CommScope Holding Company Inc (COMM) 2016 Q3 法說會逐字稿

Good day. My name is Carmen and I will be your conference operator today. At this time I would like to welcome everyone to the CommScope third-quarter 2016 earnings conference call.

(Operator Instructions)

At this time I would like to turn the show over to Jennifer Crawford, Director of Investor Relations. Please go ahead.

Thanks, Carmen. Good morning and thank you for joining us today to discuss CommScope's third-quarter 2016 results. With me on the call are Eddie Edwards, CommScope's President and CEO; Mark Olson, CommScope's Executive Vice President and CFO; and Phil Armstrong, CommScope's Senior Vice President of Corporate Finance. You can find the slides that accompany this review on our investor relations website. Now to our housekeeping items.

On slide 2 you will find our cautionary language related to forward-looking statements. During this conference call we will make forward-looking statements regarding our financial position, plans and outlook based on information currently available to management, management's beliefs and a number of assumptions concerning future events. Forward-looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors, which could cause the actual results to differ materially from those currently expected. For a more detailed description of factors that could cause such a difference, please see our third-quarter 10-Q filed earlier this morning, and other SEC filings. In providing forward-looking statements, the Company is not undertaking any duty or obligation to update these statements as a result of new information, future events or otherwise. Please note all dollar figures and percentages are approximations.

In addition to GAAP information we will provide certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors. Detailed reconciliations of GAAP to adjusted measures can be found in the appendix to our slide presentation.

In addition, we will be discussing pro forma BNS results for the third quarter of 2015 as though the acquisition had been completed on January 1, 2015. This pro forma information has not been prepared in accordance with US generally accepted accounting principles. Accordingly, the pro forma financial information may not be indicative of the results that would have been realized.

Slide 3 is our agenda for this morning. Mark will review the highlights of our third quarter, discuss quarter results, review our two segment's performance, discuss cash flow, liquidity and capital structure, review our BNS integration progress and then provide our outlook for the fourth quarter and calendar year 2016. Finally, Eddie will make closing comments before we open the line for Q&A. To make sure everyone has the opportunity to ask a question on today's call, we request you ask one question and return to the queue for any additional questions.

I will now turn it over to Mark. Mark?

Thanks Jennifer and good morning all. Turning to slide 4 you'll see the highlights of our third-quarter results. We're proud of our third-quarter performance, revenue on a pro forma basis for the BNS acquisition increased 4% year over year driven by strength in our North American Fiber-to-the-X business. In addition to the top line growth we generated strong margins in the quarter.

Our gross margin for the second consecutive quarter was a robust 42%, while our adjusted operating margin for the current quarter was a healthy 23%. This speaks to our ability to execute on our integration while continuing to manage costs effectively.

Due primarily to these strong margins our adjusted EPS was up 53% year over year, and cash from operations increased 128% year over year. We're using our strong cash generation to continue to repay debt and we voluntarily repaid $650 million over the last year.

Our net leverage ratio is now below 4 times, which is a reduction of more than 1 full turn since the end of last year. Lastly, we are pleased to increase our full-year 2016 adjusted EPS expectations to $2.57 to $2.62 per share, which is a year-over-year increase of 40% at the midpoint.

Now let's turn to slide 5 for further detail on our third-quarter results. We're pleased to report third-quarter sales of $1.29 billion which was consistent with our guidance and an increase of 33% year over year. On a pro forma basis for the BNS acquisition, revenue increased 4% year over year, driven primarily by strong North American growth in both segments. The benefit of an extra week of BNS results in the current quarter was effectively offset by ongoing product rationalization and foreign-exchange rate changes. International weakness partially offset North American growth.

Orders were $1.23 billion during the third quarter which provided a book to bill ratio of 0.95 times. The book to bill in the mobility solutions segment was 1.03 times and the book to bill in the connectivity solutions segment was 0.91 times. This book to bill reflects typical seasonality and a weak international economical environment. The connectivity solutions book to bill was also affected by timing of project driven Fiber-to-the-X spending in the Asia-Pacific region.

For the second consecutive quarter we delivered gross margin of 42%, a significant increase over prior year. The increase was driven by higher margin BNS products and ongoing focus on cost management and favorable changes in geographic and product mix. For the quarter, GAAP operating income was $181 million. Excluding intangible amortization and other special items, non-GAAP adjusted operating income increased 48% year over year to $297 million or 23% of sales. This increase was also driven by higher margin BNS products, cost reductions and favorable mix.

For the quarter, GAAP net income increased to $94 million or $0.48 per diluted share. Excluding special items, non-GAAP adjusted net income increased to $159 million or $0.81 per diluted share, up 53% year over year.

I will now discuss our third-quarter performance in both of our segments starting with the connectivity solutions segment on slide 6. Connectivity solutions segment sales increased 68% to $819 million due to incremental revenue from the BNS acquisition. On a pro forma basis for the BNS acquisition, connectivity solutions segment sales grew 9% year over year, primarily due to strong double-digit Fiber-to-the-X growth in both the North American and Asia-Pacific regions, and an extra week of BNS results in the current quarter. This growth was partially offset by slower spending in other major geographic regions, foreign exchange rate changes and product rationalization.

Clearly, North American outdoor network solutions were a bright spot for us again this quarter. North American service providers continue to drive fiber deeper into their networks for both residential and commercial applications. We're still in the midst of adding to our fiber capacity and expect to continue doing so for the remainder of the year. We believe that we are on a multi-year build in the US and expect solid growth in this portion of our business for the next several years.

The results of our indoor network solutions business were mixed. Our indoor solutions which are found in commercial buildings, data centers, central offices and cable TV headends, continue to be affected by the overall economic environment.

While our North American enterprise business grew slightly year over year, we saw cautious spending outside of the US, particularly in the Middle East and Latin America. And as you may recall, the enterprise market is our most economically sensitive business. Longer term, we expect improved performance in our enterprise business as we complete integration activities and as data center growth continues.

In the quarter connectivity solutions segment adjusted operating income increased 86% year over year to $189 million, or 23% of connectivity sales. The more than 200 basis point year-over-year increase in adjusted operating income margin was due primarily to higher margin BNS products and benefits from cost reduction initiatives. We are proud of our connectivity solutions segment third-quarter results. The team is working hard to integrate BNS effectively and efficiently, drive synergy realization and expand capacity.

Let's turn to slide 7 to discuss a few highlights of our Fiber-to-the-X portfolio. Our customers are pushing fiber deeper into every network, they are investing in broadband to deliver a higher-speed data to a home or business, they are investing in fiber to macro cell towers, metro cells and small cells and they are investing to enable network virtualization in wireless networks. These networks are capital intensive with a high portion of deployment costs related to labor in the field. We create innovative solutions to reduce the time and expense of deployment.

This slide reflects our broad Fiber-to-the-X product portfolio, which includes solutions for central office, headend and both feeder and distribution sides of the network. These passive products include a robust fiber distribution hub portfolio, fiber optic splice closures, multi-port service terminals, optical terminating enclosures and fiber optic cabling.

For example, on the right side of the slide you will see our recently introduced fiber distribution hub that we believe is the smallest footprint in the industry. The smaller size allows for more flexible installation sites. The lighter weight supports faster installations. In addition, it has the capability to be buried in ground. The ability to bury the hubs provide security against vandalism and can eliminate the need for the municipal permitting process.

As an industry leader in fiber distribution hubs with over 40 patents related specifically to the hubs, our broad portfolio enables us to help customers identify the most effective and cost-efficient solution for their deployment needs. Another example of our innovation to address fiber network deployment difficulties is our broad offering of plug-and-play, hardened connectivity solutions. We offer both OptiTAP compatible solutions as well as DLX hardened connector solutions, which maintain a smaller form factor for space constrained network deployments.

As you can see by the middle picture on this slide, the DLX hardened connector system is a smaller connector, adapter and terminal, allowing for higher density fiber in a smaller space. While the DLX multi-port service terminal accommodates 12 connector ports, in the same footprint as the current 4-port OptiTAP compatible solution. Again, another innovation that focuses on smaller, higher density hardened connectivity that is flexible and easier to install.

We are focused on enabling solutions for our customers to build an effective and efficient Fiber-to-the-X network. With our technological capabilities and diverse portfolio, we can help service providers lower CapEx by creating solutions that shift labor from the field to the factory. We are proud of the breadth of our technologically advanced Fiber-to-the-X portfolio which we believe positions us well to capitalize on the expected fiber growth for the current and upcoming fiber network builds.

Moving on to slide 8, I will now discuss our performance in the mobility solutions segment. Mobility solutions segment sales declined 2% year over year to $475 million, primarily due to weaker international spending and product rationalization. On a pro forma basis for the BNS acquisition, mobility solutions segment sales declined 4% year over year. Sales were negatively impacted by ongoing product rationalization and foreign-exchange rate changes.

North America again remained a bright spot for mobility solutions as well. Ongoing investment and densification by certain North American service providers drove low double-digit pro forma sales growth in the US, despite ongoing product rationalization within the BNS wireless portfolio. However, the solid performance was offset by declines in other major geographic regions.

Sales were particularly slow in India due mainly to the impact of the Indian spectrum auction which was recently completed. We're pleased with our mobility segment's profitability in the quarter. Adjusted operating income increased 8% year over year to $107 million, or 23% of sales. The approximate 200 basis point year-over-year increase in adjusted operating margin was primarily driven by favorable geographic and product mix and product pruning, partially offset by lower sales volumes and increased R&D spending as we continue to invest in small cell technology.

Over the near term we remain cautious in the international markets given global, economic uncertainties. Longer term we expect demand for mobility solutions to be positively affected by wireless coverage and capacity expansion in the emerging markets and the increasing demand for mobile broadband in developed markets. As a leader in the industry we continue to assist operators in transitioning for the more flexible and efficient network, including adapting to network virtualization, cloud RAN and 5G.

Next I will discuss cash flow and liquidity on slide 9. During the third quarter, CommScope generated $257 million of cash from operations, invested $15 million in capital expenditures, net of $2 million CapEx related to the BNS integration, and we paid $17 million in integration and transaction costs, primarily related to the BNS acquisition. We also paid an $8 million debt redemption premium to redeem the remaining $237 million of our PIK notes in August.

Adjusted free cash flow for the quarter was $266 million, a 73% increase over the prior-year period. This increase was driven by the BNS acquisition, the year-over-year improvement in profitability, favorable geographic mix and an ongoing focus on improving working capital performance. Adjusted free cash flow for the 12 months ended September was $671 million, up 94% year over year.

We ended the quarter with $948 million of total liquidity, comprised of $517 million in cash and cash equivalents and availability under our credit facility of $431 million. We are very pleased with our strong cash flow performance. As we have often noted, we focus on bottom line results. We continue to prune less profitable product lines which dampen top line growth but drive enhanced profitability and cash flow.

Turning now to slide 10 I will discuss our capital structure. The left side of the slide shows our capital structure and net leverage ratio of 3.97 times at the end of the quarter, down from 5 times on a pro forma basis for the BNS acquisition at the end of last year. We are proud that our net leverage is now below 4 times. We have repaid $650 million in debt during the past year which is a testament to our strong cash generation. We expect continued improvement in our net leverage in the fourth quarter.

The right side of the slide shows our major debt maturities. In October we repriced our term loan debt due 2022, lowering the interest rate by 50 basis points. We are very pleased with the repricing results which will save us approximately $6 million in annual cash interest.

Finally, our outlook is shown on slide 11 and I will highlight a few items. For the fourth quarter we expect revenue of $1.14 billion to $1.19 billion. GAAP earnings per diluted share of $0.18 to $0.20, based on 197 million weighted average diluted shares, and adjusted earnings of $0.54 to $0.59 per diluted share, up 35% year over year at the midpoint.

For the full year we now expect revenue of $4.885 billion to $4.935 billion. GAAP earnings per diluted share of $1.03 to $1.05, based on 196 million weighted average diluted shares and adjusted earnings per diluted share of $2.57 to $2.62 per share. And finally cash flow from operations of more than $550 million.

We are pleased with our full-year 2016 expectations. You'll recall that when we started the year we expected 2016 revenue of around $5 billion and adjusted EPS midpoint of $2.30 per share. While we currently expect revenue to be slightly below $5 billion, we have significantly outperformed on the bottom line, delivering almost $0.30 more in adjusted earnings per share at the current midpoint.

Driving this performance is healthy adjusted operating income, which we expect to rise nearly $300 million or 41% year over year at the midpoint. We expect adjusted EPS to grow a strong 40% year over year. We also expect cash from operations to increase over 80% year over year.

These expectations are a result of the dedication of the entire CommScope team. They highlight our focus on delivering solid bottom line results and cash generation, and speak to the power of portfolio management and product rationalization.

With that, I will turn the call over to Eddie to discuss his thoughts on the quarter before Carmen opens the call for Q&A.

Thank you Mark. Turn to slide 12, I will summarize our quarter.

We're pleased to deliver strong third-quarter results that exceeded our expectations. We are particularly proud of our robust cash profile that allowed us to pay down additional debt and drive our net leverage ratio below 4 times. Additionally, we continue to focus on integrating the BNS acquisition quickly and effectively.

Year to date, we have achieved approximately $75 million in cost synergy realization and continue to ramp this number. We are well on track to achieve our current synergy plan of greater than $100 million in 2016 and greater than $200 million by the end of 2018. While early integration activities have been successful, we still have much hard work in front of us.

We are in the midst of a significant IT systems cut over which will continue over the next several quarters. Early progress has been encouraging. We are focused on continuing to execute on our integration plans to drive significant shareholder value.

As Mark discussed, we believe we're in the early stages of a multi-year fiber network build cycle with North America leading the way. Our customers are pushing fiber deeper into the networks. As a result we saw strong double-digit growth rates in our FTTX business in the third quarter and we expect a healthy FTTX market for the foreseeable future. We are well-positioned to benefit from the expected FTTX growth because of the breadth of our technologically advanced portfolio.

North America, once again proved to be the bright spot for our mobility solutions segment as we saw low double-digit growth on a pro forma basis in North America, despite ongoing product rationalization. In contrast, weak macro economic conditions still persist throughout Europe and Latin America. This uncertainty has dampened international spending.

Despite the lukewarm international environment and overall lumpiness of the wireless business we remain confident in our long-term position. Overall, we are well-positioned to help customers transition to the networks of the future with our robust fiber portfolio and technology-leading wireless solutions. Smart phones, social networks, cloud computing, big data, mobile video and network connected every day gadgets are changing how we connect to each other and creating a future filled with even more promising connected lifestyle and business innovation.

This insatiable demand requires better network coverage, greater broadband access and increased data storage, creating a distinct need for fiber optic and wireless connectivity. We believe fiber and wireless technologies will be the essential building blocks of virtually all bandwidth intensive networks of the future.

Our customers are invested in all aspects of their networks, in the core, access and edge; including wireless network virtualization that requires fiber fronthaul, crosshaul and backhaul; fiber to the home, or fixed wireless as the last mile; 5G networks that will require densification with small cells, backhauls with fiber; and hyperscale data centers to support cloud computing and big data.

With our broad fiber and wireless portfolio we are well-positioned to enable customers to transition their networks to respond to the ever-growing demand for bandwidth. We remain focused on positioning the company for long-term success, by delivering profitable growth while managing cost effectively.

Now I will be happy to -- Mark and I will be happy to answer any questions you may have and I will turn the call back over to Carmen.

(Operator Instructions)

Your first question comes from the line of Amir Rozwadowski with Barclays.

Thank you very much, and good morning, folks.

Good morning.

I was wondering if we could touch on a couple of quick things, you had mentioned in the past that your businesses were being impacted by capacity constraints. And so I would love to hear an update in terms of where you stand with respect to that, capacity constraints?

Then, if I take a look at your revenue outlook, you folks have moved up the mid-point of the sales guidance, but it looks like you had trimmed the higher end. Where are you seeing more strength versus less strength relative to your prior expectations? Thanks so much.

Amir, I'll take the first one. We made progress during the third quarter, and I think toward the end we saw some of our shipping days decrease, and I think that helped us push out revenue maybe a little bit higher than we'd anticipated, certainly in the Connectivity business. We also saw some improvement on the Mobility side as well.

We're still in an expansionary mode; I think we will continue that into the first quarter, certainly to meet initial expectations for next year in the fiber side of the Business. But we have made a lot of progress. This does not happen by magic; we have a lot of acquisition of equipment, training of people, securing the supply from our vendors to make sure all of this works in an efficient way. And I think we are well under way to getting to the point we need to be.

On the revenue side, Amir, we are about where we thought we would be for the calendar year. You will recall that we had guided to approximately $4.9 billion at the end of last quarter. And so sometimes, given some of the project-oriented nature of our revenue, we can see a little bit of movement between quarters.

From an incremental standpoint, we remain enthused about the US fiber-to-the-X market and what we expect will be a growing trend in the data center market as we move into 2017. As you look ahead to the full year of next year, while we are not positioned yet, we're still in our planning cycle, you might consider Q3 as a good blueprint for how 2017 could look as far as a roadmap to get to mid-single-digit organic growth.

Great. Thanks so much for the incremental color.

The next question comes from the line of Rod Hall with JPMorgan.

Good morning, guys. Thanks for the question. I had a couple I guess. This BNS extra week that you called out, I guess we did not anticipate that, maybe we should have. I just wondered if you could talk about why it came in and if you can quantify, Mark, the revenue impacts at all and/or the margin impacts, it would be helpful. We're calculating maybe in the ballpark of $40 million of revenue, but I'd just be curious to know what you guys think?

I just wanted to go back to the Mobility growth in North America, that is really solid. Is that still being driven by the small cell deployments or can you give us a little bit more color on what is going on there and how sustainable that is? Do you expect that to continue right on through next year? And then I might have a follow-up. Thanks.

Yes, Rob, the way to think about that additional week within BNS is in the range of 2%. You think about it from an organic standpoint, and so we had about 1% to 2% impact negatively due to product rationalization in the quarter. We had an FX headwind of about 1% in the quarter, and this additional week was about 2%. So you put those three together, they wash.

So, we point to the 4% growth that we saw on a pro forma basis as truly being an organic growth rate. It was considered in our guidance. So, it is a difference from a year ago period, but very much a part of what we had guided to and expected in the quarter.

Mark, can you just say why it came in? It was just a calendar issue? It's just unclear, why did BNS have an extra week but --?

Until we transition all of our IT systems over onto the CommScope platform, utilizing transition service agreements with TE, they continue to do the bookkeeping for us, if you will. So, TE is on a fiscal year that ends September 30. Every six years they have a 53rd week in their fiscal year, and that 53rd week happened to fall into the September quarter. So, it is just a fall-through of the fact that TE under transition service arrangements continues to do the accounting for us for most of the BNS businesses.

Rod, I think the important thing, as Mark said, we guided with this number, we also had about the same amount of elimination of products through our rationalization program, so it is not just a free gift.

Right, okay.

Your question about North America and the Mobility side, it was pretty much across the board from that, the antenna business was strong, a very strong DAS business during the quarter, including small cells. So we are starting to see traction in ION-E, the Airvana work we are doing to be ready by the first quarter is under way and I think still on target. So, we feel good about what the future brings there.

Your next question comes from the line of Meta Marshall with Morgan Stanley.

Hey, great, thanks, guys. A couple of questions -- the first is just, as you look at product rationalization, how far are you through that process, through the BNS rationalization? And then on the second question is just, on the Sprint small cell announcement they made in the last quarter, do you think that could spur further small cell investment in 2017, you could finally see some of the site acquisition issues that have held up small cell growth in recent years dissolve, or just some commentary there? Thanks.

What we said, in the integration that we are about, this year will be about half of what the cost savings are expected to be from a synergy standpoint. If that's your -- the question that we said is something slightly greater than $100 million this year, out of a number that is greater than $200 million. So, we have raised the number, but the percentage is about the same as where we thought we would be.

But the integration, as Mark said earlier in his comments, we are in the midst right now of North America, and Europe and Asia we will do in the new year. So, it is so far going well, we are taking orders, we are making product, we are shipping and invoicing. So all of that is good, we feel good about our start, but as I said we have a lot of hard work yet to come.

Meta, just back on the product line rationalization and progress there, you may recall from our Analyst Day that we estimate that we take out about 1% of our top-line revenue each year on an ongoing basis to rationalize our product portfolio. We're very active not only in launching new products but also in pruning those that are no longer profitable to us.

In 2016, we raised that outlook, instead of from a traditional 1%, to 2%. That incremental 1% is primarily the acquired BNS DAS business, as well as a few smaller product lines within our connectivity solutions segment. So we have done the significant portion of the pruning of the acquired BNS business, and next year you should expect to see us return to our more traditional 1% or so in pruning.

The last question you asked was about Sprint and the growth. I think they have publicly announced that they are beginning their small cell deployment. We are part of that, so that would be some of what we sell to them.

Great, thanks, guys.

The next question comes from the line of Vijay Bhagavath with Deutsche Bank.

Great, thanks. Hi, Mark, Eddie.

Good morning.

My question is on what data points should we track for improvement in your overseas business heading into the new year? Would it be primarily antenna orders from the India spectrum auctions that just concluded, would it be any new optical orders from the European telcos? And then I have a follow-up.

I think you have touched on maybe a couple of them, Vijay, within the Mobility segment. We do expect that over time Europe will begin to heal. We did say that about the second half of 2016 when we started the year; of course, we have not yet seen that, but we do believe that pent-up demand will begin to break through the macroeconomic conditions in Europe to an extent next year.

To your point on the Indian spectrum auction, that went off at a somewhat lower price point than what was initially indicated, and we think that is a positive as far as having additional CapEx dollars to invest in building out that spectrum. And then on the Connectivity Solutions side, we see the beginnings of fiber builds in the UK and on the continent with carriers such as British Telecom. So those would be some of the data points that we would look to as providing some optimism around a little bit better outlook for international markets next year.

Perfect. Just a bigger-picture question: We are starting to see 5G materialize here in the US, 5G field trials, key sites and others are starting to see 5G orders. My question is: How would you see 5G starting to impact your wireless business here in North America over the next year or two? Would it be primarily driving sales of any new 5G products, would it also bootstrap or pull forward optical connectivity into small cells and macro cells? Thanks.

I think as they prepare this, part of the densification will be this. And as they prepare, in a metro cell much of the product is very similar to the macro that we sell, if they go into the more densified the in the building, the Airvana type or ION-E products, our traditional DAS will be used.

On a 5G-specific product, we are still a ways off. I don't think anybody has expectations of any deployed networks for the next several years, other than trials. So we will participate in those as they come about, but I don't think -- it would be hard to define what is a 5G cell versus a normal cell because it's a, today, mostly the same product for us.

Perfect. Thanks.

Your next question comes from the line of Tal Liani with Bank of America Merrill Lynch.

Hi, guys, this is Dan Bartus on behalf of Tal. Thanks for taking my question. I was hoping to dig into the Connectivity segment outlook a bit more. First, Google Fiber has been pretty clear about pulling back fiber-to-the-X buildouts. I was wondering how you guys expect that to impact the pace of North American builds in general?

Then, separately I was wondering if you guys could refresh our memory on your copper portfolio? What percent of your Connectivity revenue is exposed to the legacy portfolio, and how do you think about growth there? Thanks.

I will take the first part of that; it's Eddie. We don't believe that the Google announcement is going to impact materially the other customers that we talk to. They have their fiber builds pretty much under way and planned.

They still have the insatiable need for bandwidth expansion. And from feelers that we have out, and what either they are going to do from a new capacity or what they're obligated to do from acquisition-related obligations, we think that is going to be well under way. I do not think it is going to materially change what the competitor market is going to do.

Then the other part of your question, on the split of copper versus fiber, broadly within the Connectivity segment it is about a 50/50 mix of copper versus fiber products. It is the fiber side that is growing very nicely for us, in particular in the North American market with fiber-to-the-X deployments, but as well in data center applications.

Longer term, we do not view copper as necessarily a growth business. But it is a very profitable and cash flow-generative part of the portfolio. Some of the applications that we do see as ongoing for copper are in the in-building cellular deployments where we think that is still a fairly nascent market, and having Power over Ethernet to fuel small cell deployments in an in-building application would be one of the nice areas for us.

Great. Thanks.

Your next question comes from the line of Steven Fox with Cross Research.

Thanks, good morning. Just further on the enterprise Connectivity side of the Business, can you just talk a little bit about the competitive dynamics during the quarter? It seemed like there was a lot of different puts and takes, whether it was with your larger distributor, I'm not sure if you outperformed or performed in line with them. You had also one of your large competitors have trouble servicing all their customers. I guess I was curious if you could break down where maybe you did better versus worse across fiber, also within copper where I think one of your competitors has also been redirecting some resources recently. Thanks.

We think that we fared very well versus competition, from the data that we can see. I think in high-end copper, we are the major player in that market, not just here in North America but other parts of the world. While Mark says it is not a growing part of the Business, it is still important. The margins that it generates, generate a lot of cash for us to do other things. So, I do not think we lost any position there, here in North America, if that is your question.

On the fiber side, we talked about strong growth in that, we believe that does continue in the enterprise, certainly in the outside part. We had some weakness on the inside cabling, and that is more economically driven. We've talked about for years that this is really macroeconomic driven revenue, and the economy, other than here, is not exactly vibrant. So we were impacted by that on a global basis, maybe more so than what we saw here.

Great. Just to clarify two comments you just made, when you say high-end copper, you're talking about Cat 6A?

Yes.

Then, in terms of projects you were doing on the data center side, would you say that they proceeded normally or did you see any push-outs in North America and abroad?

I wouldn't say that we saw anything in terms of abnormal behavior or patterns there, Steven. As you noted, these are projects, and they will ebb and flow, and we accommodate customers when they need the products, nothing unusual though.

These projects are not dissimilar from what we see in the DAS business. When you can count revenue is determined by the accountants, and so that is something that is more of a challenge to forecast.

Thanks very much.

Your next question comes from the line of Shawn Harrison with Longbow Research.

Hi. A clarification first to the earlier comment in terms of how to think of the setup of 2016 -- or 2017 -- using the third quarter as a proxy. Were you inferring that the 9% growth, or 5% organic in Connectivity and negative growth in wireless continues in 2017? I wanted to make sure that I heard you correctly?

Then the second was more focused in on, with debt refinancing occurring and debt paydown this quarter, how do you think about deploying capital in the fourth quarter and 2017? Because it does not look like there is much cost-efficient or accretive-efficient manners to pay down debt, at least here in the near term.

Sure. Let me start with the first one, Shawn, and to clarify there, the thought was that we have achieved and were pleased with it, mid-single-digit organic growth in the third quarter. I was not guiding to any specifics beneath that as far as performance by either one of the particular segments. But that is what we view as somewhat of a benchmark as we move into 2017, as far as top-line growth in the aggregate. And then with the expectation that we will continue to grow earnings faster than sales, as we did in the third quarter, and to generate strong cash flow.

With respect to our use of cash, we will continue to pay down debt. We get the point that our highest-cost PIK notes are now behind us. But deleveraging down into our target range of 2 to 3 times is something that we have been encouraged by investors, and we are also conservative people by our nature.

So we think that there is accretive value to the Company as far as continuing debt paydown albeit somewhat lower cost debt. So we will stay focused on that until we're comfortably in that 2 to 3 times range. But as we move down that path, as you've heard us comment before, reinvesting in the Company is a top priority for us and we will continue to evaluate what is a very full pipeline of acquisition activity.

I guess, if I may just follow up on the first point, do you expect wireless to be down again in 2017, I know it is very early and budgets aren't set but just a gut feeling if you may.

Just to clarify there, Shawn, we're still very much in the midst of our 2017 planning cycle. And so my commentary was at a 10,000 foot consolidated view, not necessarily considering either one of the two segments. But rather that we have a clear roadmap for achieving mid-single-digit organic growth with an earnings profile that is growing faster than the top line.

That's fair, I figured I'd want to just try again.

Your next question comes from the line of Avi Silver with CLSA.

Hi, good morning. Thank you. Question first on gross margin, I understand that there is seasonality in the Business on a sequential basis. But when we think about year-on-year trends in the next few quarters, should both mix and synergies continue to be a tailwind for gross margin going forward, and could you address that both individually for mix, as well as synergies just separately?

Then, a follow-up question on India as well as fiber, how should we think about the timing and magnitude of the revenue ramp post the India spectrum auction, and the revenue from the fiber investments you made to alleviate capacity constraints? Thank you.

Let me start with the gross margin question, Avi, and again, we are pleased, we have now achieved two consecutive quarters of 42% in gross margin. And if you do the triangulation on the guidance that we gave for the fourth quarter, you would see, albeit a little bit of an impact due to seasonally lower volumes, still in the 40 point range in the fourth quarter. So Eddie had commented on now having achieved about $75 million in cost synergies through the first nine months. About half of those synergies go into our COGS line and the other half, plus or minus into SG&A. So we are seeing the benefit within gross margin of synergy realization, and that will continue as we move into 2017 and beyond.

The mix question is, getting back to the fact, we are seeing an unusually, based on historical standards, heavy mix of North American business. So, typically we are more of a 50% North America, 50% international. We have been in the 55/45 mix over the last several quarters, and we are benefiting from that. So as we move into the years to come, we expect that mix over time will go back to a more traditional 50/50, and that can create a little bit of a headwind compared to what you are seeing today.

Your questions about spectrum and CapEx and fiber, we are currently selling now India, as they start deploying. It is not at the same pace we have seen last year, which was a more vibrant year. But it is starting; I will go back to Mark's answer a few minutes ago, we are very early in the budget process so we are not going to get any qualification or quantification of where that is going. But that process of getting stuff in the field for their new spectrum is happening.

In regards to the CapEx, as I said in the earlier comments, it is well under way. But it is not yet finished and I would think it would be into the first quarter, maybe into the second before we finalize that. We have a lot of training yet to do and hiring in some places, so it is an ongoing process. Part of that would just be part of our normal 2017 budgetary process of our normal CapEx spend, which everybody will be vying for money to expand.

Your next question comes from the line of Jess Lubert with Wells Fargo Securities.

Hi, guys, two questions. First, can you just discuss the breadth of the strength you saw in your North American wireless business? Was it all the big four, was it concentrated amongst one or two, and perhaps help us understand what you are hearing from these customers with respect to their antenna requirements looking out to 2017? What some of the puts and takes are influencing your thought process there?

Then I was hoping you could update us on the IT system [cut-over]. It sounds like that process has already started, how is that going, and maybe you can help us understand some of the challenges you are anticipating there, and to what degree that might be baked into your forecast here? Thanks.

Okay. Anybody who buys our Mobility products, it is the same people that did last quarter and probably the same sort of relationship as they did before. So the larger ones buy a lot more at a faster pace, and that continues.

As I said earlier, the DAS spend did speed up. It was a very good quarter for revenue there, and mostly traditional product, including the part of the BNS portfolio that we have not made redundant. I think that has some strength going forward as we see projects during the course of the balance of this year being finalized. But nothing strange or different as to what the buying patterns are.

I said earlier also, the expectation of small cell deployment from our acquisition is still to be commercialized sometime in Q1, and so what we're seeing there, more on the small cell, DAS has a place in that. We're still seeing that as the strength of that business. In addition to ION-E introductions here in North America and Europe.

Just from an IT standpoint, you'll recall that we began the IT conversions back in the January time frame when we converted, literally, 10,000 BNS employees onto our payroll and HRIS systems within four months of having completed the transaction. We have recently taken kind of the next milestone step as far as converting the balance of their North American operations onto our IT platform. That is going well.

And really it is a good opportunity to do a call-out to the entire CommScope team on the effort and the quality of work that has gone into that. It has been just tremendous as far as not only the work effort but the success that the team has had in pulling that off. And then you will see us continue that pattern as we move into the first and second quarters of next year, as we do the same with Europe and Asia.

Your next question comes from the line of George Notter with Jefferies.

Hi, thanks very much, guys. I guess I wanted to dig in on the North American wireless business a little bit more. If I go back three months ago, you guys were talking about some real softness from two of the larger customers in the US.

And then also, excess inventory being around, and here we are now talking about double-digit growth rates in that business, and I guess I just want to see if anything has changed in terms of your outlook here or the trends you're seeing? How do you reconcile that? Thanks.

Yes, George, as far as calling for softness, our outlook in the North American wireless market was for mid-single-digit growth as we started the year. It was maybe a little bit stronger in the first quarter, a little bit less so in the second quarter. We are seeing it back in the low double-digit range. So we're still calling North American wireless revenue up for the year in the mid-single-digit type range, not much different from when we started the year.

What is different for us though is in the international markets, which, as we had started 2016, we said that we had expected that we would begin to see some lift out of areas like Europe, which we have not yet seen. So, with the delay in the India spectrum auction, that has created some incremental softness for us in the international wireless market. But North America, by and large, has continued on par for what we saw at the start of the year.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

Yes, good morning, everyone, and thanks very much for taking the question. I was hoping for a bit more clarification on some of the comments around fiber to the home. In the prepared comments, there was the point about book-to-bill and Connectivity being down to 0.91, and there was some seasonality to that, but also projects in Asia. But at the same time, the Company was giving optimistic comments for fiber going forward, and needing to add capacity. So I was just hoping you could maybe better square those near-term comments with the positive intermediate-term outlook.

Yes. Sure, Mark, on the book-to-bill we had commented that it was 0.91 times for the Connectivity segment in total. Within that, it was stronger in the US and in Europe, and a bit weaker outside of those two geographies. In particular, in Asia there is one project in Australia with one large carrier, that while we saw nice project revenue in the quarter, the activity level there will slow going forward and so that has influenced the book-to-bill ratio there a bit.

Other than that, you are seeing a seasonal pattern here in the fourth quarter as well; typically it is below 1 for the Company in the fourth quarter and in the first, or the third, rather. So, nothing out of the ordinary there that would be different from our commentary around continued significant strength in the US and a close to 1 book-to-bill in Europe as well within that segment.

The next question comes from the line of Simon Leopold with Raymond James.

Hi, guys, this is Victor in for Simon. I just wanted to take another stab at the Mobility business for next year. Can you speak generally about how you are thinking about it -- how you are thinking about the dynamic from a geographic perspective? More specifically, it seems reasonable to think that the international business improves at some point during the year, but could we see some moderating from the North American spending environment, given the recent strength that we have seen.

Yes, Victor, again, I will have to preface any comments with the fact that we are still in our 2017 planning cycle and so we do not have specifics to offer by segment or geographic market at this point. There are factors to consider in both the US and the international markets relative to our Mobility segment. We have talked about the AWS-3 spectrum that the carriers here have begun to build on, starting this year; we think that we will see more of that next year.

But there will be puts and takes by project. In the international markets, you are seeing that an Indian spectrum auction having been completed, we would expect there to be some activity now as carriers begin to build on that next year. We will have more color to offer by segment and by geography as we move into our fourth-quarter earnings call here in a few months.

Your next question comes from the line of Kulbinder Garcha with Credit Suisse.

Thanks, just a couple of clarifications for me. With respect to the Connectivity side, can you just remind me how diversified the fiber business is amongst customers, and what specifically would you say is your revenue exposure of the segment to fiber-based buildout? And the second question is: The growth rate organically is quite good obviously in that business at 9%. Is that above the long-term average, below the long-term average, especially with the visibility you're talking about?

And then the second thing is that, obviously I'm sure you've seen the reports from some of the [industry vendors] in the last few weeks. There seems to have been a marked deterioration in visibility. Maybe that is more the side of the US, and your revenue exposure is different, but when both vendors, perhaps more than half of the market, talk about this, it seems that we are heading for prolonged downturn in that segment, probably through 2017. Have you seen something really change in your Business in the last 90 days or would you disagree with that? Thanks.

I'm going to talk about the OEMs first. It used to be a huge part of our Mobility business; it is not any longer. It is $300 million thereabouts in total for the Company as to what we sell to all of the OEMs, so it is not a meaningful number, it is not like it used to be. So we do monitor that and we understand that they have had some challenges.

We like our diversification, we like our direct to the end user that we have changed to over the past five or six years. So that is something I think we planned for and we are pleased at where we are. But those guys are still important customers of ours and we continue to serve them well.

I think, you had a question about the fiber portfolio. We sell to virtually every telecom operator in the world. A big part of our Business here is in North America, so those would be larger customers, generally. But you know, it is a very diverse, multi-national, multi-continent portfolio and product offerings that we have for this -- whatever they need in these various areas. So it is not something that is occupied by one; we do have some that are larger, but we're not going to talk about that.

We do not see capital intensity here diminishing at all, Kulbinder. So having access to both sides of the CapEx budget, whether that be through the wireless side or through our fiber side, is important.

Your final question comes from the line of Walter Piecyk with BTIG.

Great. Thanks, and thanks for that growth rate for North American wireless operators. I wonder if you can also give us some sense of the growth rate in the Connectivity business for this North American. You were mentioning the outdoor was very strong, can you give us a sense of that? Is that also a double-digit growth rate for those, I guess you would call it the North American outdoor segment of the wireless business.

Then, also, you talked about I guess your leverage ratios earlier and the deal pipeline being active. I realize that you would like to get the leverage down lower, but if Ruckus is available to you at an attractive price, is that something, or any large acquisition that you would be willing to take leverage up to much higher levels on, at least for the near term, given the success you have had in driving free cash flow and taking leverage down after acquisitions? Thanks.

Thanks for the question, Walter. With respect to growth in the outside plant or fiber-to-the-X business in North America, we said that we did see good double-digit growth in the quarter. That has been ramping as we have moved over the past several quarters, and we expect it to stay strong here in North America, and then begin to get some legs in Europe as we look forward into 2017.

With regard to our net leverage ratio, we are pleased to now be below 4 times. Our commitment is to continue to pay down debt, and generate cash and delever into the 2 to 3 times range, while at the same time being mindful of opportunities to reinvest in the Company. Beyond that, we would not offer any further color. Our outlook for cash generation and deployment of cash is unchanged from what we have talked about now for some time.

Okay. I would like to thank each of you for taking the time to join us on our earnings call today. We appreciate your continued interest in CommScope.

I would also like to thank the global CommScope team for all of their hard work, as Mark has said, particularly with respect to the integration efforts. CommScope's information technology team and other leaders have been diligently working to integrate the BNS assets efficiently and effectively. We're very proud of all of our employees for delivering the strong results we saw in the third quarter, all while continuing to focus on the integration efforts.

We are also extremely pleased with our performance during the first three quarters of the year. We have delivered strong gross margins, robust cash flow, and stronger-than-expected bottom-line result that allowed us to accelerate our debt paydown schedule, all while continuing to deliver our cost synergy plan. We feel confident in our market position, and we expect to build over it over the long term. Thank you, all, and we will join you next quarter.

Thank you again for joining us in today's CommScope conference call. You may now disconnect.