay, I'm going to take the last one first. And we talked on maybe the two last calls about where we play in the fiber-to-the-x or fiber-to-the-home. We are the connectivity part of that, more so than the cabler. We do support fiber cable, primarily in the MSO market. But we're primarily a connectivity supplier in the balance of the telco-market.

So, there were delays last year. I think everybody has talked about those because of zoning and other reasons. We think that those deployments are picking up, and we would expect toward the back end of the year, which is what we said in February I think, that we would see those deployments pick up pace. I see no reason that that timing would change.

We see no indication from our customers in that marketplace that they expect anything different. In the advent of 5G, it will run on the LTE highway. We are a primary provider of infrastructure equipment for that. We're seeing a lot of work in densification to enhance the capability of 5G. We are on the committees as they continue to determine spec.

And we're working, as I talked about with some of the OEMs, to develop complementary products for them, like Massive MIMO to be deployed in these networks. So I think, in what we do, we're making a lot of progress, and I think we're positioned well with the OEMs as well as our wireless customers. Thanks for your question..

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

Hi guys, thanks very much. I guess I wanted to come back to the discussion of price reductions with North American customers.

I presume we're talking more so about the wireless side of the business rather than Connectivity Solutions? And then just to follow on that, I guess I'm curious about what's really changing in the environment here that's motivating this? To be fair, I don't think we've heard too much historically about price pressure out of CommScope.

And I'm wondering if this is just a byproduct of bigger new projects being in the marketplace i.e., FirstNet or if it's a byproduct of something that's changing competitively. Thanks..

Yeah, let me take that, and then Eddie will pile on it. I would say just a couple of clarifications. I don't think this is a new phenomena at all in the market.

The company has historically experienced 1% to 2% price pressure, and generally offsets that with a wide range of productivity improvement plans that it has a good track record of delivering on. And I also wouldn't say that it's limited specifically to the Mobility segment. We see this across both businesses.

It manifests itself differently in the Connectivity business versus the Mobility business. So certainly in the Connectivity business where we saw significant commodity price inflation, we were able to implement positive pricing actions. And what we saw in the implementation of those actions was, we got good traction in the North American markets.

We found that we were less competitive in the international markets, and so had to adjust our approach appropriately to maintain competitiveness.

I think the dynamic that's different, that Eddie's describing, is typically these negotiations would happen closer towards the end of the year to enable for a more appropriate feathering into the annual planning process and capacity planning process.

Whereas in this case, the negotiations began to begin in earnest more towards the beginning of the year, which I think was one shift. I think the other shift that we're seeing is a desire on behalf of our customers for a greater level of partnership kind of up and down the supply chain, which, frankly, we believe could be a good thing longer term.

As Eddie pointed out, we believe pretty strongly that's there's incremental volume opportunities which have the potential to drive incremental gross margin dollars.

Even though margins may be suppressed, there's opportunities to collaborate on product design through value engineering, and make sure we're designing our products with the ultimate efficiency and performance characteristics that our customers demand.

And there's also opportunities within the supply chain to make sure our supply chain is operating as lean as it needs to service (36:51) these customers and really drive down their total cost of ownership across the network.

So, this obviously creates a transitory challenge for us in 2018 and 2019, as we kind of adapt our business model, but this isn't a new phenomena across this industry or other industries.

Eddie, what would you think?.

That's well answered. I don't think I could add anything to that, Alex..

Got it.

So, just to be clear, this is not a function of FirstNet ramping up?.

No, not at all. It has nothing to do with FirstNet at all. I think it has to do with what the needs and expectations of our customer base and challenges they see in their market. And they do have some pricing pressure, pricing capabilities to pass down.

And I think this is maybe timing difference, as Alex said, but not materially different than what we've seen in the past..

Great, thanks..

Our next question is from Simon Leopold with Raymond James. Your line is open..

Great, thank you for taking my question. Just quick clarification and then the longer-term question. I don't think you bought back shares during the quarter. Just if you could update us on your view on share buybacks? And in terms of the trending, a number of infrastructure providers have sounded more upbeat on 5G in North America.

And I'd like to get a better sense of whether or not you're seeing that and feel better about 5G spending, but decline to take your full-year sales up because other things seem more troubling, whether it's the price declines or other aspects of the business, or whether you don't believe that 5G is getting better in 2018? Thank you..

Simon, I'm going to take your last question first. And the 5G we have high confidence in what is going and where it's going and what our participation levels are. And we're actively involved with our customer base, with the current and maybe new entrants into the supply chain and we'll continue to have introductions of new products along the way.

And I think working with some of the OEMs in a different way than we have in the past – the Massive MIMO integrated antenna that was in Barcelona, as well as introducing a radio which is the first radio of its kind that we've done, are indications of that – we participate at some levels with the trials that are going on, but these are trials.

It's not a full deployment. A lot of densification has to be completed where we are a primary supplier for the infrastructure equipment there. So, we're very positive about what we see. It's not the largest part of what our market is today, but we are very positive about what we see for the introduction over the course of the next several years.

This is not a near-term 2018 event. This is something that's going to take several years to implement in a real way..

Regarding your question on capital allocation. The company believes quite strongly that our highest and best use of capital is to invest in growth whether it's through R&D, organic growth activities or inorganic growth activities. And so that's really the first priority.

And then followed by that in order would be to pay down the debt to get the balance sheet to a position where we have flexibility to continue to fuel transformational M&A and then behind that would be the share buyback program to the extent that we don't have opportunities for growth or debt pay down.

And where it sits right now, we feel pretty confident about the opportunities to invest in growth. And so we're trying to maintain maximum flexibility with that orientation in mind..

Great, thank you..

Our next question comes from the line of Jeff Kvaal with Nomura, your line is open..

Yes. Thank you very much.

I am wondering if it's possible to tease apart how much of the margin structure changes are things that are happening in the market, sort of outside the customers that are coming to you asking for, and then conversely how much is you approaching them and saying hey, look, can we reduce our prices and gain a little bit of share? I ask because it seems as though there's a lot of pricing changes across multiple parts of your business with multiple customers that all seem to be happening at the same time, so – which is unusual and in CommScope's history.

Thank you..

Jeff, this is Eddie. I think as Alex said, some of this is probably invisible to an outsider as it happens during the course of – normally happens during the course of the end of the year, as opposed to the front. We're able to plan for the – then the next year with that knowledge base.

This issue of what we charge for our products, we try to charge the most we can, and the customer tries to pay the least they can. And so it's a conversation all the time, but we see these large customers on a daily/weekly basis. These conversations, as new products are introduced, are concurrent with those introductions.

So it's not something that we save up and then go say, let me show you a better way to do this. Once in a while, it's an ongoing transaction. So it's not materially different other than time of what we've seen in the past..

I think, Jeff, just to build on Eddie's points. A couple of additional thoughts. One is, as you know well, CommScope operates at the very highest end of the markets from a technology and a functionality standpoint. And so, typically, our approach is to pretty aggressively price our products based on the value that they provide.

And what we see in conversations with operators is they're always trying to optimize that tradeoff between getting absolutely the most sophisticated product versus what's the most affordable thing that they can get. And so, we're trying to sort of manage that tradeoff.

One of the belief that we have is, as 5G and network densification deploys more and more, there's going to be an increasing need for more and more sophisticated products to manage spectrum more dynamically, manage all these different frequencies that operators are operating on.

And we feel as though we are quite well positioned to take advantage of that trend. So it's one of the reasons why in my remarks I mentioned that we believe this is more transitory in nature, and we believe we can claw back some of the margin degradation that you're seeing. But it's not something that will occur in the short term.

It's something that needs to occur over a series of product evolutions..

And one, I guess one additional comment. I think in the Mobility side of our business, some of the products that we're introducing are at a different level of integration within their networks. I think the actions that we've taken have caused easing of the ability of us to get in the process.

And so, we think that that's something that's very important to us..

Okay. To follow up on that, I think, Alex, in your portion, remarked about speeding time to market, and you talked about investment in your own products. Should we be considering an increase in the intensity of your R&D spending? Thank you..

So, we haven't talked about a specific increase in our R&D spending above our historical run rate. What we have talked about are a couple of things. One is, sort of dramatically increasing our speed to market on these things.

You'll hear Morgan talk about sort of a fail fast mentality in the company, where we're working more proactively with our customers to actively collaborate around their needs and the evolution of the technology in the space and delivering on that quickly.

I think the other area where we see speed to market being quite critical is in the hyperscale space. And that's more of a supply chain and order fulfillment process.

And so we have a number of investments going on internally to really focus on the customer experience, and enable us to deliver to our hyperscale customers at a rate of order fulfillment that's different than what we've traditionally provided to the traditional enterprise customers.

So I think you'll hear Eddie, Morgan, myself and others in the company talk a lot about the importance of speed. Not just in technology introduction, but also in – all throughout the supply chain..

Thank you both..

Yes, sir..

And our last question comes from the line of Jim Suva with Citibank. Your line is open..

Thanks.

Should we expect price aggression to continue beyond this year? Should we expect the price increase to continue beyond this year?.

I think what Alex and I both said during some of the other questions is that..

Yeah..

Some of the pricing discussions historically have not been apparent to people not within the company, because they happened during a different timing and a planning process. And we're able to build that into plans that we do. What we're seeing today maybe is kind of a sequence timing of collaborations with our customer base.

And so, I think that's pretty much the only difference that we see in what's happening now. This is something not able to plan more because it's not apparent to us that the timing what happen as (47:48) it did among several of our customers. And then you always have the issue of M&A that is there to complicate or generate other conversations.

So, I don't think it's anything that's severely materially different than what we've seen before..

Okay. I'd like to close by reiterating that while we're disappointed with the near-term impact of our margins due to price reductions at certain North American operators and higher input costs, we're taking immediate action to mitigate the effects.

With a combination of our strong foundation, supplemented by emerging opportunities, we believe our world-class differentiated solutions and services position us well for value creation in 2018 and beyond. And, finally, as we mentioned in our earnings release, we will be hosting an Investor Day on June 13th at our facility in Shakopee, Minnesota.

Please reach out to Jennifer or see our IR events and presentations page for additional information and registration. We thank you for your time in joining us today for the earnings call. We appreciate your continued interest in CommScope, and thank you very much..

Ladies and gentlemen, this does conclude the program. You may mow now disconnect. Everyone have a great day..