Good day, ladies and gentlemen, and welcome to your CommScope Q4 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s call will be recorded.

I would now like to turn the call over to Kevin Powers, Vice President of Investor Relations. Sir, you may begin..

Good morning and thank you for joining us today to discuss CommScope's fourth 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 on to a couple of 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 2018 10-K 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. Eddie will first provide an overview, including 2018 highlights.

Alex will then review our fourth quarter segment performance, discuss cash flow and capital structure, and provide our outlook for the first quarter and full year 2019. Finally, Eddie will discuss the current market dynamics and the progress we continue to make towards completing the ARRIS acquisition, before we open the line up for Q&A.

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

Eddie?.

Thank you, Kevin and good morning. We are pleased to deliver fourth quarter results at the high end of our expectations, benefiting from stronger than anticipated sales volumes and favorable product and geographic mix as well as our ongoing cost reduction initiatives.

While we continue to expect challenging near term industry headwinds, we remain focused on taking the appropriate and necessary actions to deliver both near term results and long term success. We are focused on closing the highly strategic acquisition of ARRIS, which we believe will bring tremendous value to our investors, customers and employees.

We believe that our combination with ARRIS provides the best means to drive outsized growth in our core markets and unlock significant high growth opportunities in the adjacent markets. We're confident this transaction will put CommScope on a trajectory to a bright, successful future.

Our strong market positioning, excellent customer relationships and differentiated solutions and services are immediately strengthened with this acquisition and we are confident that it will further enable CommScope to capitalize on industry trends, including network convergence, fiber and mobility everywhere, 5G and the Internet of Things.

Turning to slide 4, I will highlight the significant progress we made in 2018. Despite a difficult business environment, the CommScope team made solid progress by optimizing our solutions, our operations and our approach to serving our customers for the future.

During the year, we generated cash flow from operations of nearly $500 million, consistent with our history of solid cash flow generation throughout most cycles. We reduced debt by $400 million, bringing the reduction since BNS acquisition to more than $1.4 billion.

We maintained our strong position as a leading supplier in intelligent antenna platforms for the FirstNet deployments.

We continue to invest in R&D for future growth and generated returns on our prior investments, as we announced multiple collaborative initiatives to strengthen our customer relationships, our product offerings and to improve the efficiency of our internal operations.

We introduce the ERA platform, an all-digital, multi-frequency, multi user, modular next generation C-RAN antenna systems for buildings and then use. We launched a full portfolio of 5G capable modular antennas for the global sub 6-gigahertz TDD bands, including 2.6 gigahertz and 3.5 gigahertz.

We collaborated with Nokia to develop a massive MIMO integrated antenna solution that enables network densification in support of mobile data traffic growth and the evolution to 5G and we launched a major modularization program across the entire portfolio of hardened enclosures, raising the bar for our outdoor ceiling solutions, improving simplicity, flexibility and time to market.

As a result of our strategic collaboration with key North American operators in early 2018, we saw improving penetration with emerging 5G technologies, including making great strides in various operator approvals of our OneCell product line.

We were also pleased to develop additional types of multi-band, multi operator access points for this groundbreaking indoor wireless solution. And of course, we announced the acquisition of ARRIS, which we are very excited about and remain on track to close in the first half of 2019.

Now, I'll turn the stage over to Alex to discuss our fourth quarter performance.

Alex?.

Thanks, Eddie and good morning, everyone. Let's begin on slide 5 with our fourth quarter results. As we announced a few weeks ago, we've delivered results in line with or above our expectations for the fourth quarter. Fourth quarter 2018 sales declined 6% year-over-year. Excluding the impact of unfavorable foreign exchange rates, sales declined 4%.

Stable results in North America were more than offset by declines in international regions, most notably the Asia Pacific or APAC region and to a lesser extent in Europe, Middle East and Africa, or the EMEA region. Our North American results continue to be impacted by operators shifting their capital allocation priorities.

This is partly related to M&A and partly related to a broader slowdown in spending associated with the wind down of the 4G cycle before 5G related investments gained momentum. Results were also impacted by selling price dynamics as well as project timing. Orders for the quarter were $1.11 billion, providing a strong book to bill ratio of 1.05 times.

This book to bill reflects a marked improvement in mobility solutions segment ratio of 1.19, which compares to 1.01 during the same period last year and ratios below 0.9 in the prior two quarters. The connectivity solutions segment book to bill was 0.97, which was a slight improvement from a year ago level of 0.95.

For the fourth quarter, operating income was $49 million. Non-GAAP adjusted operating income, which excludes amortization of purchased intangibles, integration and transaction costs, restructuring costs and other special items, declined year-over-year to $179 million or 17% of sales.

The decline in both GAAP and non-GAAP adjusted operating income were primarily driven by lower sales volumes and selling prices, partially offset by favorable product and geographic mix.

Net loss for the quarter was $23 million or a loss of $0.12 per share, which reflects the previously disclosed impact of a termination of a significant US defined benefit plan, a foreign exchange loss due to the liquidation of a foreign subsidiary and the impairment of an equity investment in a small privately held company.

Excluding special items, non-GAAP adjusted net income was $100 million or $0.51 per diluted share, which was above our expectations. We outperformed our expectation for the fourth quarter, primarily due to higher than expected sales volumes, favorable mix and an ongoing focus on cost reduction initiatives.

We also benefited from a lower than anticipated adjusted effective tax rate. The fourth quarter non-GAAP adjusted effective tax rate was 21%, which reflected a lower US federal tax rate, favorable jurisdictional mix of pre-tax earnings and IRS regulations that were released in the fourth quarter.

We do not expect this rate to remain consistent going forward. Turning to slide 6 and results for connectivity solutions. Segment sales for the quarter decreased 4% year-over-year to $667 million.

Excluding the impact of unfavorable foreign exchange rate, sales declined 2% with stable results in the US more than offset by declines in the APAC and EMEA region. While outdoor network solution sales increased modestly in calendar year 2018, we saw mid-single digit decline in the fourth quarter, as operators slowed spending late in the year.

Outdoor Network Solutions accounts for slightly less than half of the connectivity solutions’ net sales. We continue to see some headwinds in indoor network solutions with indoor copper solutions down modestly as expected, but with stability in indoor fiber.

In the quarter, our connectivity solutions segment GAAP operating income was $38 million, while non-GAAP adjusted operating income declined 2% year-over-year to $123 million.

Both GAAP and non-GAAP adjusted operating income declined year-over-year, primarily due to lower selling prices and the impact of foreign exchange rate changes, partially offset by favorable product and geographic mixes. Looking ahead to 2019 for outdoor network solutions, we expect mixed spending for global service providers.

We expect some headwinds in North America, as growth slows and as certain large service providers complete homes pass obligations. At the same time, we expect sales increases for other North American service providers and continued improvement in EMEA and Latin America.

Indoor Network Solutions represent half -- slightly more than half of the CCS segment. We expect the enterprise business, including hyper scale and emerging cloud customers to remain stable or grow slightly in 2019, reflecting two continuing themes.

First, we continue to expect modest declines in the traditional enterprise copper business, as architectures continue to transition to more wireless and more fiber. Second, we are encouraged by our progress with hyper scale and emerging cloud data center customers.

We expect that growth in our data center fiber business will fully offset the clients in the copper business and will potentially result in very modest growth for indoor solutions. Now, let's discuss the results of our mobility segment found on slide 7.

While sales were essentially stable for calendar year 2018, mobility solutions segment sales in the quarter declined 8% year-over-year to $391 million. Excluding the impact of unfavorable foreign exchange rate changes, sales declined 6%.

Double digit growth in CALA and modest growth in the US were offset by declines in other regions, most notably in the APAC and EMEA regions. In the fourth quarter, mobility solutions GAAP operating income was $11 million, while non-GAAP adjusted operating income declined 23% year-over-year to $56 million.

Both GAAP and non-GAAP adjusted operating income were impacted by lower sales volumes and selling price, partially offset by favorable product mix and geographic mix.

As we look ahead however, we expect more favorable trends in developed international markets in 2019, most notably in Europe and Southeast Asia, as operators add capacity and densify their networks in preparation for 5G.

We also expect a strong return to growth in our distributed antenna systems or DAS business in 2019 as many major venues are in the midst of a refresh cycle. We also believe that our OneCell small cell solution will begin to gain traction in the latter half of 2019.

Our outlook reflects these positive trends as well as cautious expected spending by certain operators due the industry M&A, and the typical slow down ahead of the new 5G spending priorities and funding. Next, I will discuss cash flow on slide 8.

During the fourth quarter, CommScope generated $132 million in cash flow from operations and 105 million in adjusted free cash flow. For calendar year 2018, we generated $494 million of cash flow from operations and adjusted free cash flow was $412 million.

The lower level of cash generation was primarily due to lower earnings, increases in cash used to build inventory and higher cash payments for interest and taxes. Consider these statistics for a bit more historic color to our strong sustained cash flow generation.

We generated $1.7 billion of cash flow from operations for the three calendar years ending in 2018. This compares to cash flow from operations of $993 million for the three calendar years ending in 2015. Despite some challenging business dynamics that impacted the top line, we increased cash flow from operations substantially.

We're proud of these achievements and our ability to repay debt in all business cycles. Turning to slide 9, I’ll provide an update on our capital structure. We're very pleased to have completed a favorable and significant debt offering, totaling $7 billion to finance the proposed acquisition of ARRIS.

The financing is an addition to the $1 billion convertible preferred equity investment by Carlyle and cash on hand. We are pleased with the results of the offering, which we believe is a testament to our successful history of cash flow generation and delivering on our debt reduction commitments.

We're also excited to be partnering with Carlyle team again. Based on December 31, 2018 pro forma EBITDA for the combined company, our closing net leverage ratio would be roughly 5.3 times.

We intend to use essentially all our free cash flow to reduce debt and expect that within two years of the close, we will return to net leverage of approximately four times, which is roughly where we are now as a standalone company. Our longer term target remains in the 2 to 3 times range.

Turning to slide 10, I'll discuss our first quarter and full year 2019 guidance as a standalone company.

For the first quarter, we expect revenue of $1.055 billion to $1.105 billion, GAAP operating income of $91 million to $113 million, non-GAAP adjusted operating income of $167 million to $192 million, GAAP earnings per diluted share of $0.10 to $0.13 based on 196 million weighted average diluted shares and non-GAAP adjusted earnings of $0.41 to $0.46 per diluted share.

Consistent with historical trends, we expect the first quarter to be seasonally softer, especially versus the second and third quarters of the year. The quarter could also be impacted by the customer spending patterns and selling price dynamics we have been discussing.

As we progress through the year, we expect to benefit from ongoing cost management initiatives, including two major projects we announced in mid-2018 to simplify and standardize our outsized plan product and connector processes. These two projects, which we call horizon modularity and connector excellence are significant.

They are designed to drive down cost, improve efficiency, and enhance customer service levels by building on uniform and consistent modular building blocks of solutions. Regarding the non-GAAP adjusted effective tax rate, we expect it to be in the range of 30% to 31% for the first quarter. This compares to a rate of 28.9% in the year ago period.

On the right hand side of the slide, we outline our full year 2019 guidance. We expect revenue of 4.505 billion to 4.655 billion, which is consistent with our prior commentary.

We also expect GAAP operating income of $516 million to $563 million, non-GAAP adjusted operating income of $805 million to $855 million, translating to stable year-over-year results at the midpoint, GAAP earnings per diluted share of $0.92 to $1.03 based on 196 million weighted average diluted shares, adjusted earnings per share -- per diluted share of $2.10 to $2.25 and cash flow from operations of more than $500 million.

We currently expect our non-GAAP adjusted effective tax rate for 2019 will be in the range of 30% to 31%, representing a 2.5 point year-over-year increase using the midpoint versus 2018. And with that, I'll turn it back over to Eddie for a few comments before we get into the Q&A..

Thank you, Alex. I'll now provide comments on our view of the near term business environment as well as proposed acquisition of ARRIS. Regarding the business environment, we continue to see a mix of headwinds and tailwinds that we have included in our 2019 outlook.

These include densification where there's been a growing trend in intensification of 4G networks in preparation for 5G, particularly at the metro cell layer, which we support. We believe this trend will continue as our customers push fiber deeper and deploy more sites.

However, as we have indicated previously, we believe that the more material 5G spend will begin in 2020. In FirstNet, we continue our strong leadership position as the primary supplier of intelligent antenna platforms for FirstNet deployments and we expect 2019 bills to mirror largely those of 2018.

We remain well positioned with both products and production capability to continue to be a major supplier for this endeavor. Optimization of our existing plans. Service providers are investing in the access layer by deploying fiber deeper and strengthening and optimizing the legacy collection cable plant.

We see deployments continuing as consumer demand for data in the office and home rapidly expands. We also expect the intensifying competition between MSOs and other service providers to potentially drive selected wireless over bills, as service providers work toward gigabit service.

We believe that we're well positioned to take advantage of every transport method with innovative solutions to support our customers’ needs. In fiber growth, we expect growth in indoor fiber, as we continue to build relationships with hyper scale and data cloud service center providers.

The new refresh cycle, as Alex mentioned, we do expect and see a resurgence in DAS spend in 2019 due to the rip and replace venue work and growth in small sales as our solutions are homologated by more operators and our partner network grows. And we see modest international recovery.

We are seeing growth in many of our businesses in international markets, specifically in EMEA. We expect increased sales of fiber and connectivity as well as wireless products, as operators expand their wired and wireless network for capacity and coverage. We've also reflected the headwinds that we expect to continue in 2019.

Some of the larger headwinds include uneven customer spending patterns. There continues to be variable service provider spending patterns, driven by M&A activity as well as a broader impact related by the slowdown of 4G LTE spending before 5G related investments gain momentum.

While in some cases, it has led to periods of pause, in other cases, we expect growth throughout the year. In tariff, there is some uncertainty around global tariff dynamics. However, as we said before, we have action plans in place with tariffs, as conditions may change.

On global competition, given the significant technology transitions, competitive dynamics and restrictions as large players such as Huawei, we remain mindful of potential country and competitor responses. We believe we have presented a balanced and achievable plan for CommScope to deliver the greatest value to shareholders in 2019.

On slide 12, I'll talk about the ARRIS acquisition.

Together, CommScope and ARRIS will have greater capabilities to shape the future of wired and wireless communications and be well positioned to benefit from several key industry trends such as convergence of wired and wireless networks, fiber and mobility everywhere, 5G, the Internet of Things and rapidly changing network and technology architectures.

Our combination will bring together two companies, established and respected leaders in the respective markets with a unique set of complementary assets and capabilities that are expected to enable end-to-end communications, infrastructure solutions, something that neither company could achieve on its own.

I’ve talked to many of our large customers concerning the CommScope ARRIS combination. Our customers have expressed enthusiasm to support partner -- I'm sorry, expressed enthusiasm to have a strong partner to support them, as they adapt to evolving business environment.

Like us, customers are eager to benefit from future combined capabilities, which we expect to include converged small cell solutions for licensed and unlicensed wireless spectrum, being combined WiFi and cellular capabilities, complimentary wired and wireless communications infrastructure, integrated broadband access, private network solutions for industrial, enterprises and public venues and comprehensive connected and smart home solutions.

We believe the combination of the two companies will create numerous opportunities to cross-sell, support customers in new ways and to expand into adjacent markets. Although potential revenue synergies are not reflected in our publicly disclosed synergy targets, we expect the potential uplift to be meaningful.

Examples of potential revenue synergies include creating end to end residential broadband delivery with active components from ARRIS’ networking cloud business and passive components from CommScope’s outdoor network Solutions business.

A promising enterprise market opportunity to provide indoor and connectivity via CommScope’s OneCell small cell solution using licensed spectrum and ARRIS’ unlicensed Wi-Fi offering from Ruckus Networks.

Greater opportunities with hyper scale data center operators with ARRIS’ professional services business, which designs and implements large scale data centers, this creates a pull through opportunity for CommScope’s vast fiber connectivity solutions.

Lastly, the transaction is expected to deliver near term financial benefits, including an expected 30% plus accretion to adjusted earnings per share in the first full year post close and cost synergies of at least $150 million within three years.

It's important to note that the combined company is expected to generate nearly $1 billion of cash flow from operations in the first complete year post close and we expect to use free cash flow to aggressively pay down our debt. CommScope has a history of flexing its balance sheet to finance strategic acquisitions, and then paying down debt quickly.

We expect this to continue with ARRIS and we plan to reduce our net leverage to about four times within two years post close. From a timing standpoint, we remain confident that the transaction will close in the first half of 2019.

As a reminder, we've satisfied key closing conditions to date, including HSR, the ARRIS shareholder voting approval and financing for the transaction. Now, before I open up for Q&A, I want to give a special thank you to Phil Armstrong on behalf of the entire board of directors, the management team and our over 20,000 CommScope employees.

Phil will be retiring this spring after 22 years at CommScope in which his finance and business acumen help successfully guide us through multiple acquisitions and business cycles. I wish Phil the best in retirement and we thank him very much for his service, his leadership and his friendship. And with that, we will turn the floor open to questions.

I turn it over to operator now..

[Operator Instructions] Our first question comes from Shawn Harrison with Longbow Research..

Hi. Good morning, everyone and a solid finish and start to the year and also want to pass along my best to Phil. Hopefully, he can spend a little bit more time rooting for the Panthers in retirement. But, I wanted to get in just to the cost dynamics into 2019.

I know there's some investor concerns that maybe there could be incremental pressure above and beyond what you've seen or what was highlighted last year in 2018? Is any of that potentially happening in 2019 and how far are you along in that cost recovery curve, are you a little bit ahead of plan or just essentially in line with where you want it to be..

This is Eddie. As we said, we believe that we're ahead of where we said we would be. We fully expect to recoup at least the two-thirds of what we gave up in 2018. This business is not a business of raising prices generally. We innovate technology to maintain margin, I think we've done a reasonably good job of doing that over a long period of time.

We are engaged continually with our customers as to what is a fair price for both of us and so that work continues and I think was fully reflected in our budgets that Alex has talked about, or the guidance that he's given you today and we feel comfortable with the numbers that we presented..

The one thing that you'll notice on the cost side is, we do have an increase in incentive compensation as you guess, we typically start the year assuming 100% payout of incentives, whereas in 2018, the payout was substantially less than that.

So as Eddie mentioned, we have more than offset the impact of the pricing actions and then we do have this incentive impact and then there's obviously geographic mix that will play into the margin picture, as we expect more of the growth in ‘19 to come from EMEA and APAC regions is I think I mentioned..

And then as a brief follow-up if I may, it seems like with the wireless book to bill being so strong here, or the mobility book to bill to begin the year, how does the shape of the year play out, because typically June, September, your peak year’s quarters with the March and December quarters a little bit weaker, but maybe that shape is slightly different this year, given the strong book to bill?.

A lot of the book to bill on the mobility side would be in our DAS business, venue related. Those are long sales cycles. We do have orders, but a lot of that doesn't go in until later in the year.

So it's not necessarily near-term realization, but I think what we've taken into account is what we see today and what our expectations are going to be in a normalized fashion, based upon the dynamics of the business changing a little bit.

We do have a expectation of how FirstNet rolls out, not dissimilar from last year and that has started and will continue during Q2 and Q3 and expectations that would come down in Q4, likely so in ‘18, but our position there remains at least as strong as it's been overall so far..

Our following question comes from Sami Badri with Credit Suisse..

Hi, thank you. So just a little bit of a follow up from the prior question that was asked. I just want to know where are we, as far as FirstNet builds or in the cycle. Where would you say, could you give us maybe say a number of states or number of builds remaining in the pipeline and then I have a follow up..

What we said last year Sami is that we expected this to be a -- over a three to four year period. I think that we would expect volume, revenue very similar to what we saw last year. They don't build necessarily in one state and then go to another, it's by regions, as they build. So, we're not necessarily involved in that on a daily basis.

We know what they're ordering, we know generally what they're buying by region, but we have fulfillment partners that help us with that. So, we feel good about what the build is and their commitment to spend. And so that's the important things to us..

Got it. Thank you. And my second question has more to do with the hyper scale opportunity. Obviously, 2018, we saw a very large uptick in the hyper scale CapEx spending and in 2019, that's not really the same magnitude of growth, but you are still seeing incremental spend occur in 2019 versus 2018 run rate.

Now, I just want to get a better idea on what are the measures that CommScope has taken as a company to potentially address this market a bit more closely and just kind of like attached to that, if you think about the multi-tenant data center supply chain and how those companies are specifically being growing, would you say that CommScope is now more indexed after given changes or can you just give us a better idea on what to expect from you guys as we see more data centers come online?.

We've historically had positioning with multi-tenant data center leaders and that continues as traditional data center owners as well as hyperscales use the multi-tenant data centers as alternatives to building themselves.

What we have seen in hyper scale and we've talked about this I think pretty openly, we were small in that market, others had head-starts. We, as CommScope, did not have the product categories that are necessary to compete in that market versus a traditional data center. BNS brought us some capabilities there in what we have said is one major account.

We still have that account, we're in the proofing process or trial process with a couple of others. We feel good about where we are and we think in the near term we will be awarded business.

We are seeing business with many of the other data centers outside of the trialing process that we're going, so we expect good growth in that marketplace, albeit from small size.

So that is where the growth in the fibers are, part of the data center business is and we're happy with our footprint and we believe that we can enjoy participating in that going forward..

And just Sami, in my remarks, I referenced two projects, the one called horizon modularity and the other one called connector excellence. Both of these are very strategic investments that we're making to improve both the cost positioning as well as the responsiveness to the customer set that you're mentioning..

And our next question comes from Samik Chatterjee with JP Morgan..

Hi, good morning. Thanks for taking my question. I just wanted to start off with Eddie, I think you mentioned in your prepared remarks the partnership you have with Nokia on integrated antennas and we've seen Nokia as well as Ericsson highlight increasing demand for their 5G capable RAN products.

So just wanted to get your thoughts on kind of what you're hearing from customers in terms of timing for pull-in of some of the 5G integrated antennas that you talked about?.

Well, I think Samik, our timing has not materially changed from what we said a year ago and that we think that -- and I think has been reinforced by a major operator in the recent time, we believe the spend from the standpoint of materiality will not be until next year. We continue densification.

Relative to what we talked about with Nokia and massive MIMO, we showed examples of that last year at Mobile World Congress. We're also developing millimeter wave capabilities for the needs of some of the carriers. And so those types of technology innovations are underway actively today in our labs and in some of the province..

And if I can just quickly follow up with a question for Alex.

Alex, the mobility solutions segment, if I'm working through the margin impact, looks like there is a 300 basis points decline year-over-year, can you just walk me through the drivers of that, is that primarily pricing or other drivers that I need to be keeping in mind here?.

Yeah, really, by far the biggest driver of that is going to be product mix.

Remember, as we talked about throughout the course of the year, the outdoor DAS business, the venue business is going through a shift both from a digital or I'm sorry, from an analog technology architecture to a digital technology architecture and most of the new builds in large venues is behind us, so we're entering a rip and replace cycle.

The project nature of those large investments carry with them more attractive margins than the rest of the segment. As we think about 2019, we're entering more of a rip and replace. We have a strong backlog in that business.

And then we're also introducing which we mentioned in the remarks, we're introducing the next generation digital technology, which will have a positive impact on the growth. The other thing that's going to be a positive impact on mix in the mobility segment will be strong growth in our metro cell.

So Eddie mentioned the ongoing investments in densification for the network. A lot of that’s happening at the metro cell layer and we're seeing very nice traction in several large municipalities with that product line..

Thank you. And our following question comes from George Notter with Jefferies..

I guess I wanted to ask you about merger synergies, and you've had obviously a number of months since the deal announcement. I was wondering if you've had any new perspectives to your and your opportunity to hit or exceed the $150 million target.

And I guess I bring it up because 150 million seems pretty small relative to the overall cost structure of the combined company and I know historically as you guys have been able to kind of dig in and look at the M&A targets, you've been or deals you’ve been able to exceed those targets on synergy.

So any new perspective there would be great? Thanks..

Yeah. We feel very comfortable with the targets that we set. We will have internal targets that will be greater and as we've done in the past, we will update people as we go along and let you know how we're progressing. But we do feel good. The history I think you shown, we've always beat these targets and so our expectations are no different than that.

One thing that I think is probably helpful for folks on the phone as they think about just the equation math is we do have guided to $60 million of synergy delivery in year one after the close, which is obviously a meaningful number when you think about where we’ll exit the year. So we do anticipate getting after those synergies quite quickly..

Our following question comes from Jim Suva with Citi..

You mentioned that you were ahead of plan on your clawback of the price concessions that were unfavorable last year, are those fully recouped to two-thirds or what -- can you remind us of the timeline of the full recoupment of those cost savings? And then just a couple of housekeeping items, tax rate going higher this year in 2018 with the lower US corporate tax rate, help us understand the logic behind that and then maybe like interest expense we should have going forward..

Yeah. So on the pricing, what we've said is two-thirds clawback of the margin compression and we are, as we exited the year, we had plans in place to deliver on that, actually exceed that expectation. So we are exiting the year with all of those plans in place and will reap the benefit of that, as we get into 2019.

We do have, consistent with the long run history of the company, the normal 1% to 2% pricing pressure year in and year out and for 2019, that number is towards the higher end of that range. So that covers your pricing question.

On your tax rate question, it’s really the mix of foreign earnings is the biggest driver without getting overly technical, there's some beat provisions that allow us -- that impair our ability to use some foreign tax credit to drive the tax rates down. So we are anticipating a slightly higher rate..

And then interest expense, what should we kind of be modeling, given your recent?.

Yeah. Sorry. So on interest, plus or minus $600 million and that obviously depends a lot -- large portion of our debt is variable so that depends on what LIBOR does..

Thank you. Our next question comes from Simon Leopold with Raymond James..

Great. Thank you very much for taking the question. I wanted to see if you could maybe elaborate on how you expect seasonality this year. You did comment earlier, Alex on, 1Q being smaller than 2Q and 3Q. I think what I'm really looking for is what might make seasonality deviate from historical norms. Just for example, maybe 5G starts ramping.

And so the fourth quarter might be better than normal seasonality, or maybe there's some other variables with mix, if you could elaborate on maybe some of those moving parts. Thank you..

Sure. Yeah. I mean a couple of things on kind of the trending through the year. We do anticipate, which you will have gotten from the guidance, we do anticipate the first quarter to be lower year-over-year -- lower than 2018. A lot of that’s driven by this long lead rip and replace business within the DCCS area that we've been talking about.

I think Eddie mentioned that in some of his remarks. We do also have project related spending in the back half of the year, largely targeting some of the outsized plant business in Europe. So we anticipate that gaining traction through the back half of the year.

And then as you indicate, we are anticipating the densification of the network to continue to happen in the metro style, as we get closer towards year end and into 2020, we expect some of that to ramp.

And then probably the last piece of the equation would be the hyper scale and multi-tenant piece that we were talking about earlier, as we were coming through last year, we talked about a number of pilots that were ongoing and we’re through those pilots and kind of in the more steady state procurement.

So we expect that business to ramp as we go through the year. So all that combines to give you a year that's probably more heavily back end weighted then then this year was..

And I think the important thing was the policy, we demonstrated that we had the ability simultaneously to deliver three continents and on time and right quality from all different places, which most people can't do. So I think that's the big benefit we have..

Great. And just one quick clarification if I might on the previous question. You indicated the annual interest expense around 600 million, that's baked into this full-year non-GAAP earnings guidance of [indiscernible]..

Yeah. Being calendarized..

Yeah. That is pro forma for the acquisition. So the guidance we gave, it’s Phil here, the guidance we gave for 2019 was constant standalone interest expense question I thought was the pro forma with ARRIS..

So let me -- I want to make sure I clarify that for sure.

So the 210 to 225 of full year just does not account for 600 million of 2019 interest expenses?.

And nor does it account for the ARRIS acquisition. So it's both, it depends on which way you want to look at. We give guidance standalone, Simon..

Right.

But you've taken on the debt, you've taken on the debt?.

Yeah, hold on, hold on. Hold on. Just we can make it pretty clear. The $600 million is a pro forma combined ARRIS CommScope number with the debt that I mentioned that we've just raised. So that would -- to do your pro forma modeling, that would be the right number to use.

For the guidance, baked into the guidance is more in line with our historical interest rate, which is in the range of call it $230 million to $250 million, depending on where LIBOR is.

Does that make sense?.

It does. I am now far less confused than I was before. That’s very helpful..

We apologize. We were a little confused on our end too, so glad to clarify..

Thank you. And our next question comes from Steven Fox with Cross Research. Your line is now open..

Thanks. Good morning. Two questions from me on the indoor connectivity piece of the business. I understand now that you're seeing a little bit better polls on some of the new products for hyperscale.

Can you just be a little more specific on what types of products are ramping? I think it's been a little disappointing in the past and your largest competitor has been growing very steadily in that area, and then secondly, just to be clear on the copper piece of it, when you say you're going to be down slightly on copper connectivity, is that sort of in line with market or are you expecting to gain market share and how do you view pricing across some of those mature products, thanks?.

I'll take the second question. I think we're pretty much in line with market. It depends on how 6A goes relative to the others. The lower value products are really not what comps of sales generally, some high-end category five products we might, but I don't think it's generally in line with what we see in the market.

Some of that is price competition and we're not at the lowly and of the market. So we have let some business slide if it's in prices that we don't find acceptable. And in the case of hyperscale, certainly, our larger competitor had a head start. We have been as transparent about that. I think it's possible.

And I think that what we have shown in developing connectivity products, let's say more cost-effective connectivity products relative to what we've had in the past is what we need, because the buying power of this group of customers is different.

Our worldwide service model to make sure that we can deliver these products from any location that we manufacture has been critical to that. That's one of the reasons that these people want to do business with CommScope, because we have a footprint, I believe, better than others. And so that's helped us a lot.

And I think we have demonstrated under extreme competition, I think from a standpoint of how do you react, we've demonstrated that we can do what they ask, and as I said earlier, simultaneous multi-continent bills and without issue.

So it's something, I think that CommScope has demonstrated over a long period of time that we have the technology and capability. We were behind here. We've not run from that, and I think we are catching up.

And I think we did provide them an alternative -- the customers an alternative in these product categories that would be second to none although we're smaller, but we see this is a big part of growth from a smaller base during the course of '19..

That's very helpful, and if you could send pictures of the surfboard you got from Phil, that'd be great too. Thanks..

You don't want those pictures, I promise you. He wants cases of wine, so it's….

On his side..

Okay.

Next question?.

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

Great, thanks. Maybe first question from me, I wanted to ask about OneCell, and you guys mentioned that should ramp in the second half of the year, but just getting an update on our qualifications complete with some of the customers that you gave price concessions to, where you were hoping to kind of move that prioritization.

And then maybe just a second question. You had mentioned kind of international competition kind of remaining elevated.

But just kind of what impact do you see from maybe Huawei in Europe or just kind of a tone of where you're seeing intensifying competition versus maybe a more favorable environment, thanks?.

Yes. So let me talk a bit about what OneCell is and what it's not. This is like a radio that an OEM would make, no different. It has the same capabilities and capacities. And without interference, it provides a mesh network in the building.

This is different than any one product in the market and the approval process is as rigorous as somebody like an Ericsson or Nokia getting an outdoor radio platform approved. So it's been a process that has been long and hard. We are now generating revenue in North America. So that's a first.

So the first winner, I think, is highly enthusiastic or the first customer is highly enthusiastic about the capabilities of what our product has and the price points or cost points to them from a competitive standpoint in what it will be bring them.

So plug it in, it works exactly as they intended and I think highly excited and we think will be a big grower in the market. And that continues with the couple of customers we have in Europe that continue to be happy with what they've seen.

Your second question as to Huawei, if things stay as they are, it's probably a net positive to us, because certainly in Europe we have a growing position. Huawei is strong there. And so probably has some benefits to us. We don't sell in Asia Pac our antenna products, at least in China we don't.

And we sell very little if any in India now because of pricing from Asian competitors. So I don't think we would see much of an impact in those places, because they are not at least as yet on the list of no Huawei. And in the areas where the bands have gone into place, I think we are seeing some activity. So that is a net positive for us.

They are a customer -- I've said this repeatedly and we do participate with them in many markets as a customer as well as a competitor. So it's an interesting relationship we have with them as well as other people like us around the globe. But I think we also have to see what China does relative to this and I don't think they've spoken yet..

Thank you..

Thank you. And our next question comes from Jeff Kvaal with Nomura Instinet, your line is now open..

Thank you for taking the questions. I was hoping that you could help us square the circle a little bit on the timing and uptick associated with 5G.

I think we do hear from some of the OEMs that they should be expecting some sales growth from 5G in 2019, you know, some first half, some starting second half, and then also T-Mobile seems to be not selling its spending ahead of its potential M&A with Sprint but actually raising CapEx.

So I'm hoping that you can help us kind of sort through those points and nuance..

So I think Jeff that it depends on who you're listening to, as to what their position is. One of the carriers came out about three weeks ago and said that there's not a speck that they think that there will be some preparation during '19 and 2020 -- they would see materialized spending.

Others are talking about spend that is happening today mostly in trials.

We have some products in those trials that come from most of the more -- the newer products come from the OEMs like Nokia, Ericsson, Samsung, people like that, but we are participating in what some people could call 5G and we would call it justification of the LTE network, has to be ready, because that's the backbone that the 5G will operate on.

So we're doing that. I think some of the products that Erics has, I think, will add to our portfolio of what we can offer. So we're excited about what that is that we -- we have not changed -- I don't think our timing and what we've said as to the impact upon CommScope of revenue.

We have talked about we need to get ready from a technology standpoint, so I mentioned earlier that we're developing new antennas for all the carriers in frequencies that we think will be used.

Some are going to use millimeter wave, some are going to use massive mind though, we are in not partnership but working relationship with one of the major OEMs to develop antennas like that, but may be integrated or active or whatever in between.

So that work is underway and continuing, we have demonstrated our labs the ability to transmit 4K point-to-point, we can do that right now, not in a, active side but in a lab environment.

So, all that is going on as we get prepared, but the thing before we have a spec, it's hard to know exactly what you're going to need to do but, we're going to spend over $800 million in R&D as a combined company.

I think that we will work on the technologies that we need, I think our customer base is the operators that work with us on a daily basis to understand the capabilities that CommScope either by itself or combined have and I think are pretty, pretty excited about the capabilities that we're going to have there.

So we will, they will all be significant customers of ours on a going forward basis. I think they are important to each other and we look forward to the future..

Okay. Delicately phrased, Eddie, thank you..

Thanks..

Thank you. Our last -- oh, I'm sorry, and our last….

That was good. I think we have time for one more question..

Wonderful. Sorry about that. Our last question comes from Mark Delaney with Goldman Sachs. Your line is now open..

Yes, thanks for having me and so I think for all your help over the years and the best of wishes for your retirement. I just had one question. The company is doing quite well on a number of different smaller cells. You mentioned as the OneCell and metro cells.

I think historically those products were roughly 20% of the mobility segment and probably investors better understand how that's scaling can you give us a sense of what percentage of majority do you think it's made up of those smaller cells as you move through this year and into next year? Thanks..

Yes.

What we have said is that the mix of that the DCCS business or the indoor business declined last year, it was around 15% what caused that is the bill cycle for venues slowed, the outdoor debts were in CommScope was the primary player in the market is not non-existent but is diminished dramatically from the multifrequency outdoor expenses that things that we did, so the market has shifted to indoor, our metro sale capabilities, so we have spent several years in the development of our OneCell product.

I think that during the course of this call, we've talked about how good we feel about it, and what we think the capabilities are and what some comments from our customers are. So we feel good about where that's going. I think during the course of '19, it will grow at a faster pace than the rest of the wireless business or the mobility business.

And so that's good. It is a more solution-based business, so that would mean that we liked the dollar, revenue dollar there better than other places and so we think it will have a resurgence as the bill cycles for these venues happen.

We have what we believe is the only all-digital capability in the venue business and it has a form factor smaller than anybody else's in the market that saves people construction cost and a lot of other things and so we think we have the right technology at the right time to see this resurgence happen. Thanks for your question..

Thank you..

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back to our speakers for any closing remarks..

Okay. This is Eddie. As you can hear, I think we're clearly excited about what lies ahead for both our legacy initiatives as well as the opportunities that will be created with the acquisition of ARRIS. We look forward to working together to deliver those benefits as efficiently and seamlessly as possible.

We thank you for taking your time to join the earnings calls today. We appreciate your continued interest in CommScope and we'll talk to you next quarter..

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