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. Shawn M. Harrison - Longbow Research LLC Sami Badri - Credit Suisse Securities (USA) LLC Meta A. Marshall - Morgan Stanley & Co. LLC Samik X. Chatterjee - JPMorgan Securities LLC George C. Notter - Jefferies LLC Jeffrey Thomas Kvaal - Nomura Instinet Simon M.

Leopold - Raymond James & Associates, Inc. Mark Delaney - Goldman Sachs & Co. LLC Jim Suva - Citigroup Global Markets, Inc. Walter Piecyk - BTIG LLC Avi Silver - Silver Point Advisors LLC.

Good day, ladies and gentlemen, and welcome to the CommScope Second Quarter 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 introduce your host for today's conference, Jennifer Crawford, Director of Investor Relations. Ma'am, you may begin..

Thank you, Ashley. Good morning and thank you for joining us today to discuss CommScope's second quarter 2018 results. With me on the call are Eddie Edwards, CommScope's President and CEO; Alex 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 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 provide 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 strong second quarter consolidated and segment performance, discuss cash flow and liquidity, and review our approach to enhancing balance sheet flexibility.

He will then conclude with our third quarter and full year outlook. Eddie will provide closing comments before we open the line for Q&A. 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.

Alex?.

Thank you, Jennifer, and good morning. For those of you I was able to see at our Investor Day in June, it was a pleasure to meet you and share my enthusiasm about CommScope and the bright future ahead for the company.

As you may have seen in our press release this morning, we delivered strong second quarter results led by the North American market, particularly in our Mobility segment as well as our outdoor network solutions business.

Solid volume growth and favorable geographic mix combined with our success in effectively managing costs enabled us to deliver results in line with expectations. On slide 4, you can see the details of our second quarter results, which were at the upper end of our guidance range.

Revenues for the quarter increased 6% year-over-year to $1.24 billion, driven by growth in North America, Europe, Middle East and Africa, or EMEA, and Latin America. Our revenue strength was led by strong service provider spending as operators densify, virtualize and optimize their networks.

We're especially pleased in our enhanced position as the leading provider of intelligent antenna platforms for FirstNet deployments by AT&T. We're also pleased to see strengthening outside plant spending by operators as they deploy fiber deep and converge networks.

Orders were $1.2 billion in the quarter and our book-to-bill ratio was 0.97, with the book-to-bill ratio in the Connectivity Solutions segment the highest since the second quarter of 2016.

Despite higher North American sales volumes, gross margins decreased by approximately 220 basis points year-over-year, as expected, to 38%, primarily due to the reduction in certain selling prices, higher input costs, and unfavorable foreign exchange rates.

The reduction in selling prices had a negative impact to sales of approximately 2.5% and reduced gross margin percentage by roughly 1.5 percentage points.

As we discussed last quarter and at our recent Investor Day, we continued to engage with our large North American customers to deliver innovative smarter solutions that help them drive down their total cost of ownership and increased efficiency.

While these partnerships included certain price concessions that negatively impacted margins, they also facilitated greater collaboration, which is now providing the opportunity for incremental volume and new product acceleration. At the same time, we're continuing our work to drive cost reductions across the business.

For the second quarter, we delivered a $22 million year-over-year improvement in SG&A, which was primarily due to cost reduction initiatives and lower integration costs. We expect ongoing and accelerating cost reduction in the back half of 2018 as we standardize and redesign connected solutions and continue to take cost out of our supply chain.

We are focusing on all aspects of our supply chain and engineering capabilities to drive significant cost out of various product lines, while maintaining or enhancing our industry leading solutions. So, for the quarter, operating income increased 21% to $165 million.

Non-GAAP adjusted operating income, which excludes the amortization of purchased intangibles, restructuring costs and other special items, increased 4% to $251 million. We are very pleased to return to a 20% adjusted operating margin for the quarter. Net income for the quarter was $66 million, or $0.34 per diluted share.

Non-GAAP adjusted net income was $133 million, or $0.68 per diluted share, which was at the top end of our expectations for the quarter and an increase of 13% year-over-year. Moving to our segment performance for the quarter, let's turn to slide 5, with our second quarter results for Connectivity Solutions.

Connectivity Solutions sales increased 2% year-over-year to $740 million, driven primarily by strength in the EMEA region. To provide some color on the individual pieces of the business, we're pleased by the performance of our Outdoor Network Solutions business, which is gaining momentum heading into the back half of the year.

In the second quarter, the business grew mid-single digits, driven by the North American market. Again, we experienced strong double-digit growth rates in our fiber cable products, yet it remains a small portion of our business. In our Indoor Network Solutions business, we continue to manage technology transitions.

We have shifted our focus toward helping our customers migrate from on-premise to multi-tenant data centers and towards the rapid growth in cloud and hyperscale data centers and are pleased with our progress to date, albeit from a relatively small base. We expect further acceleration in the second half of the year.

As anticipated, the indoor copper decline was offset by mid-single-digit indoor fiber growth. As the global leader in structured copper connectivity, we are also pleased to support the growing demand for Category 6A connectivity solutions. Even as lower performance category solutions declined, Category 6A solutions grew significantly.

Global enterprise customers are shifting towards 6A solutions to support the rapid growth in mobility, video, surveillance, and the Internet of Things, which all require Power over Ethernet. We provide the industry's broadest portfolio of Category 6A enterprise connectivity solutions.

Our industry leading SYSTIMAX solutions provide simple and cost-effective provisioning to support current and emerging applications, including intelligence and new in-building wireless systems that rely on 10G technology.

Our overall book-to-bill in the Connectivity Solutions segment was 1.05, with growing strength in the North American Outdoor Network Solutions business. This book-to-bill was at highest level for the segment since the second quarter of 2016.

Connectivity Solutions operating income increased 15% year-over-year to $85 million, largely driven by lower integration and restructuring costs. Non-GAAP adjusted operating income decreased 2% year-over-year to $143 million or 19% of segment sales.

Non-GAAP adjusted operating income decreased primarily due to higher input costs, primarily higher material and freight costs, lower selling price, and the impact of unfavorable foreign exchange rates. These declines were partially offset by the benefits from cost reduction initiatives and higher sales volume.

In the service provider market, we continue to see growing momentum for fiber deep networks globally with particular strength in North America into the back half of this year. In addition, our momentum in the data center market continues to grow at a healthy clip.

With the combination of these drivers, we expect Connectivity Solutions second half revenue to improve over the first half of the year. Turning to slide 6 and second quarter results for Mobility Solutions.

Segment sales for the quarter increased 11% year-over-year to $499 million, driven by double-digit growth in North America and moderate growth in Latin America and EMEA. This growth was partially offset by lower sales in the Asia-Pacific region. We are proud of our Mobility Solutions segment results.

Our performance was driven by our leadership position in the FirstNet build and in deployments by operators to densify their 4G networks in preparation for 5G. Our book-to-bill in the Mobility segment was 0.85, due to strength in North American project activity in the second quarter.

Because of this strength, we believe the second quarter will be Mobility segment's strongest quarter of the year. We remain excited about the opportunities ahead, including continued FirstNet deployments, pre-5G densification projects, and new spectrum deployments.

In the quarter, our Mobility Solutions segment GAAP operating income increased 27% year-over-year to $79 million and non-GAAP adjusted operating income increased 13% year-over-year to $108 million, or 22% of segment sales.

Both GAAP and non-GAAP adjusted operating income benefited from higher North American sales volumes that were partially offset by lower selling prices and unfavorable foreign exchange rates.

Moving on to cash flow and liquidity on slide 7, during the second quarter, CommScope generated $100 million of cash from operations and invested $17 million in capital expenditures. The cash generated from operations reflect a nearly 15% increase from a year ago period, primarily as a result of stronger business performance in the quarter.

As of quarter end, we had cash and cash equivalents of $546 million and $506 million available under our revolving credit facility, bringing total available liquidity to $1.05 billion. Before turning to guidance, I want to highlight the solid progress we're making with our ongoing growth assessment.

The purpose of this assessment is to accelerate growth in our core markets. We're working to identify new opportunities or adjacencies where we can expand our addressable markets. Key focus areas include 5G public and private network solutions, ubiquitous data center markets, industrial connectivity, as well as other opportunities.

We remain committed to identifying and pursuing opportunities to drive solid growth in core and adjacent markets through innovation and accretive acquisitions. As part of our initiatives, we believe that enhancing strategic balance sheet flexibility provides the best way to support long term value creation.

As a result, today, we will repay $400 million of our term loan by utilizing $250 million of cash on hand and borrowing $150 million under asset-backed revolving credit facility. Utilization of the ABL in the short term allows us to benefit from its lower effective interest rates, while maintaining solid liquidity.

As we improve our balance sheet flexibility, we will be in a better position to convert the M&A pipeline into meaningful growth drivers for the future. We believe we have a strong global position, unique technologies and an incredibly attractive set of industry trends to build upon.

We want to use the strong balance sheet as a strategic weapon when these opportunities present themselves. As the drive to identify incremental growth opportunities continues, so does our focus on operational efficiency.

As I mentioned earlier, we have multiple levers to pull in that regard, including standardization, modularization, and re-design by tapping our engineering and supply chain expertise.

In closing, and before turning to guidance, I hope it's apparent that we, as a team, have an increasing level of optimism in the growth opportunities that lie ahead, which will further strengthen our industry-leading position and competitive advantage.

We are confident that the continued prudent investment in our business, strategic allocation of capital towards accretive M&A and a focus on operational efficiency will enable us to deliver continued growth and value to shareholders. Turning to slide 9, I'll discuss our third quarter and full-year 2018 guidance.

For the third quarter, we expect revenue of $1.19 billion to $1.24 billion, up 8% year-over-year at the midpoint; GAAP operating income of $145 million to $169 million; non-GAAP adjusted operating income of $225 million to $250 million; GAAP earnings per diluted share of $0.41 to $0.45, based on 195 million weighted average diluted shares; and non-GAAP adjusted earnings per diluted share of $0.63 to $0.68.

On the right side of this slide, we outline our full-year 2018 guidance, which we are reaffirming today.

We continue to expect revenue of $4.675 billion to $4.825 billion; GAAP operating income of $540 million to $585 million; non-GAAP adjusted operating income of $870 million to $920 million; GAAP earnings per diluted share of $1.18 to $1.30, based on 196 million weighted average diluted shares; non-GAAP adjusted earnings per diluted share of $2.33 to $2.48; and cash flow from operations of more than $550 million.

Note that this guidance assumes no material change to current trade policies, but includes an immaterial impact in the second half of 2018 from previously announced tariffs. Before turning the call over to Eddie, I want to reiterate the sentiment that I shared on last quarter's earnings call.

This is a fantastic company that, through continuous innovation, constant adjustment to emerging trends, and reinvestment in the business, has a long history of success, which we are very well-positioned to continue. With that, I'll turn the call over to Eddie for a few comments before we start the Q&A..

Thank you, Alex. I am pleased that we delivered solid second quarter results. We met our expectations and are on track to deliver our full-year 2018 guidance of mid-single digit revenue growth and double digit earnings growth at the midpoint.

We are excited about both our latest successes and the opportunities that are still ahead for some of the most innovative solutions, innovations like our cutting-edge OneCell in-building Cloud RAN small cell solution, which is gaining commercial traction in Europe and finding initial trial success here in North America.

Our integrated solutions are differentiated, and we strive to solve our customers' toughest challenges by making their wired and wireless network solutions easier and less-costly to install, optimize and maintain.

We do this with strong design capabilities and technology know-how and have significant proprietary knowledge further differentiating us from our peers. I'm also pleased with our continuing work to deliver cost reductions across the business.

As we exit 2018, I expect to see a meaningful run rate improvement that will support ongoing strong operating results. Again, we are truly excited about our future and believe we're well positioned for continued long term success. With that, we'll open the floor for questions. And, Ashley, I will turn the call over to you..

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

Thank you very much, and good morning, folks..

Good morning..

Good morning..

Alex, just wanted to quickly double-check one of the comments that you made. You'd mentioned that you believe that Mobility – that the second quarter revenues would be sort of the highest point for Mobility revenues this year, if I'm not mistaken..

That's right..

Okay, great, great.

So then, in thinking about some of the trends that you folks are seeing in Mobility, how should we think about sort of the pace of FirstNet and sort of demand trends that you're seeing there? And then also, one of the leading North American carriers has mentioned that they expect to shift some of their spending away from macro sites to small cells.

I wanted to see if that's impacting the business at all from your perspective..

So, I'll just – I'll start and then Eddie will pile on. In terms of the FirstNet spending, we did see extremely strong FirstNet spending in the second quarter. And I think it's important for folks on the call to understand that that is one of the drivers of the margin profile that we delivered.

We had extremely strong North American revenue in the RF product side of the business. So, it was strong both from a product line standpoint, as well as from a geographic standpoint.

In terms of what's in our outlook for the balance of the year, we anticipate that spending to begin to slow in the back half of the year, which is one of the reasons for the comment behind the Mobility second quarter being at the highest.

I'll let Eddie comment in terms of the trends that we're seeing and the shift from the macro to more of the small cell deployments..

Yeah. Amir, what we've looked at in the balance of the year is that we listen to our customers and they've talked about moderating the pace in FirstNet. We've taken that into account. If it's different than that, certainly we'll be able to address the opportunity to optimize the output because of our scale and capability to quickly react.

In the case of transition to metro or small cell, certainly that's happening in the marketplace. We've talked about our position there not being as strong as what it was in outdoor DAS. We have made a lot of strides in the last quarter in working with our customers both here in North America. We have trials underway with two of the largest carriers.

They've accelerated those trials because they see the advantages that our OneCell product brings. We have revenue-generating opportunities currently in Europe, and we've seen our first enterprise directed sale of the OneCell product within enterprise working in conjunction with the carrier in that marketplace.

So, we're excited about what we've talked about the future of our C-RAN capability in our in-building product, and we think that it's going to differentiate us tremendously in the coming days..

Thank you very much for the incremental color..

Thank you. And our next question comes from the line of Vijay Bhagavath with Deutsche Bank. Your line is now open..

Yeah, hey, good morning. Yeah, my question is on M&A in terms of how relevant, Eddie, Alex, M&A is for your growth strategy heading into next year, or is it more execution from here? I mean, you have so many up-cycles around 5G, around data center, outdoor fiber densification, on and on.

So, how relevant would M&A be to all of these projects and to your growth strategy? Thanks..

Sure. So, M&A has obviously been an important part of the growth algorithm for the company historically. I think what we've communicated externally is that we actively maintain a funnel of opportunities in front of us, because we never want to close off opportunities as they present themselves.

We're clearly able to consummate anything in the order of $1 billion or so. But as we continue to advance this work around the growth assessment and evaluating opportunities in our core and adjacent markets, we're open to potential opportunities as they seem attractive. But there's nothing imminent.

So, as Eddie mentioned and I mentioned in my remarks, we're continuing to focus on execution, getting cost out of the supply chain, delivering organic earnings growth, while we're continuing to evaluate inorganic opportunities..

Excellent. Thank you..

Thank you. And our next question comes from the line of Shawn Harrison with Longbow Research. Your line is now open..

Hi. Good morning, everybody..

Good morning..

Good morning..

Alex, I wanted to delve back into the cost dynamics and the cost reductions, particularly SG&A, you highlighted it was down significantly on a dollar basis year-over-year.

How much further gains do you see in kind of OpEx as we progress into the second half on a year-over-year basis relative to, I think, what it was, maybe $22 million seen for the June quarter?.

Yes, so we mentioned the $22 million in SG&A improvements year-over-year. That's really driven by a handful of things. Obviously, lower transaction costs combined with a number of restructuring initiatives, particularly that were undertaken in the sales force side of the business as we continued to integrate the two companies.

We've talked about at length the deployment of a single ERP system across the enterprise. That work was largely completed towards the end of last year. So, there's opportunity to continue to drive efficiency in the back office. As you know, that opportunity takes a lot of work. You need to standardize process.

You need to think about your global operating footprint. You need to think about a shared service model. So, there's not a tremendous amount of low-hanging fruit, but I certainly think there's opportunity to drive the operating expense as a percent of sales down to something more in line with what we've seen historically..

Thank you..

Thank you. And our next question comes from the line of Sami Badri with Credit Suisse. Your line is now open..

Hi, thank you. Given the strong growth of the data center industry and CommScope's Multi Tenant Data Center Alliance initiative, could we just get a better idea on how this alliance works? And like, for example, you've seen Digital Realty, you've seen Equinix and several other major data center operators report some fairly strong numbers.

And I just wanted to get a better idea, and maybe some other people on the call, on how this relationship really works and how CommScope really monetizes the relationship?.

We've had long-term relationships with the primary providers in the multi-tenant data center arena. We work with them in conjunction for architecture improvements and where CommScope with its partners can fulfill their needs and their growth. So we're seeing that, over the last few months, improve our position in that marketplace.

We've always had a strong position in that multi-tenant data center business. Hyperscale is also something that we're trying to enter into and we talked about the trials that are underway with several of the hyperscale providers and we're progressing there as well.

The architecture in the multi-tenant area and the architecture in the hyperscale look alike in many regards, but they also are like the traditional data center in other regards. So, we work both sides of that to fit the best needs of our customer and support it with what CommScope has..

Got it. Thank you..

Thank you. And our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open..

Great. Thanks. I just wanted to see if you could comment on kind of the Asia-Pac results. Was the weakness due to India or kind of other regions? And then maybe another comment on customer M&A and whether the improvement of Connectivity results was a resolution of some customer M&A? Just anything that would be helpful there. Thanks..

So on the Asia-Pac results, in particular, we did see relatively flat results in China. The biggest driver of what we see in Asia-Pac was probably in our India market, which we actually break out separately.

As we commented before, a lot of the business in India is much more price-sensitive, and so it's very difficult to make any sort of margin that's attractive. So there's been a strategic decision in some of that market to not serve it as aggressively given the margin profile. So, that's really the big dynamic there.

So, the second part of your question was around M&A, and was that specifically oriented towards the Asia-Pacific market or M&A more globally?.

No, just on a number of your customers have been involved in large M&A or are involved in pending M&A, and just whether – you saw pretty good improvement in outdoor connectivity results this year, which seem to be delayed last year due to some pending customer M&A.

So just trying to figure out if there is a correlation on a particular customer for the improvement in connectivity results or just any comment there..

Meta, I think it's more where their deployments are. The part of the deployments that CommScope is not the major participant in, it's other competitors of ours, we are the connectivity part of that. So, we sell one fiber, for instance, that is a material growth part in the quarter and we expect for the balance of the year to be good.

So, it depends on what – where they are in their deployment. Certainly with M&A, our expectations is there's a pause and a reaffirmation of direction from the customers. We saw that with several of our customers during the course of the quarter.

I think we're seeing an acceleration of the spend today in some of those areas that we saw slowness last quarter. And so it's just – it follows the traditional cycle and I think that we're now appreciating the side of it that CommScope participates in..

Got it. Thank you..

Thank you. And our next question comes from the line of Samik Chatterjee with JPMorgan. Your line is now open..

Hi, good morning. Thanks for taking my question. I just wanted to check on the North American market, Nokia, Ericsson, the radio peers have been mentioning that there's a high level of customer interest in buying 5G upgradeable equipment.

So, what are you seeing from your service provider customers in terms of equipment deployment this year and are they trying to cover for 5G frequency deployments in the future already, for example, like FirstNet deployment, or do you still believe 5G is like a distinct and separate opportunity from the growth you're seeing this year?.

Samik, I think as we've said, 5G will be built out on the backbone of the LTE network, and so all of the operators that we interact with are in the process of densifying and virtualizing their networks, and so we are seeing strong spending really across the board. And it's uniquely positioned for our technology with multi-port antennas.

You've heard us talk about the active antenna that we're currently developing, and so forth. As it relates to FirstNet, which I think you also mentioned in your question, we did see extremely strong FirstNet spending in the second quarter.

I think as Eddie mentioned, we do anticipate that abating somewhat towards the third quarter, and there's a question mark on whether or not that picks up in the end of the year or transitions into next year, but we are extremely well-positioned to serve that unique customer need, given our technology and the relationship that we have with that customer.

I think the last piece of your question was referring to the partnership that was recently announced between Nokia and T-Mobile as a prepositioning for 5G. As you've seen us talk about and saw at Mobile World Congress, we're actively partnering with Nokia to develop an active antenna that will serve the 5G market.

And so, we feel as though we're extremely well-positioned to take advantage of whatever might come out of that partnership, although it wasn't clear from the announcement exactly what the nature of that partnership is likely to be..

God, that's very helpful color..

On the case of T-Mobile, we've been their primary 600-megahertz provider since they started the deployment. I think what we showed in Barcelona is an indication of what our capabilities are, not only to be an antenna provider in the Massive MIMO or 5G applications, but also as a potential radio provider for that market as well..

Got it. Thank you..

Thank you. And our next question comes from the line of George Notter with Jefferies. Your line is now open..

Hey, guys, thanks very much. I guess I wanted to follow-up on the questions about wireless in the second half of the year and then FirstNet. I guess my thought is that FirstNet has some pretty strong goals in terms of coverage, so I'm a little perplexed by the commentary about weakness in the second half of the year relative to Q2.

Is there something going on with inventory here? Is that part of the kind of narrative around FirstNet and North American strong first half, weaker second half, or are we being gated by installation capacity in terms of the professional services organizations that install stuff on towers, I mean any more flavor you can give us would be great.

Thanks..

Yeah, no, I think it's – look, we are positioned to respond to whatever the customer need looks like. And to the extent they determine to continue spending at the pace that we've seen right through the third and the fourth quarter, we're positioned to deliver on that need.

So, there's no issue with inventory; there's no issue with manufacturing capacity that we see. I think it's largely a question strategically. They've been building out at a extremely strong pace for this first half of the year and I think they're taking stock of what their pace needs to be to continue to meet their obligations.

There's – depending on when you ask the question, you get different levels of feedback from that customer on their expectations and their outlook. And I think they'll just make that determination strategically as we get further into the third quarter and the fourth quarter and we'll be positioned to respond accordingly..

Got it. Thank you..

Thank you. And our next question comes from the line of Jeff Kvaal from Nomura Instinet. Your line is now open..

Yes, thank you.

Could you help us frame the near term and then sort of immediate term gross margin variables that we should have in mind? And one would think that if North America ticks down a little bit that would be a negative to the gross margin, but then on the other hand, you've talked about cost savings, kind of recouping two-thirds of what you conceded in the pricing pressure earlier this year.

So, if you wouldn't mind stitching a few of those variables together for us over the next two to four quarters, or what have you, I'd be grateful..

Sure. So, just to help sort of bridge the gross margin, I think the biggest driver obviously of our gross margin performance is volume, given the fixed cost nature of the plant. So, when we have strong volumes, as we did this quarter, that's obviously – they're very beneficial.

In terms of the compression that you saw in the quarter, about a 150 basis points of that was driven by the pricing pressure that we've talked about previously, and then about a 150 basis points of that was driven by the combination of commodity cost inflation as well as FX headwinds.

On the commodity cost inflation, we have undertaken to pass through as much of that as we can in pricing and we've been relatively successful in North America, in particular, as the market has responded favorably.

In other markets, we've been less successful, only because the market dynamics are different and we've had to be flexible to maintain our competitive positioning. In terms of the levers that we control, there's work ongoing to take cost out of our supply chain.

So, we've mentioned by 2019 we will be able to claw-back about two-thirds of the margin compression that we've seen as a result of the pricing actions that we talked about. I think having gone through the business review, we feel good about our ability to deliver on that commitment.

We're actively working with the supply chain to partner and reduce procured costs and streamline the supply chain. And then we are always looking at opportunities in the plant to both improve our modularization and streamline our footprint.

We have a program that we've talked about around Connector Excellence to reduce some of the labor content in our connectorization work and that work is ongoing and continuing to advance nicely. So, I think we're working hard to preserve the margin structure that the business has delivered historically..

That's super.

And then just as a quick follow-up, could you remind us how you are faring with your target to be in three of the top five DSPs (37:23) by year-end?.

So, you're referring to hyperscale data centers?.

Yeah. Sorry, yes, pardon..

Yeah. So, that work is going extremely well. So, we've got a number of pilots underway where we're working hard to earn our – earn the trust of the customers and begin to earn a place at the table as a secondary supplier to one of our larger competitors. We're doing that globally.

We feel as though we're uniquely positioned, given our global footprint and our ability to deliver anywhere around the world if they have a need, and I think we're building traction that's certainly accelerating towards the back half of the year. It is from a small base, however..

Yeah, we're in virtually all of them from a quick-turn standpoint, so – but in the traditional connectivity indoor enterprise product, that's where the trials are underway, but from the acquisition of Cable Exchange, we're virtually in every one of them. But as Alex said, it's small today..

Thank you, gentlemen..

Thank you. And our next question comes from the line of Simon Leopold with Raymond James. Your line is now open..

One is the strength in North America versus international. So, it sounds like there's a combination of forex in FirstNet contributions and upgrade activity. If we could get a bridge to maybe understand part of that gap.

And the other part is – and this is a question I know you've answered before, so it's not that I haven't listened, but helpful if we could get an understanding of how we could correlate or not correlate your sales trends with the typical base station providers like Nokia and Ericsson. Thank you..

Let me answer the second part of that and then Alex can talk about the first. It's very hard to correlate between an OEM sale and what we sell because they're done at different points in time. The radio and the antennas don't go up at exactly at the same time.

That's what they hope to do, but a lot of the deals that we've seen this year, our antennas have gone up before the radios have, so it's not – we've had this question for 20 years, I guess, and it's very hard that you get a quarter-to-quarter correlation. You know, within a year or within six months, probably so, but that's generally very hard to do.

Ours generally go in before. We have a large part of the content on the macro towers, and so that is important to us, but it is hard to correlate from that standpoint..

And so just picking up on that North America strength versus international, really the significant driver of that strength is, as we've talked about, the Mobility business and particularly in FirstNet. So we've seen a lot of support in that side of the business. We also have seen strong capital spending in some of the other operators.

The other piece of the business that is performing quite well is in our outside plant business. So outdoor, I think we referred to it in the script as the Outdoor Network Solutions portion of the business. You've seen a lot of the strength in Corning's results as they deploy fiber deeper into the network.

As we've talked about, we operate in a separate portion of that deployment. So, we operate typically from the node to the home, more of the connectorization solutions, and so that we believe tends to be a bit of a leading indicator in our business.

And we're certainly seeing that in terms of both the strength in the outside plant business in the quarter as well as the outlook for the balance of the year..

And forex?.

Foreign exchange..

Foreign exchange. Sorry. So, foreign exchange actually provided a tailwind to the overall growth target. It was a headwind on the cost side of the equation. We've talked about the bulk of our – not the bulk, but a significant portion of our manufacturing footprint is in China and India.

So as the dollar strengthens relative to those currencies, it becomes a cost headwind, but certainly the reverse is true from a top-line standpoint..

Great. Thank you for taking my questions..

Of course..

Thank you. And our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open..

Yes, good morning and thanks for the opportunity to ask a question. The fixed wireless product that CommScope launched at Mobile World Congress, I think, was targeted to be available for trials in middle of calendar 2018.

So, can you please give us an update on where that stands, maybe give us a sense of the breadth of customer interest and what kind of timeline we should have in mind for revenue?.

It's still in the initial stages of trialing, Mark. So sometime next year, I think, we'll see meaningful revenue. It depends on how the deployment of 5G is going to actually be and where CommScope will fit into that infrastructure..

It's helpful.

I guess a follow-up, I realize CommScope focuses on selling full solutions, but the increase in copper pricing has been a headwind to margins in Connectivity, and with the recent decline from a high level of copper prices, if we assume that current pricing is sustained, how long before CommScope would start to see a benefit to its cost structure from that? Thank you..

Yeah. So, I think, obviously, the price that we're able to charge is elastic, driven largely by copper prices. To the extent we're able to take pricing on the back of commodity price inflation, it stands to reason that we may need to give some of that back as commodity prices decline.

I think typically what the sales force would say is there's something like a one- to two-quarter lag between both capturing the price in the inflationary environment and being able to retain the price in a deflationary environment. But we'll do what we need to do to protect the margin structure in either environment.

I think one of the things that's important to mention is we are the leader in Category 6A SYSTIMAX product, which is specified in, in some of the more demanding use cases for structured cabling, where there's Power over Ethernet, higher bandwidth requirements, those sorts of things.

And that product, because it's more technologically sophisticated, does command a price premium relative to the more commoditized product, and that is really the market that we're the strongest in. We actually develop that product and continue to be the industry leader in that product..

Thank you..

Thank you. And our next question comes from the line of Jim Suva with Citi. Your line is now open..

Thank you very much for all the details thus far. I have two questions and I'll ask them at the same time, and you can take them in any order. In your prepared opening comments, you mentioned about the price concessions you gave, well, are leading to higher cooperation with your partners.

Can you help us understand, I assume that cooperation takes some time to nurture into new products. And if so, when should we expect the revenue or the share gains or that cooperation to result in increased revenues? Then my follow-up question is, I believe you're going to be repaying down some debt pretty soon here.

And if so, could you just help us on interest expense, kind of what we should be modeling or thinking about for interest expense if indeed I'm correct on that assumption of paying down debt? Thank you..

Yeah. I think in regards to cooperation, participation with our customers, I think we're already seeing gain in product categories within a couple of them. That exercise is behind us, we're done, contracts signed, underway. So, we're on to new things and working with our customers to make sure that we participate as we can.

We have a legacy of quality products across the board, not just in one of our categories, and I think that scale and flexibility is appreciated by our customer base. And I think we're starting to see that collaboration benefit us..

Let me take the debt paydown and implication on interest expense. So, as we mentioned, we're paying down $400 million of debt, $250 million of that paydown comes from cash in the balance sheet and then an incremental $150 million comes from the asset-backed revolver.

The reason for that tapping into the ABL is because there's an interest rate arbitrage opportunity there. So that's about a 75 basis point or so interest rate arbitrage to take advantage of that lower cost facility. We anticipate paying down that drawdown by largely through Q3's cash flow. So you would see that kind of go away.

If you think that our weighted average cost to that is around 540 basis points, 543 basis points, that ought to help you sort of do the math on an annualized basis in terms of what it is sort of for the balance of the year, we're anticipating somewhere in the order of $10 million to $12 million incremental for the year..

Thank you so much for the details. That's greatly appreciated..

Thank you. And our next question comes from the line of Walter Piecyk of BTIG. Your line is now open..

Thanks.

Are small cells a part of the outdoor network solutions that you referenced showing strength in Connectivity, or is that just dropped for broadband, fixed broadband?.

Yeah. No, thanks for the question. So to clarify, when we talk about outdoor network solutions, I use it interchangeably with our outside plant business, so that's embedded within our Connectivity segment. The small cell business is, whether DAS or metro cells, that's embedded within our Mobility segment..

So you're not doing fiber-type sales or connectivity fiber-type sales for the small cell demand that's out there?.

No, we do that, that would be in our outside plant business as Alex said. It would connect in to either a remote radio head provided by one of the OEMs, by a DAS equipment, or one of our small cell applications that we have. So we do both. That's the nice thing about the multi-capabilities of what CommScope provides; it has that capability to do both..

Got it.

But it sounds like, or maybe you can just ask, I don't want to lead the witness, but, so what is – which one is the driver for outdoor network solutions, which you seem pretty bullish on, is it the fixed broadband side of it or is it these cables that are connecting these outdoor units or the small cells?.

The largest part is the traditional connectivity side of it, the other part of fiber-to-the-x – as well as fiber-to-the-x. The other part of connectivity are between the wireless applications back to another node or something like that would be a smaller part of that..

Got it. And the just one final question. If AT&T – I mean, they're doing 69,000 towers, so it doesn't seem to me like Q2 they're going to be done with this stuff.

So, if they extend the next purchase out into Q1 of next year, calendar next year, does that mean there's more risk of another pricedown like we saw this year?.

So, we believe that we've successfully negotiated all of the pricing that we anticipate and we've communicated that pretty transparently. So, we go, though most of that is behind us..

I don't think there's any delay in anything just from a price standpoint. I think the spend is based upon how fast they can deploy and weather and all sorts of different things and the spend does fluctuate. And they have a cutoff that they have to make according to the government, I think they'll do everything they can to meet that.

Then they have another year to go to make the next cutoff and they'll deploy as they see fit. And so, we have the capability of speeding up or slowing down, whatever we need. We have other customers as well, so it all fits with our operational planning..

Based on what SBA was saying last night, it seems like they're going to burn through those antennas pretty quickly and they want to build not just because of meeting government deadlines, but they actually have to put capacity in their network as well. So, I would hope that maybe we see some more in the fourth quarter, but I guess we'll see..

Well, I think we'll see. Our expectation as I said earlier is that we have assumed there will be some moderation in the back end of the year. Q4 could be a pleasant surprise if they decide to accelerate. And so, as I said also, we're ready to respond to that..

All right, great. Thank you..

Ashley, can we have the next question, please?.

Thank you. And our next question comes from Avi Silver..

Hi, good morning. Just really a follow-up to the last question. Alex, you mentioned there's a question whether FirstNet spending picks up in the fourth quarter.

I realize you already said Mobility's peaked for the year, but we now have implied guidance for the fourth quarter on revenue based on the annual guidance, so to what extent is a pickup at FirstNet baked into your guidance as we exit the year? Thank you..

Yes. I think as Eddie mentioned, we anticipate spending being mitigated towards the back half of the year, which is what's baked into our guidance. To the extent we're pleasantly surprised, there's upside from that, but that's not either was baked into our guidance or what we've seen from the customer as we've entered into the third quarter..

Got it. Got it. And just a quick follow-up, also a follow-up on the last question.

You mentioned – you talked a lot about what you've done to contain the issue and it doesn't happen again at those carriers, but on the pricing side, maybe you could give us your sense as to how you guys have prevented this risk at other domestic and international – happening at other domestic and international carriers? Thank you..

Yeah. So just to be clear, we certainly haven't prevented the risk. I think what we've communicated quite consistently is that this is a dynamic in our business that has occurred as long as Eddie's been in the business. The only difference was – what we communicated in the first quarter was around – really around timing.

Typically, this would occur in a more normal business cycle and we would be able to bake it into our ongoing operational planning, so it would be completely invisible to you all. So, that was really the only dynamic.

And I don't anticipate that we'll get out of the world where we're always talking about price with our competitors, given the significant value of equipment that we have on the cellular tower. I think in line with that is the fact that we deliver the most sophisticated technology in the market today and there's a natural obsolescence cycle.

And so, through that natural obsolescence cycle, as next-generation technologies are introduced, the price floor is continuously kind of being reset, which is one of the reasons why we've been able to historically maintain the gross margin performance that we have.

I think in the Investor Day I referred to over the last four, five years we've actually increased gross margins to the tune of 550 basis points, and that's driven by the fact that we provide, among other things, the most technologically-sophisticated antennas in the world.

There's – almost none of our competitors are able to provide the level of port complexity that we can, and it's based on the tower becomes more and more a premium, the associated value with our product and multi-port antennas becomes that much more valuable to our operators.

So, just want to clarify, we're not declaring that there will never be another pricing discussion in the market. What we are clarifying is that the value of our product allows us to manage that in a way that preserves our margin structure..

Great. Thank you..

Thank you. Avi.

Eddie, could we have your final closing comments, please?.

Yes. Thank you, Jennifer. And let me close by reiterating our excitement about the future of CommScope as we continue to implement our strategies that drive strong long-term results.

With the combination of our strong foundation supplemented by emerging opportunities, we believe that our world-class differentiated solutions and services position us well for continued value creation in 2018 and beyond. Thank you for taking the time for joining us in our earnings call today.

We appreciate your continued interest and we look forward to talking with you next quarter..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day..