Q2 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Commscope second quarter 2019 earnings Conference call. At this time all participants are listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should be the court assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded.

Now I'd like to turn the conference over to host company public comps Cook Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining and say I discuss Commscopes second quarter 2019 results with me on the call are any Edwards President COO.

CEO .

Alex Pease Executive Vice President and CFO and mortgage Kirk Chief Technology Officer.

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 recent at the peak filings, which identify the principal risks.

Certainly that could affect future performance.

Before turning the call over to Alex just a few housekeeping items to review.

Today, we will discuss certain adjusted or non-GAAP financial measures Fortune is trying to work.

In this morning's earnings materials.

Reconciliations of non-GAAP financial measures.

In 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.

In addition.

[laughter] comparisons described as pro forma.

All references to our second quarter of 2019 results will include air receipts from Arizona for people first at April Thirtyth.

Three days within the calendar quarter before the acquisition date every before.

Also note that the second quarter of 2018 results include historical Airbus results, reflecting certain classification changes to align to commscopes presentations.

Oh quarterly growth rates described during today's presentation or on a year over year basis, unless otherwise noted.

Finally, all references to our second quarter 2019, net sales, excluding an 18.3 million dollar deferred revenue purchase accounting adjustment that reduced our reported net sales.

I'll now turn the call over to our executive Vice President and Chief Financial Officer, Alex Steve Allen.

Thanks, Kevin and thanks, everybody for joining US today. This morning, I'll begin with some financial remarks on the quarter discuss our outlook for the third quarter and the year and then Eddie will give a business overview, including comments on the management change that we announced this morning.

Following his remarks, we'll open the call up for questions.

Beginning on slide four this morning, we were pleased to announce net sales and adjusted EBITDA results that were in line with our expectations and adjusted EPS above our expectations.

Our second quarter results reflect disciplined execution as we continue to navigate a challenging operating environment.

Moving to slide five second quarter net sales increased to $2.59 billion, primarily driven by the benefit from the Arizona acquisition, which contributed $1.38 billion.

Pro forma net sales declined 12% to $2.61 billion, which includes a 1% impact of unfavorable foreign exchange.

North American net sales decreased about 12% with weakness across the remaining geographic regions.

The sales performance in the quarter was primarily the result of significantly reducing the cable operator, spending, which we and others in the industry have been experiencing throughout the course of the year.

Consolidated orders for the quarter were $2.43 billion, providing a book to bill ratio of 0.94.

For the second quarter, adjusted EBITDA increased 46% to $39.6 million or 15.3% of sales.

Pro forma adjusted EBITDA declined 20% to $381 million or 14.6% of sales.

The adjusted EBITDA results were primarily driven by lower volume, particularly in networking cloud Cmcs software licenses.

We were able to partially offset this topline softness with favorable commodity in raw material pricing as well as lower operating expenses.

As we will discuss later synergy and cost savings actions for the year are tracking well well ahead of plan and the commitments that we made earlier in the year.

Finishing up the piano book net interest expense was $165.3 million.

Excluding the amortization of debt issuance costs until idea of $11.4 million as well as acquisition related interest of $2.8 million interest expense was $148.7 million.

The adjusted effective tax rate in the quarter was 26.4% versus our expected range of 27% to 29%.

The favorability in the second quarter was the result of a low of a lower full year estimated tax rate assumption.

The first quarter adjusted tax rate was approximately 30%, we recognize additional tax benefits in the quarter.

Adjusted net income in the quarter was $153 million or 66 cents per diluted share as compared to adjusted net income of $133 million or 68 cents per diluted share.

As a reminder included in our second quarter 2019 diluted share count the assumed conversion of the Carlyle preferred stock, resulting from the 1 billion dollar investment to help fund the boss acquisition.

This resulted in an incremental 34.8 million weighted average shares outstanding.

Moving forward the full quarter impact will be 36.4 million shares for the $1 billion investment divided by the equity conversion price $27.50.

Now moving to our segment results I'll begin on slide five slide six and discuss results for connectivity and mobility solutions.

Connectivity solutions segment sales for the first quarter decreased 9% year over year to $671 million, excluding the impact of unfavorable foreign exchange sales declined 8%.

In North America sales decreased about 5%, 5% followed by weakness in the remaining geographic regions.

As expected the results were negatively impacted by softness in the network cable and connectivity business driven by the current trend of lower capital spending from certain cable operators, particularly in North America.

In addition to enterprise sales declined in both copper and fiber markets, primarily in Europe , and the middle East.

While our enterprise fiber business was soft in the quarter, our strategic focus on growing our hyperscale and cloud datacenter business continues to gain momentum growing nearly 30% in the quarter today, we have meaningful business and four of the five top hyperscale accounts that have a significant and growing footprint in both cloud and multi tenant data centers.

We expect this momentum to continue in sales to accelerate as we move throughout the year and we capitalize on our competitive advantages.

Specifically these advantages include a highly efficient global manufacturing footprint and supply chain with the capability to meet hyperscale demand anywhere in the world.

Secondly, quick turn capabilities for customized solutions, which was a key benefit from our cable exchange acquisition.

Thirdly, a low cost pre terminated high fiber count connectivity solutions.

And finally, our industry, leading network of channel and distribution partners delivering on the fast paced and high service requirements in the market.

Turning to profitability, we're pleased to say that while adjusted EBITDA was down about 10% year over year to $142 million.

Driven by the top line volume declines.

Adjusted EBITDA margins were stable at 21%.

The margin performance was the result of lower material costs and lower operating expenses. In addition to favorable mix with successfully offset continued pricing pressure in volume declines.

Moving on to mobility solutions.

Segment sales for the second quarter exceeded our expectations and increased 6% to $529 million.

Excluding the impact of unfavorable foreign exchange sales increased 7%.

While the seasonal nature of our mobility business typically results in higher sales in the second and third quarters I'll note that due to the cadence of that North American operator, spending, including Firstnet deployments in 2019, we expect sales to be more weighted towards the second quarter similar to what we saw in 2018.

From a geographic perspective results benefited from nearly 9% growth in North America and significant growth in the middle East and Africa, partially offset by a decline of $18 million in the Asia Pacific region. As we continue to proactively take steps to manage our profitability and exit lower margin businesses.

Growth in the quarter was led by our macro tower accessories, and metro cell fitness with sales increasing over 60% led by a record quarter in steel and accessories.

Operators are accelerating spend to densify their fourg LTE network in preparation for Fiveg and we expect this momentum to continue.

In the quarter, adjusted EBITDA increased 23% to $140 million or 27% of sales nearly 400 basis point movement over this point last year further demonstrating the ability of the team to manage costs and protect margins in the business.

Results were driven by a combination of higher sales volumes manufacturing footprint relocations and other cost reduction initiatives to improve profitability.

Turning to slide seven for our acquired Harris segment performance.

For the customer premise equipment or CE segment second quarter net sales were $890 million with adjusted EBITDA of $62 million.

Second quarter pro forma net sales were $913 million, a decrease of 9% year over year and pro forma adjusted EBITDA of $60 million declined 2%.

Pro forma EBITDA margins of 6.6% of sales represent a 50 basis point improvement versus last year as the team has worked hard to manage raw material cost removing controllable overhead and stabilizing pricing.

Lower TV revenues were largely a result of a broadband product shipment decline of 36% as we continue to recover from the shift of production out of China to avoid the impact of use China tests.

That being said now that non China production has ramped we anticipate our broadband device volumes to return to more typical levels in the third quarter and we believe the business is well positioned as the demand for bandwidth continues to grow significantly and operators move to monetize their DOCSIS three dot one investments.

Video shipments for the quarter grew 2% year over year and improved sequentially as slept operators continue with technology refresh cycle. 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 in the second half of the year.

For the network and cloud segment second quarter net sales were $344 million with adjusted EBITDA of $45 million.

Second quarter pro forma net sales were $348 million, a decrease of 37% and pro forma adjusted EBITDA of $35 million declined 73% to 10% of sales.

This is compared to 23% of sales last year, highlighting the significant effect of lower sales volumes on this business.

Our network and cloud segment sales were lower driven by a 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 aligned around a path towards virtualization.

That being said, we continue to see strong growth in bandwidth demand and we view our network and cloud business as extremely well positioned to serve a wide range of architectures when the impact of these transitory factors abates.

For many of the reasons mentioned above the access technology portion of network and cloud is down.

However volumes did improve towards the end of the quarter.

Looking forward and thinking about the evolution of the network, an increasing amount of the investment dollars will take place in and around the note favoring both this business as well as our fiber and copper cable as well as our connectivity businesses.

As a market leader and installed nodes advanced technologies, and fiber and copper connectivity commscope is uniquely well positioned to benefit from this trend.

All told whether in a fully virtualized legacy or hybrid network configuration Commscopes installed base of nodes combined with our latest generation of technologies are fully upgradable to support a distributed access architecture and optimize their customers' investments in the networks of the future.

Moving on to the record second quarter results.

For the record segment second quarter net sales were $151 million with adjusted EBITDA of $6 million.

Second quarter pro forma net sales were $153 million, a decrease of 10% and pro forma adjusted EBITDA of $3 million as compared to $15 million of last year.

The decline in profits is largely the result of lower sales volumes given the high fixed cost nature of the business.

Well Ruckus sales remain soft we're encouraged by the sequential 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 Lifesize six fast ramping of a cloud based architecture and several recent customer wins all as evidence for the longer term strength of this business.

Furthermore, we remain excited about the long term growth potential and rockets as part of our new capability and offering licensed and unlicensed spectrum solutions in the market.

We believe this combined solution is extremely relevant in Fiveg and has the potential to solve many of the most demanding and 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 fiveg unfolds.

Returning to the consolidated results for Commscope I'll address our cash flow on slide eight.

For the trailing 12 months, we generated $366 million and adjusted cash flow from operations and $267 million and adjusted free cash flow.

During the second quarter adjusted cash flow from operations was a negative $40 million in free cash flow was a negative $67 million.

These amounts exclude cash paid for transaction integration and restructuring costs.

Cash flow in the quarter was impacted by additional cash interest as a result of the Harris acquisition and a slower cash conversion cycle than expected.

Importantly, we expect free cash flow generation to meaningfully accelerate as we move into the second half of the year.

Now, let's discuss our capital structure on slide nine we closed the quarter with a net leverage at six times pro forma adjusted EBITDA, which includes pre acquisition adjusted EBITDA per area for the trailing 12 months as well as $135 million of anticipated cost synergies and $31 million of other cost savings initiatives.

Looking ahead, our first debt maturity isn't until 2021 and as we previously stated our primary focus is paying down debt.

To that end, we're pleased to announce that this week, we redeemed $100 million of our 5% senior secured notes due in 2021, and also announced our intention to redeem our second $100 million. Shortly after this call.

Both these payments come in advance of our typical year end cash flow peak and we expect further debt payments during the remainder of 2019.

While our expected cash flow and adjusted EBITDA levels heading into 2020 or lower than originally anticipated due to the temporary headwinds in the acquired air businesses, we remain steadfastly committed to deliver de levering the balance sheet.

We are focused on generating strong cash flow managing our expenses over delivering on our expected synergy target and returning to a net leverage ratio of approximately four times with all urgency.

In addition, we remain fully committed to advancing to our longer term net leverage target of between two and three times.

All that being said given the eris is facing short term headwinds, resulting from cyclicality. It will now be very challenging to meet our first year financial targets for the transaction. However, we remain confident in the strategic rationale behind the combination and our ability to deliver significant shareholder value over the medium and long term.

Before I shift to our guidance for the third quarter I want to highlight that we have met or exceeded our top and bottom line guidance now for three consecutive quarters and have worked hard to rebuild investor confidence in our forecasting and communications.

As we continue to integrate areas, we will continue to build on the progress we have made in providing you the best visibility we can into the trajectory of the business.

Now moving onto our third quarter guidance on slide 10.

Turning to our outlook for the third quarter, we expect revenue in the range of $2.3 billion to $2.5 billion.

non-GAAP and adjusted EBITDA of between $310 million to $370 million and non-GAAP adjusted earnings per share between 37 and 47 cents.

Additional assumptions include an adjusted effective tax rate between 29, and 30% and a weighted average diluted share count.

Of approximately 232 million shares.

Turning to slide 11 regarding our second half 2019 outlook.

And our qualitative remarks last quarter, we referenced the perspective that we were hopeful cable operating a cable operator spending would normalize in the back half of the year, which we have not yet seen materialize.

While we still believe strongly that subscriber and bandwidth growth the evolution of Fiveg. The evolution of advanced network technologies and distributed access architectures, all point to strong growth in the short to mid term the back half of the year is likely to continue to be challenging from a revenue standpoint.

With that said I'll provide some additional color to help you model our expectations.

And our connectivity and mobility segments, we expect sales to follow our normal seasonal pattern with third quarter sales declining sequentially and then another sense sequential decline in our seasonally soft fourth quarter.

From a modeling perspective, we'd expect a similar trend to what we delivered in 2018.

We expect that adjusted EBITDA margin cadence to be consistent with that pattern as well.

And our CE segment, we expect sales to sequentially decline in the third quarter, but improved in the fourth quarter to that end, we expect sales in the first half of the year to be stronger than the second half of the year.

The sequential decline is primarily related to a continued reduction in the us the pay TV market and slower international video deployments, partly attributable to international operators M&A activity.

We expect these dynamics to be partially offset by a slightly increasing broadband market.

In 2020 and beyond we see the continued deployment of DOCSIS three dot one modems wide by six and the evolution of the next generation of DOCSIS technologies to be Tailwinds for CP.

For networking cloud, we expect modest sales improvement sequentially throughout the remainder of the year, albeit not at the same pace. We originally contemplated.

As we indicated during our first quarter call.

We anticipated reduced network spend in the second quarter, but we now believe that a return to a higher level of capital spending by operators will push out farther than we originally had anticipated.

That being said, we do see 2020 as a much stronger growth year as operators continue to push fiber deeper and thats no splitting activity and upgrade their network to take advantage of next generation technologies.

The fundamental drivers for investing in the broadband network remain unchanged increase subscriber count capacity utilization and increased access speeds continue to drive growth, we remain firmly positioned to capture a significant share of this market demand given our advantaged product portfolio and deep customer relationships and we expect far better network and cloud performance in 2020.

In our Ruckus segments, we expect net sales in the third and fourth quarter to be relatively consistent with our second quarter results. While we remain confident in the long term growth trajectory of this business. We are focused on optimizing the cost structure to align to our current sales trends to preserve profitability.

Finally, I'll provide a couple of full year assumptions to keep in mind for the full calendar year 2019, we expect an adjusted effective tax rate between 27 and 29%.

Weighted average fully diluted share count of around 223 million shares outstanding.

Now I'd like to turn the call over to Eddie heading.

Thanks, Alex and good morning, everyone. This Alex referenced earlier, we were pleased to deliver consolidated second quarter results that are within or above our original expectations.

From legacy Commscope perspective, as we committed to roughly one year ago, we successfully manage margin compression caused by recent pricing dynamics to deliver profitability in line with our historic range.

For our acquired heiress business segments. The remainder of 2019 is proving to be more challenging than we expected.

This is largely due to the result of a significant reduction in capex spend but certain large cable companies.

Commented publicly on the.

2019, net working capital priorities.

That being said our long term view is unchanged and we continue to feel confident that these trends are transitory as operators will need to invest in their networks to remain competitive.

Well, our long term growth trajectory expectations for the business remains intact.

We are working on a renewed sense of urgency to execute our strategic plan and achieve our short term and long term goals.

As a result, we are continuing to control what we can.

And continuing to streamline operations realign resources to the highest return opportunities and focused intently on cost reductions and cash generation to adapt to challenging near term operating environment.

And of course, we intend to intensify our strong focus on customer relationships and serving them exceedingly well.

This is a proven Costco playbook, and we will lean into our combined organization strings to accomplish this.

During similar downturns in the past we have successfully shown to market, we can absorb topline weakness and act with agility to preserve profitability optimize free cash flow and meet our short term and long term financial obligations to that end we are taking.

Immediate actions to ensure we continue to deliver value to our shareholders and customers around the world.

First as part of our effort to streamline the organization. This morning, we announced the elimination of the Chief operating officer position.

So the responsibilities of the role shifting to me and other members of my executive team.

As a result, Bruce Mcclelland is no longer with the company and we wish him well in future endeavors.

This decision to flatten our real leadership structure expands accountability, which weve been striving to do and virtually every part of our company as part of our transformation.

I am deeply committed to Commscopes continued growth and success and with the board full support and taking a more active day to day operational and leaving our company through these challenging times.

Second we are accelerating our cost synergy efforts and now expect to exceed our first year target of $60 million.

We are on track to us.

Achieve at least $75 million in the full year post close.

Which 50 million is expected to be realized in calendar year 2019.

In addition, we are highly confident that we will exceed our stated $150 million of annualized synergy run rate savings and do so.

Hit of the third anniversary of closing this transaction.

Third we have taken incremental access to reduce costs to address or softer topline.

These cost reductions are in addition to our stated eris acquisition synergies and including streamlining sales and not and R&D operations to align with current sales trajectory.

We expect to realize the benefit of at least $30 million during the balance of 2019 from these actions.

In addition, we are evaluating opportunities to optimize our manufacturing footprint among other possible access to generate further savings.

Fourth we are focused on this DNA expense accrual control were also taking actions to optimize our R&D spend.

We are focusing on the high growth opportunities in modulating based on end market demand, while not jeopardizing long term opportunities.

While we continue to invest for growth and 2020 and beyond our R&D spend will be below our previously expected run rate of $800 million.

And lastly, we are mobilizing the organization around a renewed set of priorities to improve working capital efficiency to optimize cash flow generation.

Driving free cash flows in our company's DNA and we will take it and we will take aggressive steps to meet our debt retirement, our debt repayment goals.

Before.

Open up the call for questions I'd like to make a few final remarks.

Despite the challenging year, we remain very excited about the combined comps go connect ferrous portfolio.

We are now just four months into the ownership of the aerospace business.

As we continue to integrate our teams and processes our enthusiasm for what we can achieve together grew stronger.

Together, we have a more compelling than diversified global platform for both service providers and enterprises.

To that end I want to highlight what we believe are some of the exciting growth opportunities ahead for commscope.

These include a venue solution that combines our next generation Air advanced technology, with our Ruckus wireless Lan and switching technology that will provide a greater capacity capability than ever before.

The resources that position to get in at the beginning of private networks transformation, enabling the internet of things and low latency applications, which are critical capabilities for the crowded there for the industrial private network and core to Fiveg.

Physician to lead the transformation of the cable operators core networks as they evolve from central solutions to a distributed access architecture in a cost effective manner by virtualizing their combining their best of class C cap platform with our unmatched install base grew up who knows.

Leverage our expertise to assist operators with their current transition to the next generation technologies, such as DOCSIS 3.1, and helped to fund the next evolution of DOCSIS.

And finally, our unique position to provide a holistic OEM agnostic view fiveg that solves real world network rollout problems inside acquisition power and backhaul, we support our operators.

Operator customers in the quest for open interfaces in all aspects of the network from our antennas and cables and connectors to our small cell remote radio heads metro cell and Das solutions.

Today, we are supporting the US advanced wireless industry initiative, which is building for forward to the scale Fiveg wireless research platforms with our products.

These platforms will provide opportunities for fundamental research in areas, such as millimeter wave dynamics spectrum and new Fiveg architectures.

In closing I continue to believe that the new commscope is better positioned than ever to take shape to help shape the future of communications connectivity.

Without question, our portfolio of industry, leading products, coupled with our strong customer relationships and talented workforce give me great confidence in our long term growth potential.

Im highly confident that the actions that we're taking 2019 to reposition our organization will better enable Cubs go to choose accelerating the financial returns as capital spending improves from our largest customers.

And with that.

But the four for four questions and I'll turn it back over to you John .

Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on you touched him telephone. If your question has been answered or you wish to leave yourself from the queue. Chris County, Our first question comes from your line is towards.

With Jefferies. Your line is now.

Hi, guys. Thanks, very much I guess, maybe I wanted to start by.

Talking about the networking cloud.

Piece of the business, obviously, that's been a struggle for you guys, but.

Can you talk about what you think the real.

Kind of impairment of that businesses in terms of its ability to drive free cash flow and profitability.

Obviously, a lot of trends you guys talked about some of them da you've got virtual C cap out there you've got.

A competitor selling their cable product in an all you can eat model I mean.

What do you think is really just structurally impaired versus just the business that comes back and.

Kind of rebound in terms of transitory issues.

Okay. Thank you well this is Morgan Kirk I'll try to answer this from a structure from and what the market looks like in general. So historically this market and for the past 20 years has been integrating all of its core functionality into a single product called see copper centralized Cup.

This is now being disaggregated and we have been a player in the aggregation of it and we expect to be be a player in the disaggregation of it.

The disaggregation is as far as we're concerned taking.

The code that we have had on our own equipment and migrating up so that it can run on.

Of traditional servers and run through traditional data network.

While moving parts that cannot run on those types of servers out toward the end of the network in something as you may know remote phy.

We believe that the fact that we have been writing this code for the past 20 years supporting US featuring up and are now reporting to these two.

And.

Gives us a unique advantage in having something that is very heartening and something that is very feature rich.

We move out to the remote side of the world.

Where we have a significant position in all nodes deployed around the world. We have a strategy both taking the hardware that we used to have centralized repackaging and putting it into these remote nodes.

Along with our amplifier equipment and power supplies and packaging.

And giving operators a seamless upgrade path for today's today's DOCSIS. In addition.

We have the opportunity to enhance those those remote nodes to support new features.

Like extended spectrum.

And full duplex DOCSIS.

Or even higher amounts of.

Of.

Capacity in future.

All this plan, which allows that migration is really what Commscopes springs brings to the table. It has capital preservation for end customers. It gives them an opportunity to expand and grow as they need.

And we think that vast experience and the market position is something that will be critical as we move forward. We expect to play in both the head end and in the remote side and we expect to win in both.

Got it I guess I guess, that's the Genesis of the question here is.

How much of that business is.

A lot of the trends you're talking about are very deflationary right in terms of the.

Revenue and margin impact you guys get.

So I guess I'm trying to better understand this this business you've acquired and Eris and this networking cloud division, that's really the profitability driver there like.

Who are the issues, we're seeing financially there more structural or the temporary in nature, just given the environment you see thats. The focus of the question, yes. So I think let's let's be clear we view the issues as transitory the things that Morgan was highlighting our more of evolutionary shift in the network that we feel.

Unbelievably well positioned to take advantage of so this is.

I'd take place in a couple of ways. One is that the legacy CMBS business, the esix thousand chassis well.

We have a platform, which we've announced recently to introduce more virtualized technology into that side of the business as well as the hybrid technology that takes advantage of the installed architecture that we have where the significant market leader and then there is also a migration of profit going from the CMBS piece of the business entity access technology or the node piece of the business, which is exactly what Morgan was explaining that increases that the profitability and the the absolute revenue.

In that note. So we believe we're very well positioned to take advantage of that structural shift that's going on in the market, what you're seeing right now.

It is really a transitory pause and I would say that it's driven by really three things. So one is customer driven M&A. So we've talked about that predominantly in Europe , although it's had impacts and other pieces of the business as well.

One large cable operator has been very vocal on their significantly depressed level of capital spending.

Driven by some substantial investments that they made in 2018 and continuing to work through that capacity.

And then I do think the industry more broadly.

Hey is waiting to see how this technology shift evolves before they continue to.

To invest but the fundamental drivers are unchanged subscriber.

Subscriber growth.

Bandwidth demand growth the need for lower latency the importance of the consumer and the internet of things in the home all of those are the fundamental drivers that will propel that business as Morgan mentioned, we have.

2030 years of history as the market leader here and are very well positioned to take advantage of that when the capital spending rebounds.

Thank you.

Thanks, Thanks George.

Our next question comes from the line of Sammy beds.

Credit Suisse your line sandals.

Hi, Thank you very much so I have a two two questions really the first one is you just update us on tariff plans and when you think that.

Cash will no longer impact the business on your side is that still projected to be the end of the year and then the second question I have has a lot more to do with the rock this business and more specifically.

I think if I.

Remember your comments correctly, you think that the revenue and maybe profitability dynamics will be similar in Threeq and fourq, if the euro compared to Twoq. Some of your peers have directed us to believe that Threeq and Fourq you is actually going to be a very positive ramp.

And it sounds like you guys are a little bit of a different.

Situation can you just give us more color on the dynamics you are seeing from a distribution competition and technology acceptance perspective, just because some of the trends you mentioned are very prolific and the revenues may not necessarily reflect that at least a projection of revenues.

Okay. So I'll take the first question seven and then Alex and Morgan can cover the less.

The the Terra so this one through three were pretty well down the road to having those.

Having done done.

Weve relocated up pretty much the us desks and antenna products that we make so much of the arrows product had been moved out of China into the Philippines, Vietnam and Indonesia.

That was.

Generally behind this accomplished in the first part of the year.

Lists for.

Covers some of our desk products that we have to relocate to that will be done all of which will be done by the end of the year. So I guess the short answer is we think by the end of the year we through it.

It has been very disruptive to the flow of revenue and where it came from mcos.

A lot of a lot of this actually stopped sunworks supported with some stopped.

I think generally is back into some level of normalcy now, but we do have some work and.

The balance of the year to take care of risk for.

Which which is well underway. So by the end of the year, we think it will be behind US and list I don't think there's anything beyond the lists for.

So we think that will be behind us.

Let me just give you some color on the balance of the year for four Ruckus, and then I'll, let I'll, let Morgan talk more about the technology trends and what we see as the longer term potential so for the balance of the year, We mentioned as we talked about.

So that in Q1, there really are some short term.

Soft patches that we've had and we pointed particularly the sales sales execution has being one issue and then we pointed to the second as being the loss of a couple of key customer accounts. So and then with pointed to a third which was a buildup of inventory in the channel.

So we're continuing to work through those issues Weve realigned the sales force we've actually integrated.

The rockets enterprise Salesforce with Commscope enterprise sales force to create one.

Set of channel partners, one combined approach to market and and that work is ongoing we've worked through the majority of the.

Issues in the channel and we've actually won back a number of those.

Those customers some other wins that we point to.

Are some real progress, we're making on the OEM front to really drive manufacturing velocity and then winning back some of those key customer accounts that we lost and then the last point that I've mentioned in terms of back half back half strength.

Our our very strong E rate.

Order book that when when that spending begins to flow through we should be very well positioned to monetize that so there is there is a lot of good activity that we see.

As we look to Two Q3 q and Fourq Q as we think about that.

The qualitative remarks.

We did we did point to it being a little bit more on the flat side.

Largely driven by the fact that Theres a lot of this work ongoing and we're continuing to see some temporary impact of moving through the integration really really bringing this business up to what we believe is it skewed up its longer term potential, but I'll I'll, let Morgan talk a lot about what we see is some of the key technology trends and why we think this is such a strong growth platform.

So there there are two basic trends that are going on and and.

They have and impact and the question always comes down to timing. So as you probably know way to 11, a X or Y five six as it's called is just beginning and this is a fairly unique transition because it goes to multi gigabit requirements at the edge, which means that there is an upgrade cycle not just for the Wi Fi access point, where we also get exposure for our switching portfolio.

And our cable portfolio everything needs to be upgraded to fully take advantage of this new technology. So we think in the medium term. This is going to rise dramatically. However.

These access points are just beginning to ship.

And of course clients are now just becoming available that are capable of taking advantage of this so.

I think perhaps it's a question of who believes what timing is going on that may be a difference between us and the rest of the market.

Finally, the other trend that we think is taking off that that will have an impact to us.

As as we move through the year and on its next year is the move toward toward cloud and subscription services.

And in this case, we agree thats starting to accelerate but again, we think thats a 2020 effects.

Got it great and then I just actually have one more follow up regarding the cash conversion cycle do you still anticipate the year for 29 tend to be relatively back half loaded or even just.

Like last quarter loaded from an operating cash flow perspective, just a quick comments on that would be great.

Yes, let me thanks for the question. So so we do our typical seasonal pattern for cash flow is very back half loaded.

And and tends to be whether it's sort of late in the fourth quarter or even slipping to early in the first quarter. That's when we see a lot of receivables activity as folks built inventory heading into the the end of the year for deployment in the first part of the year. So thats, a normal sort of see the seasonal cycle and really.

Second part of Q1.

Q2, and first part of Q3 tend to be our low point.

So we do anticipate cash flow accelerating through the back half of the year I would point out.

The fact that we've we've been able to make a $100 million debt pay down just last week and we committed to another $100 million.

Likely to go out next week and that was in advance I would say that was that was.

Got a head of the original expectations that we thought so we have been doing some a lot of work on optimizing cash flow even in the soft topline environment and making sure were being very efficient on cash repatriation to really focus on the debt paydown. So both of those are hopefully very positive signals.

Great. Thank you.

Our next question comes from the line of Simon Leopold.

Lehman Steve.

Great. Thanks, Thanks for taking the question I believe in the prepared remarks, Alex indicated that you have lower than previously expected cash flow expectations.

Could you give us a little bit more quantification on what you're expecting for.

Cash flow from operations or free cash flow would be better.

Either that the next 12 months or 2020, if we could just get an understanding of what your expectations are now.

Yes, I mean, I would say that nothing has changed in terms of our long term our long term expectations for the year, we we continue to see that business as being.

Very strong and its ability to generate cash and as I mentioned in my last answer.

Even despite the current soft topline environment, we're continuing to generate cash and pay down debt, we do see that.

Trajectory accelerating through the.

Through the back half of the year and then we see 2020 being a much more positive year than 2019. So we view that everything that we're seeing currently as as simply pushing expectations.

Out by a couple of months so longer term sort of no change in the short term we are taking.

Immediate actions that Eddie mentioned to really focus on cash generation. So we increased our one year synergy target to $75 million above the 60 that we communicated we accelerated the full delivery of the 150 and we anticipate exceeding the 150 we are.

Actively taking additional cost actions to get.

Improved profitability again, despite the soft top line. So we're doing everything we can to it to make sure we are delivering on that on the paydown commitments that we've made.

Everybody's got a little bit different definition of long term and I I just want to make sure. We're clear I think you're referring to 2020, it sounds like it's probably a little bit lower than than what you had talked about previously, but still a pretty healthy approaching billion dollar cash from operations kind of number is that the right way to interpret your comments.

I think Thats fair I mean, we're not in a position yet to provide quantitative guidance, obviously for 2020, we certainly.

Views a level of cable operator spending that we see right now as being transitory and rebounding and 2020.

So I see 2020 as being a much more normal year, both because of a recovering capital spending environment as well as a lot of the actions that I've described sort of reaching full run rate.

Great. Thanks.

Whether you have the right resources to essentially move forward with the acquired assets from Harris.

We said when we believe we do we have we have a very competent people in both size of the company that that have the ability to move up.

Our technical skills that we have which areas.

That's that's the primary thing and development and design they have they have a lot of skill sets there.

Our goal is to continue to improve the physicians as we can with the combined into season and try to get some some back and forth between the two so you know we were sending help to places.

And I think we're seeing a lot of a lot of change there but the.

The change I think that.

We did that we made in network crowd is very positive Kevin I think a highly capable person.

And in any of the changes that we make in the near term or medium term. We think we'll we'll have good people there as well.

And when do you expect that that you'll be in the market with a a a virtual C cap solution I know there was some some press out on on I think a six month kind of timeline are not sure whether that was validated but by you or not.

Yeah. So this is Morgan. This is the end of the year timeframe certainly, but it is something that is accurate.

Great and then just one last one I wanted to double check I think you indicated that you expected to see P. sales would be up sequentially in the December quarter, just historically I always thought of that as a weak seasonal quarter for CP is there something specific going on in that quarter that.

Maybe makes it a little bit different thank you.

I think it's really most of the communication that we've heard from from customers is that they intend to have their capital spending increase in the second half.

Second half the year and and so we.

Expect that while Q3 is likely to be a little bit on the soft side for CP. Most of the benefit of that increase capital spending comes through in the fourth quarter and some of that as is actually based in conversations that we've had that we've had so far.

Great. Thanks for taking the questions.

Okay I was just kind of just.

We also remember when we commented on some of the softness that we've seen and CP its been driven by the.

Moving of manufacturing out of.

Out of China, and that's led to a bit of a decline in some of the broadband volumes. So that move is now fully behind us and where were ramping up the production capacity in recapturing some of that share loss that we saw as we add manufacturing facilities offline. So that sort of also what's driving that the.

Bit maybe non typical ramp.

Great. Thank you very much.

Your next question comes from the line at the met and Marshall Morgan Stanley Your line.

Got it thanks, and maybe I'm kind of complaint on to Simon's question of just what kind of actions are being made in the short term on kind of areas account management continuity and just making sure that kind of customers are circled up with to make sure that there's no disruption in this transition period and then if you could just comment on the mobility side sprint Timo and kind of ongoing combination in being in flux, there and just what kind of by purchasing behavior, you're seeing there or what you kind of put into expectations as far as.

Expectations of when that transaction closes on their spending patterns. Thanks.

Well I think this is Eddie and you know.

We have the benefit of serving the same group of customers generally I have met with the most if not all the senior people in most of our customers.

That will be reinforced in the coming weeks certainly Oh, we have very competent sales teams a combined sales teams now that cover the entire industry and so you know we need to reinforce and show or face I think we need to make sure that they understand the full capabilities of Commscope now as a combined company and what we can provide that so maybe maybe I'm reading more so than what we have in the past from a from a provision standpoint.

In the case of T mobile and sprint, we assume it's going to happen.

We think that's a positive you know generally when these things happen there is a pause.

We think that calls could be muted because these these guys to talk to each other a lot and for a long time.

And so we do a.

We are a primary supplier of their products to them.

And so we think thats an opportunity for US. We also had a probably 35 year long relationship with dish and so however, they fit into this in this equation I think that we can be a meaningful provider for the bits of the combined entity that they're going to get so so we think it's a positive you know that it is a caveat and these things there there is generally a pause, but we do think it will be muted.

And we've been in a close conversation with ER.

With the the people that we will be making decisions we think.

And and so I think we're ready to go.

And is that pause building the expectations aren't still TBD waiting to figure out timing of when everything.

Yeah. This is Morgan so I think it's a TBD, but as Eddie said its muted I'd like to comment on our on demand a little bit more of a unique situation. So I'm I'm very bullish on the sprint T mobile got together and the possibilities that will happen in the industry. The addition of this fourq operator, which we're building a network from the ground up represents a unique technology opportunity for Commscope.

Not not only will they need our traditional products, which we sold to them for years, but they have an opportunity to design. The network differently then them current legacy operators in that they can use a an open around standard interface.

To enable the core portion of the network and the export from the network be disaggregated. This is an opportunity for commscope to play in a way that we have had a hard time, finding the past where the remote radio heads and the base spend units have been.

Fairly closed.

Having to be supplied by the same supplier. We believe this is an opportunity where we may be able to do a lot more for them. So we see this the developments in the wireless industry iOS as uniquely positive.

Great. Thanks.

Mhm.

Our next question comes from the line of Snake Cherokee.

JP Morgan your line.

Hi, Thanks for taking my question I just wanted to wanted to start off with the connectivity solutions group and Weve seen one of your competitors recently lowered expectations, the fiber growth, citing push out of projects by telecom companies as well as the Lewiston from cable.

Just wanted to see what you're seeing on the ground.

Have your expectation the slow growth in the fiber side of the business change when you started the year and anything that's changed on the pricing aspect as well.

Yeah, I think others others have commented this oh in recent weeks and we're seeing we're seeing the same.

The same issues of your pricing is.

It depends on the when and where as to the aggressiveness or or may be more moderation of where prices are but we do see softness in the traditional enterprise both in.

But in both copper and fiber.

The Hyperscale business from our standpoint is a is a percentage wise a big growth market right. Now you know we are smaller than others.

But as we said earlier, we're in four of the five major named a hyperscale providers. We also have a meaningful position in the multi tenant data center marketplace, which we have been in for a long time so.

So I don't think what we're seeing is any different than what others have previously talked about.

Okay, but if I can just quickly follow up on for Alex Alex can you help me think about the season 19, though combined business not going forward just more curious about kind of the as we go from a kind of 2.6 billion run rate in Two Q2 .4 into Q, how much of that is seasonality.

Let's just kind of more of a moderation in the overall macro driving sold headwinds. The business also feels like you have a 200 million sequential decline in revenue would have 50 million decline in EBITDA. So just.

The weak weaker Q1, and weaker Q4, and then a strong Q2 and Q3 and a lot of that is driven by.

Just the construction season, whether it's on the tower or.

In the field and so that will be sort of typical and my understanding is a lot of that is fairly typical.

Within the acquired businesses, while the one difference is with the acquired businesses, particularly in the network and cloud side, you tend to see a fairly strong ramp at the end of Q4, that's driven by large software license sales as they are positioning the network capacity additions for the following year and and also.

Taking care of any residual capital spending that they have left in the budget, so that would be sort of that call. It the typical seasonality.

That's been thrown off a little bit in the recent past by by what we've seen in mobility and first net so.

What we've seen is that the Q1 in Q2 for mobility tend to be seasonally stronger than Q3 in Q4.

That's certainly what we saw in 18, and we expect that trend to be almost mirrored.

And not and this year as well and that's largely driven by the first net spending as opposed to what I'll say more of a macro level seasonality. So.

Hopefully that helps get at your question.

Yes, no that helps.

Follow for the remaining lovely thank you.

Thank you.

That concludes the question and answer session for today I will now turn the call thankful to Cindy.

We think we thank everybody for joining the join US for the second quarter call. We appreciate your continued interest in Commscope and we look forward to talking to you at the end of Q3, thanks very much.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may disconnect.