Good morning ladies and gentlemen and welcome to CommScope's Third Quarter 2019 Results Conference Call. [Operator Instructions]I would now like to turn the conference over to your host Mr. Kevin Powers Vice President Investor Relations.

Sir?.

Good morning and thank you for joining us today to discuss CommScope's Third Quarter 2019 Results. With me on the call are Eddie Edwards President and CEO; and Alex Pease Executive Vice President and CFO. You can find the slides that accompany this review on our Investor Relations website.

Please note that some of our comments today will contain forward-looking statements based on our current view of our business and actual future results may differ materially. Please see our most recent SEC filings which identify the principal risks and uncertainties that could affect future performance.

Before I turn the call over to Eddie just a few housekeeping items to review.

Today we will discuss certain adjusted or non-GAAP financial measures which are described in more detail in this morning's earnings materials.Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website.

All references during today's discussion will be to our adjusted results. Also note that third quarter of 2018 results include historical ARRIS results reflecting certain classification changes to align to CommScope's presentation.

All quarterly growth rates described during today's presentation are on a year-over-year basis unless otherwise noted.I will now turn the call over to our President and CEO Eddie Edwards.

Eddie?.

Thanks Kevin and good morning everyone. Today we reported third quarter sales that were in line with our outlook and adjusted EBITDA and earnings per share that were at the high-end of our outlook.

Our results were consistent with our expectations with the exception of some Network & Cloud product sales that were expected to occur in the fourth quarter and Mobility sales weakness due to a pause in spending related to a pending large carrier merger.Overall our results reflect our ability to manage near-term headwinds while maximizing profitability in a challenging environment.

During the quarter we made progress across several areas as we continue to execute on our strategic plan to deliver shareholder value. From a financial standpoint while sales were down year-over-year on a pro forma basis we successfully stabilized adjusted EBITDA margins at 15.5% and generated over $500 million of adjusted free cash flow.

This strong cash flow performance enabled long-term debt repayment of $200 million during the quarter and an incremental $200 million in the fourth quarter to date.As Alex will touch on later we continue to expect strong positive cash flows through the fourth quarter.

CommScope remains a strong business and these results illustrate our ability to act with agility and meet our short-term and long-term financial obligations despite broader industry challenges.

Examples of proactive efforts to maximize our profitability and stabilize our business include we are evaluating all opportunities to accelerate deal related cost synergies.As a result of our efforts to date we're on track to deliver at least $75 million in cost synergies in the first year post close and exceed our annual run rate savings of $150 million ahead of the third anniversary of the close of the ARRIS transaction.

In addition to deal related synergies we have taken decisive action to execute on our previously announced plans to deliver $30 million of incremental cost action in the second half of 2019. We reprimanded manufacturing footprint optimization changes and driven efficiency gains through product reengineering initiatives.

As we continue to work to enhance efficiency reduced cost and drive integration solution in the short and long term we're coordinating and integrating all indoor LTE work together and utilizing traditional switch expertise.This will enable us to service a nascent but important CPRI and eCPRI aggregation market among other programs.

As these broader industry headwinds abate CommScope will be strategically positioned to capitalize and return to growth as we have experienced in the past. We continue to believe in the long-term potential of the business and are committed to delivering shareholder value. Now I'll turn to specific business performance.

In Connectivity Solutions indoor fiber sales remain pressured in the quarter with continued shift from company-owned data centers to the cloud.However we continue to identify opportunities to ensure that we continuously improve performance of CommScope.

For example because of the intense focus on data privacy and security we're seeing financial services' clients employing more of a hybrid approach that being deployed in both company-owned data centers and into the cloud.

We have a strong history of success in company-owned data centers and we believe that investment by the financial services sector is an attractive opportunity for CommScope.In addition hyperscale data center sales remained robust and are more than doubled in the quarters in a market expected to grow at low double-digit CAGR over the next five years.

A strong performance is driven by two factors. growth in the overall market and strategic could grow in our position in the high fiber camp connectivity product segments. One of the primary concerns of hyper Scale customers is scaling up quickly on a global basis to meet customer demand.

While indoor copper Enterprise sales continue to decline in line with the industry we're focused on maintaining and strengthening in our market position and positioning our products for new applications.To ensure our continued leadership, we're investing in innovation that provides the best performance in the industry to help our customers deal with connectivity challenges of today and tomorrow.

Please include solutions to solve for connectivity and increased power needs from devices such as Wi Fi access points, the Internet of Things and indoor small sales.

As a result we have seen our in building cellular sales through the Enterprise channel grow substantially year-over-year as our Enterprise sellers and channel partners collaborate to sell more CommScope products and services.We remain well positioned with the breadth of our industry leading portfolio to address these growing needs and over time we expect our rate of decline subside.

Network cabling and connectivity remained soft as expected in the quarter primarily due to the headwinds from Tier 1 North American cable operators and carriers but we see opportunities for growth in other areas of the market.Tier 2 and Tier 3 markets in the U.S.

remained strong as they build out their networks to address regional markets underserved by other larger players. In addition from the international perspective we see fiber deals continuing across several markets. Recently we won fiber-to-the-home deployments in the Philippines Germany Puerto Rico and the Middle East.

All told we expect to see a modest drift in fiber cabling and connectivity from the cable operators in 2020. In Mobility Solutions we continue to help operators design their sell side architecture for 5G.

To that end our base station antenna business and we continue to help our operators continue our customer operators to efficiently deploy more and more spectrum within the even tighter space constraints at the top of poles buildings and towers while also continuing to improve network performance.

The average port density of our antennas we're shifting this year is up nearly 50% versus two years ago.This is an investment cycle that we expect to continue over the next decade.

And we are well positioned to capitalize on this opportunity In our metro cell business which features small cells we now have fully integrated smart poles deployed in multiple major U.S. markets including Boston Dallas and Los Angeles.

These solutions are designed to solve challenging site acquisition problems for carriers by blending complex connectivity installations with Urban Street furniture. Our solutions are deployed in over 10000 integrated metro cells across the country.

Deployments are rapidly growing as we receive zoning and architectural approvals by growing this to municipalities.To that end we've made investments to more than double our manufacturing capacity to provide a full breadth of solutions to meet the requirements of nearly every urban planner.

Importantly these integrated smart pole solutions pull-through additional product sales they include fiber connectivity RF infrastructure and power. We're incredibly excited about this business as the growth engine for CommScope in the near and long-term.

In our distributed antenna systems and indoor small cell business we're making good progress across multiple fronts. Our next generation digital DAS solution called Era is an RF over fiber distribution system that involves the conventional DAS architecture by adding centralized or C-RAN capabilities.

Importantly Era makes in building wireless solutions easier to install.The system has a smaller footprint saving space it's easier to manage and less expensive to operate in other systems all while giving operators neutral hosts and enterprises the room they need to grow as 5G technologies and applications come to market.

I'm happy to say that we've been awarded the cellular coverage for the 2020 and 2021 Super Bowl stadiums further validating that fully digital Era DAS platform as the industry's leading solution to pack maximum amount of spectrum and bandwidth from multiple operators into high-density coverage venues.

Next our C-RAN small cell offering called OneCell recently won formal approval from the major North American Tier 1 carrier.The formal approval followed multiple trials across different venues and we've already signed a contract for Turkey deployments with the significant pipeline of various buildings and venues.

OneCell is our innovated -- innovative in-building small cell solutions that supports multi-bands and multi operators.

OneCell is built on 5G architecture and dramatically reduces the cost of ownership for in-building cellular coverage.With 5G relying on indoor coverage to be successful OneCell unlocked an entirely new and very large pool of addressable market for us in small buildings and venues and it lights a solution to deliver cellular services.

In addition OneCell is built on an IT friendly architecture which allows the solution to be deployed and operated by IT ecosystem which further unlocks scaling opportunities.Also we expect OneCell sales to increase significantly in 2020 and continue to grow as the need for reliable and cost-effective indoor cellular coverage increases for 5G.

This product will also add operating capabilities for the FirstNet footprint. Moving to CPE we successfully introduced new video products in the third quarter including a set-top box for Altice that combines far-field microphones and speakers with traditional set-top capabilities.

This combination creates a new class of Smart Media Device and enables integration of digital home services with video.

During the quarter we also launched 4K set-tops in several European operators.Moving to broadband we're excited that our fixed wireless broadband gateway is in the final stages of lab approvals the 2 American wireless service providers.

We remain heavily engaged in next generation gateway to development for both PON and DOCSIS solutions with deployments expected in 2020.We're also continuing to support the gigabit broadband service rolled out with Vodafone in Germany and we're seeing strong additional demand from this service in the newly acquired Unitymedia regions.

Moreover we launched the Mercury V2 DOCSIS gateway supporting Liberty Global's GigaCity service.

From a cost standpoint there are some certain set-tops that will leave this for a went into effect in September with additional tariffs going into effect in December.We show the impact of this risk fourth house in the third quarter which we expect to continue in the fourth quarter however we expect that the impact will be materially mitigated by the first quarter of 2020.

Finally we saw a sequential increase in CPE gross margin and EBITDA due to cost containment and material cost improvements.This extends gains and gross margin and EBITDA achieved in the second quarter and we expect to see further improvements in the fourth quarter.

We continue to drive positive changes in the organization to improve efficiency and are deeply focused on cost management.

Turning to network and cloud as expected sales improved sequentially in the third quarter from an improvement in cable spending and some earlier-than-expected orders while the business remain softer than expected this year we achieved several notable milestones in the quarter.As the market leader in installed nodes advanced technologies and fiber and copper connectivity CommScope continues to be a natural choice for upgrade modules as operators look to upgrade to a distributed access architecture.

To that end we recently launched our new optics aggregator and optics termination products at a Tier 1 North American cable operator. These new node based products are significant as they will become a key component in this operators distributed access architecture upgrade.

The first products were installed in the field last week with volume shipments coming this quarter.In addition we've been asked to engage jointly in a large Tier 1 MSO and a large chip manufacturer for their next generation Remote PHY device.

CommScope was awarded this project because of our industry leading capabilities and record of scale which are a necessity for a project of this significance to be successful. Moving on to vCore our virtual CMTS platform we are currently in trials with several operators and will be ready for commercial launch by the end of the year.

We're making great progress and are very comfortable with our time lines and positioning.According to third-party projections the market for virtual platforms is expected to be relative and small for 2020 with the majority of the DOCSIS infrastructure spending continuing to go through current traditional platforms.

Also we don't expect our commercial time line to be impactful on our long-term market positioning and we'll continue to deploy our current generation CCAP products. And finally we continue to add new Remote PHY device modules to our portfolio.

In the first half of 2020 we plan to launch our new Remote MAC-PHY module which will be plug-in compatible with our node platforms.This will give us the ability to support either a vCore plus remote PHY architecture or a fully distributed Remote MAC-PHY. And turning to Ruckus Ruckus had an active quarter making progress across all product lines.

Following the launch of the R750 the industry's first Wi-Fi 6 certified access point we introduced several additional products including the R650 and C750 which will not only improve network throughput for up to 3 gigabits with new compatible clients but also will improve the capacity for existing AC clients by up to 30%.

This is proving to be incredibly valuable for our customers with high-density requirements like schools that continue to be a very important segment of this business. In line with our plans we continue to upgrade our switch portfolio.The ramp of our high-end ICX 7850 campus switch is progressing faster than we expected.

We believe that with a need of 10 gigabit per second capable switches to see Wi-Fi 6 access points we will see significant growth with these products.

For CBRS during the quarter we continued to build support for private networks with trial systems and combined engineering efforts with our OneCell product line which will enable us to address solutions for both licensed and unlicensed spectrum.Our CBRS business kicked in high gear with SEC announcement of entering initial commercial deployment.

One of the first publicly announced deployments of CBRS was in New York's Times Square and included Ruckus technology.

And just yesterday Ruckus CBRS technology was demonstrated as part of the Microsoft Azure capabilities for private LTE networks during Microsoft Ignite.For cloud and analytics we released a beta release for all of new cloud and analytics platform which will tie both our licensed and unlicensed wired and wireless products together on a single pane of glass and help our customers manage and optimize their networks.

This platform will launch in the first quarter of 2020. From a market standpoint we've made great progress in adding our wireless products to federal certification for at least next year.

We position the Internet of Things Wi-Fi 6 and analytics toward the hospitality markets and we're continuing to focusing our offerings at all levels of the education market.Wrapping up our third quarter achievements we continue to make progress on our ARRIS integration plans.

Day 100 items have been completed and we have finalized the new proposed vision and values for the combined organization to be embedded with an aligned culture..

We also implemented a 3x1 website integration that will create a more consistent communication platform and experience to all stakeholders as well as expose our collective customer base to our entire portfolio.We generated over 400 cross-selling reads during the quarter leveraging the breadth of the product portfolio and have -- that has a potential to deliver significant revenue synergies over the next few years.

And I mentioned earlier we remain on track to deliver at least $75 million of cost synergies in the first full year post close of which $50 million will be realized in calendar year '19.From an organizational design standpoint we restructured our CEO reporting relationships to flatten the organization and drive accountability.

I am pleased with our early results but we have the opportunity to make further refinements to better position the organization.

Now before I turn the call over to Alex I want to reiterate how excited I am about the unique opportunity that we have to shape the future network connectivity.We've made a number of changes this year that are repositioning the company to achieve accelerated returns and confident that we will deliver on the strategic and financial promise of the ARRIS acquisition.

We have notable progress from ARRIS already and continue to believe this successful integration will position the company for long-term success.

With our portfolio of industry leading products strong customer relationships a talented team and long-term potential to lead the transformation of communications connectivity remains as strong as ever.Now I'd like to turn the call over to Alex for our financial discussion.

Alex?.

Thanks Eddie and good morning everyone. Today I will begin with a review of our third quarter financial results and discuss our guidance for the fourth quarter as well as providing our preliminary view for 2020 we'll then open the line up for questions. So let's get started.

In the third quarter net sales increased to $2.38 billion primarily driven by the benefit from the ARRIS acquisition which contributed $1.34 billion.ARRIS sales in the third quarter include a $14 million reduction of revenue related to a deferred revenue purchase accounting adjustment.

Pro forma net sales declined 15% which includes a 1% impact of unfavorable foreign exchange. Third quarter sales were down across all geographic regions as we continue to be challenged by cable operators spending geopolitical trade tensions and a temporary pause in spending due to a pending telco merger.

Consolidated orders for the quarter were $2.35 billion providing a book-to-bill ratio of 0.99.For the third quarter adjusted EBITDA increased 55.5% to $369.8 million or 15.5% of sales. Pro forma adjusted EBITDA declined 13.5% to $369.8 million yet we were able to modestly expand margins.

The adjusted EBITDA results were primarily driven by lower volumes particularly in Network & Cloud CMTS software licenses.

We partially offset this top line weakness with favorable commodity and raw material pricing as well as lower operating expense as a result of the aggressive actions we have taken to preserve profitability as we manage a difficult operating environment.Our cost synergy and cost savings actions for the year continue to track well ahead of plan and the commitments we made earlier in the year.

We also expect to exceed annual run rate savings of $150 million ahead of the third anniversary of the close of the transaction.

Finishing up the P&L booked net interest expense was $160.7 million excluding the amortization of debt issuance costs and OID of $7.4 million interest expense was $153.3 million.The adjusted effective tax rate in the quarter was 28.1% versus our expected range of 29% to 30%.

The favorability in the third quarter was the result of lower-than-expected U.S. tax cost on foreign earnings. Adjusted net income in the quarter was $127 million or $0.55 per diluted share as compared to adjusted net income of $115 million or $0.59 per diluted share last year.

As a reminder included in our third quarter 2019 diluted share count is the assumed conversion of the Carlyle convertible preferred stock resulting from the $1 billion investment to help fund the ARRIS acquisition.Now moving to our segment results I'll begin on slide seven and discuss results for the Connectivity and Mobility Solutions.

Connectivity Solutions segment sales for the second quarter decreased 13% year-over-year to $635 million. Excluding the impact of unfavorable foreign exchange sales declined 12%.

In North America sales decreased about 14% with weakness in the remaining geographic regions.As expected results were negatively impacted by softness in the network cable and connectivity business driven by the continued trend of lower capital spending from certain North American cable operators and capital spending reductions on major projects by North American carriers.

In addition Enterprise sales declined in both copper and fiber markets primarily in Europe and China with declines of 12% and 31% respectively.Turning to profitability adjusted EBITDA was down about 25% year-over-year to $121 million with adjusted EBITDA margins of 19.1%.

Despite the impact of lower sales volumes we were able to offset some of this pressure through continuous cost savings and efficiency programs.

Moving on to Mobility Solutions segment sales for the third quarter decreased 3% to $406 million primarily impacted by a pause in spending related to a pending North American carrier merger.This order delay impacted the third quarter Mobility sales by nearly 5%. Excluding the impact of unfavorable foreign exchange sales decreased by 2%.

From a geographic perspective results benefited from growth in North America and EMEA which was offset by declines in Cala and APAC. While macro tower RF cell product sales declined primarily due to the carrier merger uncertainty our macro Cala accessories and metro cell business increased about 30%.

This growth was followed by our DCCS business with project wins in EMEA and North America.

Operators are accelerating spend to densify their 4G LTE networks in preparation for 5G and we expect this momentum to continue.In the quarter mobility adjusted EBITDA increased over 8% to $83 million or 21% of sales a 220 basis point improvement over this point last year farther demonstrating the ability of the team to manage cost and protect margins in the business.Results were driven by a combination of favorable product mix manufacturing footprint optimization and other cost reduction initiatives to improve profitability.

Now turning to slide eight for the ARRIS segment performance. CPE second quarter net sales were $826 million a decrease of 12% from the pro forma year prior.

While revenue declined year-over-year adjusted EBITDA increased 55% to $60 million.EBITDA margins of 7.2% of sales represent a 310 basis point improvement versus last year as the team has worked relentlessly to manage raw material costs remove controllable overhead through headcount optimization efforts and stabilized pricing.

Lower CPE revenues were again largely the result of weakness in our broadband business as we continue to be pressured by reduced cable operators spending and weaker demand from a Tier 1 carrier.Over time we continue to believe that broadband device volumes will return to more typical levels and provide an opportunity for growth as the monetization of DOCSIS 3.1 investments occur.

Video shipments for the quarter declined 1% year-over-year but improved more than 6% sequentially as select operators continue with a technology refresh cycles. Despite these factors we expect the combination of ongoing tariff mitigation activities and the continued growth in North America over the top trends to be likely headwinds moving forward.

For the Network & Cloud segment third quarter net sales were $377 million a decrease of 29% year-over-year.Adjusted EBITDA was $95 million a decrease of 31%. Adjusted EBITDA margins declined to 25.2% of sales.

Our Network & Cloud segment sales were lower driven by combination of factors including customer-driven M&A strong capacity additions added in late 2018 and to a lesser extent a temporary pause in spending as the industry aligns around a path toward virtualization.

We continue to see strong growth in bandwidth demand and we view our Network & Cloud business as well positioned to serve a wide range of architectures when impact of these transitory factors abates.To that end we're starting to see an uptick in CMTS license purchases from a major Tier 1 North America cable operator as they begin to exhaust capacity from last year.

This is a good indication for continued purchases of current CMTS products to the foreseeable future. Moving on to the Ruckus third quarter results. Third quarter net sales were $137 million a decrease of 23% from the pro forma the year ago.Adjusted EBITDA was $10.8 million a decrease of 19%.

Despite lower sales volumes and what has historically been a high fixed cost business adjusted EBITDA margins of 7.9% improved 43 basis points from the pro forma year prior as we execute our cost savings and efficiency plans throughout the business.

We remain confident in the long-term potential of Ruckus and expect trends such as the introduction of Wi-Fi 6 and cloud-based architecture to provide a tailwind for the business.

While Ruckus sales remained weaker than expected we're encouraged by the improvement of over 30% compared to the first quarter.We see an additional E-rate demand ahead recent wins in the OEM channel the introduction of Wi-Fi 6 fast ramping of a cloud-based architecture and several recent customer wins all as evidence for the strong longer-term growth prospects of the business.

Furthermore we remain excited about the long-term growth potential in Ruckus as part of our new capability in offering licensed and unlicensed spectrum solutions in the market.We believe this combined solution is extremely relevant in 5G and has the potential to solve many of the most demanding in-building and venue wireless challenges of the future.

It will also serve as a critical element to unlock the full potential of private networks which represents a substantial growth engine as 5G unfolds. Returning to the consolidated results for CommScope I will address our cash flow on slide nine.

For the trailing-12 months we generated $393 million of cash flow from operations and $590 million in adjusted free cash flow.During the third quarter cash flow from operations was $522 million and adjusted free cash flow was $535 million. These amounts exclude cash paid for the transaction integration and restructuring cost.

Cash flow in the third quarter significantly improved from the prior quarter with a meaningful improvement in the cash conversion cycle.For example our days inventory outstanding improved to 65 days through a cross functional inventory optimization program.

Through the successful implementation of this program we delayed final configurations drove optimistic fast transportation of low volume high-value inventory and improved tracking and management of inventory which resulted in a more flexible product line and lower utilization of cash.

Importantly we continue to expect to generate positive free cash flow in the fourth quarter.It reaffirms our previous expectation of a meaningful improvement in the second half of the year. So now let's discuss our capital structure on slide 10.

We closed the quarter with net leverage of 6.1x pro forma adjusted EBITDA which includes pre-acquisition adjusted EBITDA for ARRIS for the trailing 12 months as well as the $120 million of anticipating cost synergy and an additional $20 million of other cost savings initiatives.Because of the significant cash flow generation during the third quarter we redeemed $200 million of aggregate principal to our -- of our 5% senior secured notes due in 2021.

Shortly following the end of the third quarter we redeemed an additional $200 million of the 2021 notes which occurred on October 20.As previously mentioned with the expectation of meaningful cash generation in the back half of the year we expect further debt repayments to occur in the fourth quarter.

Despite temporary headwinds we experience in the current operating environment we continue to deploy the traditional CommScope playbook tactically adjusting the operating models of each segment to maximize efficiency and cash flow generation.The most recent redemptions of our 2021 notes emphasize our ability to execute in a challenged environment and our commitment to deleveraging with the utmost urgency.

Longer term we remain committed to returning to a net leverage ratio of approximately 4x and eventually to 2 to 3x.

Now moving into our fourth quarter guide on slide 11.For the quarter we expect revenue of $2.2 billion to $2.24 billion non-GAAP adjusted EBITDA of between $275 million to $335 million and non-GAAP adjusted earnings per share between $0.27 and $0.37.

Additional assumptions include an adjusted effective tax rate of 27% and 28% and a weighted average diluted share count of approximately 232 million shares. Turning to slide 12 regarding our fourth quarter outlook by segment.

In our Connectivity segment we expect sales to follow our normal seasonal pattern declining sequentially for the fourth quarter.We expect the softness to be driven by weaker network cable and connectivity as well as decline in the Enterprise copper and fiber.

In our Mobility Solutions segment we expect sales to follow our normal pattern and sequentially decline in the fourth quarter.

However in addition to the seasonal trend we are accounting for the temporary spending uncertainty associated with a large North American carrier merger that will materially impact Mobility results.This pause in spending impacted Mobility sales by about 5% in the third quarter and we expect that impact to increase in the fourth quarter which is largely timing related.

In our CPE segment we see strong demand for gateways and IP set-tops at key North American cable operators but we're currently experiencing supply constraints that will prevent us from achieving the full upside potential.

In addition we're seeing impacts from lower capital spending at other operators due to declining pay TV subscribers a shift from capital spending to content acquisition and the shift to lower ASP IPTV set-tops.As such we now expect fourth quarter revenue to be modestly down sequentially from the third quarter.

For Network & Cloud as a result of some expected fourth quarter customer orders that we booked in the third quarter we now expect fourth quarter sales to be relatively flat for the third quarter.

In our Ruckus segment we expect net sales in the fourth quarter to modestly decline in the third quarter while we remain confident in the long-term growth trajectory of this business we're focused on optimizing the cost structure to align to current sales trends to preserve profitability.Before I open the call up for questions I'll provide a few early thoughts on our business outlook for 2020.

Given what we're hearing from around the industry and from our customer conversations cable operator spending is anticipated to be largely unchanged from 2019 but the mix of spend is extremely important for CommScope.We see an opportunity for a modest uptick in network infrastructure spend next year while CPE spend will continue to be constrained.

While we expect CPE sales decline likely in the double digits in 2020 we have and are taking significant action to address our cost model and we expect continued EBITDA margin improvements.

From a carrier standpoint we currently expect wireline spend to decline next year but importantly for CommScope our business is more dependent on wireless spending.

While early we'd expect to continue network transition to 5G to drive steady wireless spending next year.Additionally while we're experiencing short-term headwinds due to a pause in spending related to the pending merger of 2 large carriers over the long term we expect this to benefit CommScope.

We are well positioned to provide an industry leading set of solutions to enable their potential sell-side architecture. From a geopolitical standpoint beginning with tariffs we've mitigated the majority of the impact but we still have a few items remaining to address mainly filters and some of our distributed antenna products.

In addition by the end of the fourth quarter nearly all CPE video set-top box production is expected to be out of China. Moreover we expect the U.S.

China trade tensions to continue to impact Chinese spending levels on our Enterprise fiber and copper products.In consideration of these factors while still very preliminary impacted on what we know today we would expect our sales to decline modestly in 2020 primarily driven by a decline in CPE.

Again while early we believe there's an opportunity for our remaining segments to be stable to growing in 2020. From a cash flow standpoint our primary focus will continue to be debt pay down.

While we're not providing firm cash flow or debt pay down guidance at this point our second half results should be a good indicator of what we think we can deliver on 2020.Thanks again for your time this morning.

And operator if you please open the call up for questions?.

Yes, sir. [Operator Instructions] Your first question comes from the line of Jeffrey Kvaal of Nomura Instinet. Your line is now open..

Thank you very much for taking the question. I guess my first question begins with the shift in revenue out of the fourth quarter and pulling into the third quarter.

Could you gentlemen give us a sense of how sizable that shift might have been and what that tells us about the outlook for 2020?.

I'll take the first part of that and Alex can quantify. There is a significant -- I think from standpoint of the carrier business we're a large provider to all the carriers here in North America. So we had a shift in Q3 and we're going to have a shift in Q4.

We will expect in 2020 that that will come back depending upon timing of the merger or depending upon as they anticipate when the bills may restart.

So I think Alex mentioned that was 5% or so in Q3 and Q4 will be a number bigger than that.So the other is the MSO related spend in Network & Cloud these carriers stand depending upon needing to add licenses to their systems and that's not necessarily in our control. So they spend more in Q3 than we have anticipated.

We had planned for it weeks ago to be a Q4 revenue generator. But that just happened early. So it's not a loss of business or anything relative to the market it's just a timing as to how the large operators do their spend cycles.

I think with the wireless carrier we've talked about the pauses and shifts and starts with -- when these mergers happen and so we probably will see others as we go through the next year..

And so Jeff let me take the second half of your question around implications for 2020. The short answer is there really aren't any implications for 2020. The merger related delays that Eddie mentioned that's business that we'll get as soon as the uncertainty of the merger is behind us and we know that from conversations with the customers.

So we're anticipating that basically being an additional opportunity in 2020 when that deal finally gets approved. It's not atypical at all for the purchases of these license agreements to migrate from one quarter to the next because it's a nearly instantaneous purchase.

The fundamental thing is the underlying bandwidth demand which is continuing to grow at 30% to 50%.And so as capacity gets consumed in the network we'll see operators add licenses which will return the Network & Cloud business to its more historical levels. So we're really just in the process of working through this capacity in the network.

The overall guide for 2020 really with the exception of CPE you're looking at stable-to-modest growth across all of the segments.

The Mobility would be the -- probably the leader in that trend and then some recovery -- some modest recovery in Network & Cloud and then cable or -- Connectivity probably being more on the flattish side.Although all the significant wins we've made recently in hyperscale should provide some tailwind which I referred to.

And then really the big top line headwind will be the decline in CPE which we've been managing through although we do anticipate maintaining EBITDA across that. So overall even in a kind of slightly declining to flattish top line environment you should see an improvement in overall EBITDA performance. So hopefully that helps..

Okay.

And I guess should we translate that EBITDA performance slight improvement into free cash flow slight improvement? Or is there -- are there some fluctuations on the balance sheet we should be aware of? Or how do we think about that for next year?.

Yes it's safe to assume that that would translate to free cash flow. I mean the only offset for that would be capital spending but we don't anticipate a large amount of capital spending next year unlike what we normally do..

Excellent. Thank you both very much..

Thank you..

Thank you. Your next question comes from the line of George Notter of Jefferies. your line is open..

Thank you. right guys, I wanted to ask about the Network & Cloud division and that's the business that historically has been much more predictable in terms of the revenue run rates $500 million to $600 million a quarter if you look back at last few years within ARRIS. And yet the step down is still really significant.

And I guess I'm kind of wondering what you think the kind of normalized revenue run rate for that business might look like. And I understand there is a lot of moving parts here in the industry with obviously the large customer there dialing back capital spend. You've also got a lot of technology confusion I think around.

But is there some kind of normal levels of sales and EBITDA run rate you think you could ultimately get out of that business?.

Yes let me take a crack at it and then Eddie can elaborate. So I think -- really you should think about probably 3 drivers of what we're seeing in Network & Cloud right now. So the first is that kind of large investments in capacity that happened over the course of 2018 and that capacity is latent.

So there's probably a year or 18 months that bandwidth demand continues to grow 30% to 50% to consume that capacity that was introduced in 2018 before you need to continue to invest in a meaningful way.

That's the first driver.The second driver is this uncertainty around virtualization and distributed access architecture and a bit of a freeze in spending as folks want to understand how that evolution is likely to unfold. And as Eddie mentioned this is going to be a multiyear journey.

And is it true that we're a month or 2 behind in starting that journey?Yes. But it's equally true that we're building off a base of 20 years of experience in the industry leading position in both CMTS and access technologies. And we believe we have an extremely competitive product that Eddie talked about in his remarks.

And then the last piece really has to do with an FTX architectural decision and really one of the major large operators that typically leads the industry in these choices choosing to go one direction versus the rest of the operators kind of waiting and seeing.And that's led to sort of a broad-based pause in spending.

You'll know that a lot of that pause is likely behind us as it's just become clear that this architecture becomes very very expensive for a number of the operators. And so they've decided to pursue a different option.

So what does all that mean? Really it means that we see -- we don't see a structural shift in the Network & Cloud business away from the historical performance of Network & Cloud.What we see is a temporary soft patch that will likely persist through the balance of 2020 and perhaps into 2021 but there is no reason to believe why this business can't get back to its historical quarterly revenue and earnings potential as we work through these challenges.

Eddie what would you –.

I think you covered it well. I think the important thing I'd like to reiterate is that there's been much said about us not being in the virtualized network. I think what I tried say is that we have a deployable product right now. We believe that that will be in the market in Q1. We don't believe that market is going to be strong.

We have a relationship with all of the customers but one of them has a special relationship with one of our competitors. So we'll deal with that. But we will have in the marketplace competitive product to provide full offering to all the customers..

Thank you..

Thank you. Your next question comes from the line of Simon Leopold of Raymond James. your line is open..

Great, thank you. I wanted to just get a quick I think important clarification from you on the 2020 commentary. I want to make sure that the baseline for 2019 is pro forma for ARRIS being with you for the entire year as opposed to the fact that you had acquired it in the spring just to....

No no no -- yes thanks for that. It's an important clarification. Yes it's a pro forma as if we own the company for the full year..

Great. I think that everybody can breathe now. Appreciate that. Wanted to see if we could talk a little bit about maybe a shorter-term perspective on 4Q cash flow from ops and delivering. Because it looks like the very strong cash you generated in 3Q was a little bit coming from working capital.

So just wondering whether there's sort of timing issues there? How we should think about the fourth quarter cash from operations?.

Yes it's a good question. So you'll remember cash flow generation in Q2 was actually a little bit light. So there's a combination of things happening in Q3.

The first is all the proactive steps we're taking on inventory management that I mentioned in my script and that is enduring and there is still work to be done on just getting inventory out of the channel and using that as a source of cash.

There was also some very strong customer collections activity which was related to some of the softness we saw in Q2. So that would certainly be more of a timing issue. I would just -- we didn't guide cash flow for Q4. I would expect it to be fairly significantly weaker than Q3 given the strength we saw in Q3.

A lot of that will depend on the collection -- the customer collection cycle.It's not unusual to see the customer collection cycle bridge from the end of the year to the beginning of the year. And that can have significant fluctuation.

But we do anticipate as I mentioned continuing to pay down debt and we'll focus all the cash flow to continue to pay down those 2021 and derisk the balance sheet..

And then just one last one and a quick clarification which I think I interpreted from your comments on the Network & Cloud segment results for 3Q. It sounded like the 2 sources of strength here we're really licensing sales for capacity into CCAP and then transmission business being quite strong.

Just want to make sure I heard that correctly?.

The first point absolutely correct.

I'm not sure exactly when you say the transmission business what you're referring to?.

Well basically the things that aren't services and aren't CCAP?.

Yes that's fair yes. I mean Overall I would say on the Network & Cloud piece Simon we are seeing that business firm up. We are seeing capacity being added to the system. So I think there is some positive things.

And then the really positive things just to reiterate as Eddie mentioned we rolled out our virtualized solution we got Remote PHY nodes being deployed in the field we're making a lot of progress on this next generation of technology..

Great, thank you..

Thank you. Next question comes from the line of Samik Chatterjee of JP Morgan. your line is open..

Hi, good morning. Thanks for taking my question. If I could just start off on the Mobility Solutions group you had positive comments about the outlook for that group next year.

Just looking to see if you can dive in a bit into the pipeline for macrocells and the OneCell product? And how should we be thinking about the timing of the ramp here? And if you can give us a sense of how big you think these businesses is together can be for CommScope in two to three years?.

What I said is that that businesses we have 10000 sites that have some type of coverage. What we're seeing of late is really a full stack fully compatible sell side it's just in the telephone pole or streetlight. And business is rebuilding itself about every other month right now. So we have very high expectations.

I think the 3 cities that I mentioned where we have coverage are good examples of what we can do with difficult environments.

We have the ability to sell the full capability we understand RF we understand power and backhaul and that's something that we strive to continue to outperform.So we think it can be multiples of what the current macro sites are because with 5G coming you're going to need these sites to be closer you're going to need that for latency issues as well as coverage and we think that we're just at the beginning of what this is going to be.

So we haven't quantified it in relation to the macro it will be less per site but many times more in coverage. So we're very excited about it and we've gotten some really accolades from some of the cities where these things have been deployed also because of the aesthetics the ability of better coverage and the invisibility of these poles..

So Samik let me just hit on the kind of sequential growth. So when we talked about the Mobility segment as Eddie mentioned the -- where the growth is going to come from are these macrocell and OneCell in-building solutions. So that's more back half -- back half weighted. We typically would see Q1 as being one of the weaker quarters of the year.

But in addition to that the growth in the segment will come from the back half as these things start to ramp. So I think it's realistic to anticipate a reasonably soft Q1 which would not be atypical..

Okay. Alex if I can just quickly follow-up with you on the long-term operating cost model. I mean you're planning toward some improvement in the top line trends for certain segments next year. But if some of them were not to materialize like should we think about the long-term cost model.

You're running at about 1.7 I think at this point and you have synergies and savings of around $200 million is that like the right level of cost model for the business going forward?.

Yes. So as Eddie mentioned I believe in his remarks. We're aggressively going after cost and not just synergies but also broader cost actions.

So the business that's probably we're focused on most is within the CPE business where you do have a decline in top line environment and our commitment is to maintain profitability first and foremost and if that means that we are deliberately exiting certain programs that aren't profitable then that's a trade-off we're willing to make.

So the business is in the process of building a combination of a revenue optimization plan as well as a cost takeout plan to maintain profitability despite that top line environment.

In the other businesses we're continuing to evaluate the cost structures and as I mentioned even in a modestly declining to flat top line environment for 2020 we should anticipate relatively healthy EBITDA performance..

Thank you..

Thank you.Your next question comes from the line of Steven Fox of Cross Research. your lines open..

Thanks. Good morning. My first question was on the Connectivity business. I'm not quite sure I understand all the negative leverage that was produced in the quarter.

So I understand sales volumes being down drove some of the margin decline but can you explain what else contributed to the 25% year-over-year decline in EBITDA?.

On Connectivity really it's largely volume related. So this is a relatively high fixed cost business since we own the manufacturing assets and so if we're not keeping the assets full then you have an absorption issue. So that's really what the issue is there.

What I would point to which is extremely positive sign is the growth that Eddie mentioned in the hyperscale. So what we've said is that copper is going to be in a business that's in structural decline over time.We believe that the growth in fiber will offset that decline and return Connectivity to growth.

And so the fact that we're now -- we've doubled the size of that business in the quarter on a year-over-year basis and are now extremely active in 4 of the 5 hyperscalers really shows that the momentum is building which we feel very good about..

Okay.

And then in terms of the Sprint merger I mean the expectations are that after the transaction is completed there's an immediate recovery in spending on your products or like historically there's still a pause post deal are we carrying on any business recovery there for 2020 with your comments or should we sort of exclude that for now?.

Well I think Steve the comment made about a combined merger being the reason for delay in antenna spend in the third and fourth quarter. We -- and I think Alex further said that we -- that's not less that's just delay. And we think that that will be caught up. And so these mergers are all different and some take a pause.

I think a lot of work's been done and this one beforehand. So I think it's just a matter of getting approval or near approval before the spend will start back in earnest. So I think there's opportunity for catch up volume. We have to see. That's something that's not been communicated to us yet.

But it's something that we're close to and well positioned with both sides of the merger..

Okay, appreciate that. Thank you.Thank you. Next question comes from the line of Meta Marshall of Morgan Stanley. your line is open..

Thank you.

I just wanted to get a sense of whether some of these mid-band spectrums getting completed prevent some of the spending that you would expect on macrocells or if you would expect it to be an accelerator afterwards? And then maybe just diving into kind of the Ruckus segment and when you would expect to kind of see some upward movement from the Wi-Fi 6 upgrade?.

Meta the -- in the macro environment unless they change frequencies the antennas that we sell today are the same ones we sold yesterday. And as I said we're selling much more complex antennas today than we did years ago.

We had 32 port antennas today and some looking at even larger and we're doing it in a smaller form factor so we save our customer's money from the rental standpoint. So we see that continuing at a reasonable pace.I think we do see an uptick in what our densification is going to be.

I think we see an uptick in OneCell as AT&T wants to do work with FirstNet to make sure that they have a more efficient network. So I think a lot of positives are going to be there as we see from all the different ranges of products or sizes within Mobility segment.

So we're very bullish I think next year we'll be weighted more toward that side than the wireline side..

Got it.

And then just on Ruckus and Wi-Fi 6?.

Okay. So we were the first in the market and we're excited about the take rates that we're starting to see. We're getting a lot of really good momentum between both sides of the company as we've combined the sales forces. So we have the full range of capability of the partner part of our historical Enterprise business.

So that's taking off and we're getting a lot of cross selling. And now I say 400 or so much of that is in the Enterprise Ruckus side of the business.The ability of us to go and have a wired and wireline or license and nonlicense capability is unique in the marketplace and a lot of our partners and installers and all that see the benefit of that.

So it's -- a lot of those questions are some of the first things that the people I see with the customer base talk about. And so we think that's going to be -- as Alex said we think that has a lot of potential next year and years after..

Great, thanks..

Thank you. Our last question comes from the line of Jim Suva of Citi. Your line is now open..

I have 2 questions. They're a little bit related. So I'll ask them at the same time. And that regards the December quarter guidance. Three months ago you mentioned that it would be up and now it's going to be down.

So what really changed so fast in three months that caught you by surprise? And then my second question related to that is it looks like the December quarter earnings or the portability of the company quarter-over-quarter really takes a pretty big or abnormally big step down.

So what's -- from Q3 to Q4 what's really pressuring the margin to the earnings so much? Is it fully attributed to tariffs or mix or ASP pressure? It just seems like the earning is pressured more than just simply the sales?.

I'll talk about maybe the revenues. The biggest factor in the difference between what we would said last -- maybe even 2 weeks ago is the merger impact in the wireless Mobility side of the business that went from possible acceleration to stoppage or at least a slowdown until next year.

That would be the biggest part of the top line and that would -- certainly those volumes in that product line would be impactful to the bottom line as well. That also is affected because of the utilization of our factories. Alex mentioned that in one of his other comments. So we do make all the antennas that we sell.

So if we don't have the demand we don't make them and the plant is underutilized somewhat. Second part of the question..

Yes if I understood the question -- your line is a little muffled but I think you're talking about the margin compression from Q3 to Q4 sequentially. And so assuming that was what your question was it's really driven by a handful of things the first and biggest driver would be a mix shift.

So this license sales revenue that we've been talking about carries with it substantially higher mix than the manufactured products. And so to the extent there was more of that in Q3 than in Q4 you would see a big mix shift. The second would be sales decline in the CCS business which we pointed to. And also in Mobility.

And so as Eddie just mentioned the deleveraging effect of those -- that top line decline is causing some margin compressions but for Mobility and particularly I just want to reiterate what Eddie said this is purely timing related. This is related to the merger and we anticipate that business coming back.

We have the product ready to go as soon as the customer is ready to buy it..

Very helpful and thank you Okay,.

Okay. Thanks everyone for your interest in CommScope. We appreciate your continuing attention and we look forward to talking to you next quarter. Thanks a lot..

Ladies and gentlemen this concludes today’s conference. Thank you for participating and have a wonderful day. You may all disconnect..