CommScope Holding Company Inc (COMM) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the CommScope Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference may be recorded.

I would now like to turn today's conference over to Jennifer Crawford, Director of Investor Relations. You may begin.

Thank you, Hughie. Good morning, and thank you for joining us today to discuss CommScope's second quarter 2017 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 onto our housekeeping items.

On Slide 2, you will find our cautionary language related to forward-looking statements. During this conference call, we will make forward-looking statements regarding our financial position, plans and outlook based on information currently available to management, management's beliefs and a number of assumptions concerning future events. Forward-looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors, which could cause the actual results to differ materially from those currently expected.

For a more detailed description of factors that could cause such a difference, please see our second quarter 10-Q filed earlier this morning and other SEC filings.

In providing forward-looking statements, the company is not undertaking any duty or obligation to update these statements as a result of new information, future events or otherwise.

Please note that all dollar figures and percentages are approximations. In addition to GAAP information, we will provide certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors. Detailed reconciliations of GAAP to adjusted measures can be found in the appendix to our slide presentation.

Slide 3 is our agenda for this morning. Mark will review the details of our second quarter results, review segment performance, discuss cash flow and capital structure, review our capital allocation priorities and then provide our outlook for the third quarter and full year 2017. Eddie will then provide closing comments before we will open the line for Q&A. (Operator Instructions)

I will now turn the call over to Mark. Mark?

Thank you, Jennifer, and good morning all. Turning to Slide 4, you see that the details of our second quarter results. Revenue declined 10% year-over-year to $1.17 billion. Sales declined in all major geographic regions. Foreign exchange rates negatively affected revenue by less than 1%. Orders were $1.07 billion in the quarter, which provided a book-to-bill ratio of 0.91x. Book-to-bill in the Mobility Solutions segment was 0.85x, while the book-to-bill in the Connectivity Solutions segment was 0.95x.

Weakness in indoor network solutions, fewer large projects in the Asia-Pacific region and cautious service provider spending drove lower sales and orders during the quarter compared to the year-ago period.

For the quarter, operating income was $138 million, non-GAAP adjusted operating income which excludes amortization of purchased intangibles, integration and transaction costs, restructuring costs and other special items declined 17% to $242 million. The decline in operating income was primarily driven by lower sales volumes and unfavorable mix of products sold. Despite the disappointing top line results, we were able to maintain 40% gross margin and over 20% adjusted operating margin, due to cost reduction measures as evidenced by the approximate $32 million year-over-year decline in operating expenses. The reduction in operating expenses reflected the benefit of cost reduction initiatives and lower incentive compensation expense.

In addition, lower intangible amortization offset higher restructuring charges within operating income. Net income for the quarter was $55 million, or $0.28 per diluted share. Non-GAAP adjusted net income was $119 million or $0.60 per diluted share.

I'll now discuss our second quarter performance in each of our segments, starting with the Connectivity Solutions segment on Slide 5.

Connectivity Solutions sales declined 7% year-over-year to $726 million. Revenue declined in both our indoor and outdoor Network Solutions businesses. Modest growth in the Europe, Middle East and Africa region, or EMEA, was offset by lower sales in the U.S, Asia-Pacific and Latin America.

Foreign exchange rate changes negatively affected revenue by less than 1% from the year-ago period.

Our outdoor Network Solutions business, which is primarily fiber-to-the-X and about 45% of segment sales, declined mid-single digits. Modest growth in EMEA was more than offset by declines in Asia Pacific, the U.S. and Latin America. Sales were affected by fewer large projects in Asia-Pacific, as well as industry competitive dynamics and consolidation, which impacted North American service providers' spending patterns.

We believe that the reduced threat from nontraditional competitors has provided the opportunity for traditional service providers to deploy fiber connectivity at a more measured rate. For example, within our outdoor fiber cable sales grew at a double-digit pace. And consistent with the market, our outdoor fiber connectivity sales were weaker than anticipated. And we believe that this may largely be the result of timing related to certain service providers passing more homes than they're currently connecting. We believe these connections will come in time and we are well-positioned to benefit from that service provider spend.

Our Indoor Network Solutions business, which primarily serves the enterprise market, is about 55% of segment sales. Revenue declined to mid-single digits led by lower copper sales in the U.S. While Indoor Network Solutions sales remain challenging, we made progress, improving our market position with multi-tenant and hyperscale data center customers, which I will discuss on the next slide.

Then turning to segment profitability, Connectivity Solutions operating income in the quarter declined 19% from the prior year to $75 million, while non-GAAP adjusted operating income declined 13% year-over-year to $146 million. Results were impacted by lower sales volumes and unfavorable mix of products sold, partially offset by the benefit of cost reduction initiatives and lower incentive compensation expense.

Let's talk about the progress that we've made in the data center market on Slide 6.

As we discussed last quarter, we are continuing to see a shift from enterprise-owned data centers to multi-tenant and hyperscale data centers. While we have historically been stronger in the enterprise-owned market, we are actively developing new solutions to better support the specific needs of the new hyperscale and cloud data centers.

The world's increasing consumption of data combined with the trend of businesses and service providers outsourcing their data center facilities rather than owning and managing them has resulted in significant growth in multi-tenant data centers.

To address this shift in the data center market this quarter, we formed the multi-tenant data center alliance, as part of our partners network. Members will be able to offer optimal network infrastructure solutions for customers, who need to deploy this technology in multi-tenant environments. The alliance deepens relationships with our partnerships and helps enable enterprise customers to transition to cloud computing with CommScope's trusted partners and leading solutions.

We are proud that Equinix became the first member to join the alliance and we're pleased with the support and success we have seen to date.

The evolving hyperscale data center architectures are also driving demand but require higher capacity networks with increased density, lower latency and a clear migration path to 2540 and 100 gig solutions. To meet these challenges, a data center's optical infrastructure must be flexible, future ready and easy to manage.

We recently announced our new high-speed migration platform, which uses modular building blocks to support the growing speeds and densities that new applications and architectures demand. We have seen early market excitement about the new platform and we'll continue to identify opportunities that innovate and meet the evolving demands of our industry. We expect to introduce additional new products for the data center market in the second half of this year.

Most recently, we completed the previously announced acquisition of Cable Exchange, a privately-held quick-turn supplier of fiber optic and copper assemblies for data, voice and video communications. Cable Exchange provides a variety of fiber optic and copper cables, trunks and related products used in high-capacity data centers and other business enterprise applications. The company, which was founded in 1986, specializes in quick-turn delivery of its infrastructure products to customers from its 2 U.S. manufacturing centers located in Santa Ana, California, and in Pineville, North Carolina.

This highly complementary acquisition deepens our capabilities in supporting the growing market for high-capacity, multi-tenant and hyperscale data centers operated by the world's largest technology in retail companies. Together with Cable Exchange, we expect to enhance our service to the data center market. We are thrilled to welcome Cable Exchange to the CommScope family, we intend to operate it as a stand-alone business within the Connectivity Solutions segment.

Let's look at our Mobility Solutions segment results found on Slide 7. Mobility Solutions sales declined 15% year-over-year to $448 million. Sales declined in all major geographic regions. Despite higher sales in India, sales in the Asia-Pacific region declined due, primarily, to fewer large projects in Southeast Asia compared to the year-ago period. We also saw continued cautious spending at certain North American Wireless operators. Foreign-exchange rate changes had a negative impact of less than 1% on mobility sales compared to the year-ago period.

Industry consolidation, M&A activity, technology changes, regulation and timing of regional spending patterns, all contribute to the ongoing volatility that we have seen in the global Wireless business. As many of our peers have noted, Wireless is a dynamic market.

Mobility Solutions segment operating income declined 31% year-over-year to $63 million. And non-GAAP adjusted operating income decreased 22% year-over-year to $96 million or 21% of segment sales. Both operating income and non-GAAP adjusted operating income were impacted by lower sales volumes, the unfavorable mix of products sold, partially offset by lower incentive compensation expense.

Turning next to Slide 8, and I'll discuss our cash flow and capital structure. During the second quarter, CommScope generated $87 million of cash from operations, invested $18 million in capital expenditures, and paid $17 million in integration and transaction costs, primarily related to the BNS acquisition. Adjusted free cash flow for the quarter declined year-over-year to $86 million. The lower level of cash generation was primarily due to lower performance of the businesses and the prior-year benefit generated from the extension of vendor payment terms.

Turning to our capital structure on the right side of this Slide. At the end of the second quarter, our net leverage ratio was 3.8x, and as a reminder, we have no debt maturities until 2021. During the quarter, we refinanced our 2022 term loan to reduce the interest rate margin. We eliminated the LIBOR floor and reduced the spread by 50 basis points, which will reduce cash interest cost by about $5 million annually. And at June 30, our weighted average effective interest rate was 5.36%.

We also invested $41 million towards the completion of a stock repurchase program announced earlier this year, which was designed to reduce dilution from our equity-based awards.

Let's turn to Slide 9 to discuss our capital allocation priorities. As we've consistently stated since our IPO in 2013, our priorities for cash are: first, to reinvest in the business through R&D, CapEx and M&A activity; second, to reduce debt until we reach our target range of 2x to 3x net leverage; and third, to return capital to shareholders.

We're investing about $200 million in R&D and about $70 million in CapEx annually. We acquired Airvana in October 2015 for about $45 million to enhance our small cell portfolio. We just acquired Cable Exchange for about $120 million to enhance our data-center portfolio. We accomplished all of this by -- while reducing our debt by $815 million in under 2 years. We continue to believe that reducing leverage benefits all stakeholders and we expect to reach our goal of approximately $1 billion of debt reduction post the BNS acquisition by the end of this year.

In addition, we're pleased to announce that our Board of Directors has recently authorized to repurchase of up to an additional $100 million of our stock. The intent of the repurchase program is to enhance stockholder value and returns. Given the expected near-term volatility and results compared to a positive longer-term outlook, we believe that a stock repurchase is prudent. Based on these priorities on our current outlook, we now expect to end the year with net leverage of about 4x.

Turning to Slide 10, I'll discuss our third quarter and full year 2017 guidance. In the near term, we expect cautious spending patterns to continue at certain North American service providers due primarily to industry competitive dynamics, consolidation and delayed finding of certain expected network upgrades.

As you know that large service provider projects in both of our segments are difficult to forecast. Consolidation discussions can cause uncertainty in the market and temporarily defer spending on network upgrades.

Additionally, spending on various parts of the networks happens at different times. Finally, competitive dynamics in the service provider market have allowed customers time to plan their network deployments in a more cost-effective manner. We now believed these deployments will occur at a more sustainable pace over a longer period of time. In the interim, and as I mentioned earlier, we have taken incremental actions to manage costs, including lowering incentive compensation; cutting selling, general and administrative expenses; and reducing our workforce.

And so, for the third quarter, we expect revenue of $1.1 billion to $1.15 billion. GAAP earnings per diluted share of $0.20 to $0.25 based on $197 million weighted-average diluted shares, and adjusted earnings per diluted share of $0.50 to $0.55.

For the full year, we now expect revenue of $4.5 billion to $4.6 billion. GAAP earnings per diluted share of $0.87 to $0.99 based on $198 million of weighted average diluted shares. And adjusted earnings per diluted share of $2.15 to $2.30. And cash flow from operations of greater than $500 million.

And with that, I'll turn it over to Eddie for his closing remarks.

Thank you, Mark. While we expect the industry environment to remain challenged for 2017, we are focused on our solutions, our customer relationships and cost structure. The bulk for our 2017 call down is due to North American service provider spending, which we believe has been impacted by industry consolidation and competitive dynamics among service providers. We have also seen weaker international conditions than expected primarily due to the timing of certain large projects. We continue to believe no material FirstNet shipments have occurred to date. However, we are well-positioned to benefit from the deployments once they begin.

In our North American outdoor network solutions business, we have seen volume growth in fiber cable, but fewer homes have been connected to -- connected than we expected. We believe that this is yet to come through a more sustainable build cycle over a period of time.

Our conviction has not changed around the fact that consumer demand requires service providers to push fiber deeper into their networks and operators to densify their Wireless networks.

On the commercial solutions front, we have made progress during the quarter. We completed our first OneCell deployment by a Tier 1 of network operator for Vodafone at Liberty Stadium, a multipurpose venue in the U.K. The results were impressive. And its first live event, attended by 27,000 concertgoers, the OneCell solution handled 162 gigabits of throughput, over 0.5 million connections during the concert. The OneCell solution was implemented in just 10 weeks from the start of planning to the go-live, including 5 weeks only for installation. We are proud of the dedication of our team and believe this is a great step to our OneCell commercialization.

Additionally, we have made progress in our Indoor Network Solutions business with the introduction of our High Speed Migration platform and the acquisition of Cable Exchange as Mark has talked about. We are pleased with the way High Speed Migration has been received by our customers and are excited to welcome Cable Exchange into CommScope.

Cable Exchange is well-respected for their delivery capabilities and customer relationships and we are thrilled to have them on board.

And finally, we continue to focus on successfully completing the integration of BNS, and look forward to completing the vast majority of our international ERP implementation in the fourth quarter of this year.

While the industry remains challenging, CommScope remains strong and we are controlling, what we can control, to ensure the company is positioned for continued success. We are taking action to drive new solutions and actively manage costs. We will also continue to adjust our operations to adapt to customer spending patterns and technology migrations as we have successfully done many times before.

Despite the short-term slowdown in spending, we are confident in our ability to extend our track record of value creation and express -- and expect solid growth in 2018.

And with that, I'll turn it back over to Hughie to start our Q&A.

(Operator Instructions) Our first question will come from the line of Rod Hall with JPMorgan.

So I guess I wanted to focus on 2018. So we understand that there's always a lack of visibility in telecom spending and, obviously, that's kind of playing out here. But you guys are talking about growth in 2018. And I wonder if maybe you could -- I know you won't want to guide for it, but could you give us just color on how you expect that to develop? Do you believe that some of the timing of these revenues pushes out into the first half of the year? Or do you think that mobility or connectivity drive that more? Can you just talk us through kind of how you see 2018? And then I have a follow-up to that on mobility. I just wanted to see if you could talk a little bit about FirstNet visibility? You said it didn't have new orders yet. Do you expect that still to be happening in Q4, the same way you did last quarter? Or are plans there are still changing and maybe that revenue is pushing out into the early part of next year? So we'd appreciate it if you could comment on both of those things.

Yes, sure. Thanks, for your question, Rod. I'll address the first part and then Eddie will discuss FirstNet. To your point, we have just begun our 2018 planning cycle and so it is too early for us to call 2018 at this time. But as we've commented, we do expect to return to year-over-year revenue growth next year, albeit, off of what is now a lower call for 2017. The international markets are still a concern for us as we look into 2018. But we do have winds at our back in North America, we believe in both of our segments. So if we just talk through for a minute the -- maybe by segment or major product area. Within the Wireless business in North America, FirstNet clearly is a tailwind as we move into next year and Eddie will provide some further color to that. Outside the U.S, we've talked about the lumpiness in some of the Southeast Asian project activities. And so we do see international generally moving in a positive direction but it is too early for us to be optimistic about growth in the international market there. Within the Connectivity Solutions business, in our fiber indoor portfolio, you've seen us make nice progress to that during the quarter. You will see more of that in the second half of the year. We believe that, that is a long-term growth market. As we had commented last quarter, we are playing a little bit of catch-up there. We're pleased with our progress, we have a little bit more to go but we're very confident of how we're achieving good position in that market. The copper side of the market -- indoors, we have described that as a non-growth business. We continue to adhere to that. It is a good profit generator and it's very cash flow generative for us but not a growth market looking forward. And then the key variable for us is in the U.S. FTTx market. We are enthused about the long-term fundamentals, we do see the MSOs starting out a little bit slower than what we had expected. We see them now coming out of their planning and moving more into ramping as we move further into '18. The pace of that is still yet to be determined. And then we commented from the carrier-side of the FTTx deployments, we do see more homes being passed than connected right now and we think that the connections will come in time. So those would be kind of our high-level views by industry and end-market, as we look ahead into '18.

Okay. And in the case of FirstNet as we've talked about this several times before with you guys, we have always thought it would begin in earnest in 2018. We do have a very small amount of revenue in Q4. Yet to have an order, and we believe there are no orders out here. We have sold a very small handful of antennas that are multipurpose that could be used for testing for different applications. They now have 7 opt-ins, I guess, as of yesterday. And so it's starting -- that's starting to fill up. So they could make decisions as to when to start deployment. And that could change. But we are well-positioned with this carrier and the application of FirstNet and what that will mean in antennas and other apparatus that we sell along with antennas on the towers, we believe that we will be a material participant in that. We have a continuing approvals of our antenna designs there will be more than 1. And so we have continually worked with AT&T to make sure that the designs are being integrated. You know we have a very good relationship with the engineering staffs among all the territories and you will have different applications as you go through the country. So we see a tailwind in 2018 and '19, as we expect FirstNet deployments as well as additional spectrum deployments to occur at the same time. We've said before, we think this is a several hundred million dollar benefit to us over the life of the build, that would be 3 to 5 years, something in that area, heavily weighted towards the first part of it. Some of the applications though can be served with our traditional antennas with a few minor modifications and so we'll see that as well. But -- so we feel good about what we have stated as to the timing, all subject to change due to customer preferences. We don't control that but we're standing here ready to support them as necessary.

Our next question in the queue will come from the line of Shawn Harrison with Longbow Research.

Just either on the connectivity side mainly focused on fiber or wireless. Is any of the weakness you're seeing tied to share loss or maybe lower-than-anticipated participation either in some of the connectivity side of fiber been rolled out or just in some of these Wireless deployments? And then I have a follow-up.

Shawn, as Mark has said, in the rollout of what we're seeing today, fiber cable is not the primary product that we provide in these rollouts. It is the connectivity part. Connectivity is a lag to the cabling and so we would normally see a lag. And so what he said also in his prepared remarks is that based upon the order rate and position that we have with some of these rollouts, we believed less is being connected than we had originally assumed. So we don't anticipate or see that there's been any share loss from CommScope standpoint or relationships with the customers whether it be an MSO or a service provider in the rollout.

And then Shawn, again, when you bifurcate the market we'll call it between carriers and MSOs. We have seen a somewhat slower start to these deployments by certain of the larger MSOs, a market that we are very well-positioned in. And so we do expect that these will come out of the planning stages and begin to ramp here as we move throughout the second half of '17. And we look forward to the growth opportunities in '18 and beyond in that market.

I have the same question though on the Wireless side of it be it either with FirstNet or the other U.S. carriers in terms of just (inaudible) what you're seeing there, is there any share dynamic that is a headwind?

No. We meet regularly with all of the major U.S. carriers. We know specifically what we sell to them and we know generally what the share dynamics are and we think that they are virtually unchanged, from that standpoint. You know these buildouts go in fits and starts. And so that's something that we have to adapt to. And I think those of us that have followed us over the last several years have seen big ramp ups and big ramp downs and slowness and then high speeds. So we adapt to that, we don't see any significant material or really small share change in that marketplace. We have said in the aspect of FirstNet that we would expect to share that probably equally with another carrier -- another provider. That would be less than what we see in our other antenna business. But that's something that is a special project and I think handled outside of the normal course.

And this is my follow-up. On the connectivity side, there were a lot of issues that came up last quarter either be a share loss in the enterprise market as you consolidate brands or the lead time issues on the fiber side. Could you discuss where you're at in, I guess, correcting both of those issues now that we're in early August?

Okay. We talk about share loss in several aspects, I think, last time. One was in certain geographies Asia Pacific being one, where we have lost share and in many cases, we would expect that loss to be permanent because it's at margins that we don't find attractive generally. I think, in most cases of share in general, the service-oriented causes of share loss, we think are virtually corrected. And we're seeing those customers return back to us as we talked about our expectation would be. So our customers found alternatives for a period of time, they're working through that. And we don't see any long-term damage as related to the service-oriented challenges that we had. So that's fully what we expected, it's happened with other people in this marketplace and there is some loyalty for long-term relationships that we have there. So we're comfortable with that.

And Shawn, just for clarity, what we had called out last quarter was some modest share loss within the Tier 2, Tier 3 providers within North America. And when you step back and look at our Q2 performance, we have seen growth year-over-year in that market with the Tier 1s. So to Eddy's point that when these things occur, it typically does take a couple of quarters to regain the confidence of customers that you weren't able to ship on-time to. That was an item that we been very transparent about last quarter. We think the impact in Q2 has been immaterial.

Our next question will come from Amir Rozwadowski with Barclays.

I was wondering if we could touch upon some of the cost savings initiatives that you folks have put into place. If we take a look at the near-term guidance, there is an implication that margins will continue to face some pressure in the near term. Just trying to understand sort of the size and scope of some of these initiatives and how we should think about it playing out in terms of the cost structure going forward?

I'll cover a few and then, I think, Mark can add to that. We -- as you know, we make about 85% of what we sell. That is impactful as the volume is not flowing through the factories. So we have had to adjust. In some cases, some of our factories around the world, not all, depending upon the products that are made at -- certain of them. That's something that we have done all our life and it's something that -- as you've seen, Amir, the ability of us to ramp up and then to ramp down is something that makes us may be different than some of our competitors. So we continue to do that. We've had a general look at our fixed costs and have made some adjustments there. We'll continue to review the size of our company relative to -- I mean, the cost of our period expenses relative to the size of the company and adjust as appropriate. So that's an ongoing nonstop thing that CommScope does. It's something that's [inbreded] into our -- or bred into our beliefs and so we'll continue to do that.

Yes, Amir, as far as the cost actions that I believe you are referring to those that are incremental to our $70 million of additional synergies for the year, and you're right. You can see that, at least, initially reflected in the $32 million reduction in operating expenses versus the second quarter of last year. I think, I had commented in my prepared remarks that we have cut SG&A, we have reduced the workforce and we have curtailed incentive compensation. There are incremental actions that we have taken during the quarter that haven't manifested themselves yet on the P&L and you'll see the impact of those in the second half. The other thing to keep in mind from an overall margin standpoint is we have called softness in the U.S. service provider market that will alter the mix a bit between North America and the international markets. And we do generate generally higher gross margins in North America. So that will put a little bit of pressure on gross margin.

Great. And then just 1 follow up on -- in terms of the FirstNet. I mean, what are sort of the stages here going forward and sort of as was tracking the potential progress in this and the opportunity set. What should we look for? You know it sounds like testing and specing gear has already been taken place? Or, is it, at the very least is in process? Is the next phase sort of working with some of the turf vendors? Is the next phase waiting to see sort of the states that opt in? Just trying to assess what data points investors should look for in terms of the potential progress to getting to that sizable opportunity?

I think Amir, what you've said is exactly what is happening. The acceptance of antenna designs is almost there. We're still working -- we and others are still working on finalization of those. We both have tweaks to the designs and there could be a few smaller companies that would participate with specialty antennas. It will depend upon whether it's in a rural or urban venue as to maybe the speed of deployment, they could do some rural maybe quicker. And so we're in touch -- that's the benefit of having a coverage as we have. We're in touch with all of those engineering districts to see what is going to be needed. And as the opt-in -- we wouldn't expect, as they opt-ins continue that they would take advantage to start deploying in some of the areas as opposed to waiting till finalization of it all. We would be in contact with AT&T on an ongoing basis as to what their needs are. There is a time lag between ordering and delivery so we need to make sure of what their expectations are, so we can certainly meet their -- meet or exceed their demands.

Our next question in queue will come from the line of Jess Lubert with Wells Fargo Securities.

I have a couple of question. Maybe just first, I was hoping you could help us understand to what extent North American mobility weakness is largely due to the large U.S. carrier deploying FirstNet and some of the associated delays or if it's become more widespread? And perhaps, how confident you're feeling about your revised outlook for the second half of this year? And then just secondly on the indoor business, last quarter, you'd mentioned a number of integration issues with respect to the ERP consolidation, the rebranding of some products, I think there were some manufacturing issues. So I was hoping to understand where you were with these factors? Are they resolved? Still presenting challenges? And how are you thinking about that indoor business as we work through the next couple of quarters? And what gives you optimism that new products, Cable Exchange could positively move the needle next year?

Sure, Jess. If I could, then maybe I'll just frame it briefly, but again of the call down that we've made for the full year, about half of that comes from each of the 2 segments, about 2/3 of the total comes from North America, from service providers. Within the Wireless segment, the call down there is much more related to softness that we see in the international markets much less so as far as service providers. The impact of timing around FirstNet, we had addressed that in our updated outlook at the end of Q1. And so what we see is more of the impact of M&A and cash conservation in the U.S. market from a carrier standpoint. With respect to your second question around the impact of some of the integration challenges that we had talked about. We see those largely behind us. In Q1's results, we have indicated about a $15 million charge or expense, if you will, one-time related to ramp up in efficiencies. Our capacity ramping is virtually complete, at least at this point in time. So we've worked through that. Within the enterprise market, we did call out some share loss, in particular, in some of the international markets. We had pointed to brand confusion. And we have worked hard during the last quarter and a half, a lot of activity with business partners to clarify those brands. In some of the international markets, where margins are low or negative, we have relinquished that piece of business. But while there's still maybe a little bit of work to do in that enterprise market with respect to integration challenges, we feel that we've made very good progress and that most of that overhang is now behind us.

I think one thing to demonstrate that the buying patterns of our customers, meaning how often they order as opposed to ordering in bulk, has changed to what is more typical. So their expectations of delivery is now being met. And so their need to ordering in bulk and build up inventory of their own is not there anymore and so that's a much better process for both of us.

And if I could just quickly follow-up on the international mobility piece. Can you help us understand where you are seeing most of the incremental weakness there? Is that just project timing in Asia or is that more spread? Where are maybe things feeling better/worse?

Yes. Mark said in his comments that it's the year-over-year, it's the absence of large projects. We had large projects last year in the Philippines, in Vietnam that are not recurring. That's the nature of this business in that part of the world that it's not a repeating revenue kind of thing. It is big-project oriented and we haven't had one of those in this time period. So that will naturally make the comparison challenging.

And then maybe just to add that, Jess. We have seen a -- I'll call it, a continuation of healing in Europe still not yet back to a growth profile, but certainly moving in the right direction. And then in India, we did see growth in that market in the second quarter. We expect to see growth again in the third quarter. But in the aggregate, it is the softness in Southeast Asia. Over the last 4 or 5 years, we have had the benefit of at least 1 to 2 large projects each year. We would point to at least 3 countries that are in the pipeline right now, Indonesia, Malaysia and Thailand, all of which are either in the planning stages or in early deployment stages. But not yet to the point where it has generated meaningful revenue for us.

Our next question will come from Vijay Bhagavath with Deutsche Bank.

I would like to get your thoughts on how should we think of growth rates for fiber and your copper cables business heading into next year? And where I am coming from is, could we anticipate fiber getting ahead of copper in terms of growth rate heading into next year? So we see a net positive single-digit growth for Connectivity next year. Are we thinking this correctly?

Yes, sure, that's a good question, Vijay. And the answer, unfortunately is going to be it depends. When you look at our most recent performance, and I think you're referring to our outside plant business as opposed to fiber in the aggregate including indoor, is that correct?

Yes.

We have seen a higher rate of growth. As we had commented our fiber cable sales, not only in the second quarter but in the last several quarters has been growing at a nice double-digit rate. The meaningfulness or the sizing of fiber cable within our total portfolio though, that is a fairly small component. Connectivity, the apparatus that goes at either end of the cable that is the bulk of our outside plant portfolio. And so that has been growing more slowly than what we had anticipated. Now a positive for us is that given that we do have coax cable in the portfolio as well, you know MSOs, we think, will take advantage of their installed networks to maximize their investment and to use both coax and fiber cable as they begin to deploy. But fiber cable growth for us at least over the near-term has outstripped the connectivity, primarily because of the rates at which homes are being passed verses connected. And so we'll have to see how that plays out into 2018. At some point, that will shift. The carriers are not laying the cable without plans to connect it. And so those connections we believe will follow, the timing of it though will be tough for us to call.

And I think, Vijay. As Mark has said before. In fiber cable for the outside plant, it's primarily the MSO market that we support. It is not the big deals that you -- that have been recently announced that. We do support those customers but it's more on the connectivity side.

Yes, perfect. A quick follow-up, if I may, any update on design wins at these major cloud companies? You know these are the big spenders for fiber.

Relationships?

Design wins with hyperscales.

No. As we've talked about, I think on every call since BNS, we had 1 hyperscale customer. We still have 1 major hyperscale customer but we are seeing revenue build at the others. I think, Cable Exchange brings us an entry into most of them, if not all. And so we're excited about that. The enthusiasm raised since this announcement of this small company has been surprising to us. And we think the technology that CommScope has along with the agility and delivery speeds that Cable Exchange can bring, married together is going to be a unique growth opportunity for us. We think that over time, these larger people will like to have multiple suppliers, so we think there's an opportunity for us over a period of time to make some progress in growth in that marketplace.

Our next question will come from the line of Mark Delaney with Goldman Sachs.

I guess we were just something to clarify a bit more specifically on the cadence of the OpEx cuts, Marvin, you talked about $35 million down year-over-year in the last quarter and some new opportunities as you go forward. But is that sort of $35 million declined year-over-year? Should we expect similar rates of declines for the next couple of quarters? I guess, that was part one. And then I had a second question is if I'm looking at your full year revenue guidance properly, it seems like the sequential decline implied in the fourth quarter is down low single-digit sequentially? And I know it's obviously coming off of a low base for the September quarter into December. But that'd be a more benign December Q on Q decline than what you are seeing in most recent years. So can you just help us understand the thought process behind that 4Q implied revenue guidance and how much visibility you have into fourth quarter revenue at this point?

I think your interpretation there Mark is correct. We would call as far as year-over-year growth or decline, the third quarter is a low point. And we do expect to see growth beginning again in Q4. And do you do see a somewhat atypical sequential ordering pattern there in 2017. As far as the expense reductions, again, the synergies those are intact as we've been talking about them now for some time, those will continue. The reductions that you've put in place earlier in the year, you see those getting reflected in our Q2 results. There are incremental action that we have taken that aren't yet reflected in the P&L, which you will see here in the second half. And we will continue to manage both our P&L expenses as well as our cash flow generation until we get through this lull period and we're back into a growth cycle here next year.

If I could just follow-up Mark on the 4Qs seasonality and it kind of being better than the normal seasonality. Is that entirely just a lower starting point or is there any specific projects that you guys have line-of-sight to?

Well as Eddie had talked Mark, we do expect the FirstNet activity to begin at some point in the fourth quarter. Some of the work here that we've been discussing is project related, fairly difficult to call exact timing. But look, when we take our full year outlook down by $350 million, we're going to make sure that we've taken all those things into consideration.

Our next question will come from the line of George Notter with Jefferies.

I guess, I wanted to go back to the fiber connectivity business. So you're talking about the rate of homes passed versus homes connected, there's a differential there. But also as we came out of the Q1 numbers, you guys were talking to an inventory correction that was going on, on fiber connectivity. I guess, just trying to understand if we are talking about the same thing here in terms of homes passed verses connected or this is a different influence that's new, that's propped up this quarter. So if you could just clarify that, that would be great?

Yes, George. The inventory that we had talked about in Q1 was the fact that lead times had extended not only for us but for the industry, as demand exceeded supply generally. And whether it was ourselves or others that are serving the market, everybody was in a capacity ramp mode. And lead times in some cases for us had extended out to the 16-week plus timeframe. And so you had customers that were placing orders well in advance of when they otherwise would for certain products. As supply and demand have caught up with each other as we move through the second quarter, those lead times have come in. And so the inventory that we had referred to in Q1 was again, an imbalance that we think has been largely corrected at this point. So we don't have significant amounts or anything unnatural at all as far as our connectivity products accumulated in a channel to our knowledge.

I think and the answer to your question about connectivity going forward, we know, where we play in that market, and so we are not seeing the same rate of growth as you would see in the fiber cable, that has been talked about for the larger projects. So our deductive reasoning is that there's not as many connected fiber to the home or node or whatever that has been typical. And that we're seeing more homes passed than we are seeing connected.

Okay. So you are saying that cable operators and telcos are pulling fiber feeder cables out into their outside plant networks but not yet connecting homes to the same degree?

Yes. The rate of deployment versus the rate of shipment on that product set is difficult for us to gauge and that it is a fairly small part of our portfolio, George. Whether or not, cable is being shipped but not deployed, it's something that -- it's not in our wheelhouse to gauge that precisely. But everything we're talking about here is compared to our expectations as we have come into the year. Our expectation was that there would be more of a ratable deployment of the connectivity as the fiber cable itself was being deployed. And we aren't seeing that ratio as we had expected coming into the year.

Our next question will come from Steven Fox with Cross Research.

Just one question. Just broadly speaking on the Connectivity business, can you sort of talk it to why you think you're holding shares as opposed to maybe losing share in certain pockets? And the reason I'm asking is because if you look at some results from like Anixter, Belden, et cetera, there's been some talk of some constraints around contractors, which you haven't brought up. And also you've seen some better trends around connectivity, I think, on the outdoor side. So I'm just curious if you can just provide some assurances around what you think is going on with your market share in connectivity?

I think, Steve, if any, I think the large customers that we serve, we understand where we are, on the partner networks that we have are extensive. We sort of gauged them as to storages of capacity and they -- what they tell us is they don't see anything of materiality. So not sure as to that comment.

Okay. But, overall, I guess, you're fairly confident based on what you're saying that there's not any kind of share shifts that you have to address as well in connectivity? Just to get that on the record.

We see nothing of that's meaningful.

(Operator Instructions) Our next question will come from the line of Kulbinder Garcha with Crédit Suisse.

I think, you kind of touched about this a little bit during the call. But I wanted to be clear. In terms of a return to grow in each business segment, Connectivity, you have more visibility will come sooner, I think, is that right? And that -- but that's still not going to be by the end of this year. Mobility, the trajectory improves as we go through this year and growth hopefully returns in 2017. That's just the timing of kind of how growth looks in each segment. Then the second question I had was on the approach to cost given the weakness, I'm kind of surprised that there isn't a $100 million or $200 million new program as such. Is that something that's going to be communicated later or this will be more incremental or if you could let us know how you thinking about that? That would be helpful.

Let me answer the last part of that question first. We constantly look at our cost structure, I think that's the way we maintain 40% gross margin and 20% operating income. That's not something that we wait. We have expectations that the market recovers and that we're going to need a company that is substantially the same as what we are today. We have impacted the variable part of that as much as we can, to not lose capacity or to maintain capacity at a level that is flexible. And we'll continue to do that. So I think, we've have gone through a lot in the integration of cost cutting. We instituted another level of it, about 6 weeks ago. We'll continue to look at our cost structure to make sure it is matched right with our business as it evolves. So -- and I think that's something that a close focus of how we operate our business.

And, I think, Kulbinder, back to your first question. You know, I had commented previously that we did see growth in our outside plant connectivity sales to the Tier 1 service providers in the U.S. on a year-over-year basis. We had talked about within that, our fiber cable growing at a double-digit pace. And the connectivity we believe will follow. The exact pace of that again, we were wrong coming in the year. We thought it would be more ratable. So we do expect there to be a catch-up period. We don't believe that the carriers are laying the cable without plans to connect it. The other side is the MSO market, which has been slower to start. We believe that they are still in some cases in their planning cycle. In other cases, in the early stages of deploying, we expect that to gain momentum moving into 2018 and we're very well-positioned in that market.

And our final question will come from the line of Simon Leopold with Raymond James.

I wanted to ask about 2 topics. Firstly, the easier one, I think is just trying to get the sizing of this cable exchange business, you did mention the approximate size of the deal. But just trying to figure out how much revenue we should expect to come from that business? And then the other question, trending question, I'm interested is understanding a little bit about what's going on with your small cell/Das business. I've made the assumption that it's not wedded to FirstNet, that it wouldn't necessarily correlate with that particular project as much as cabling and antennas might. Is that correct? And if you could give us some idea of the contribution and trends from small cells? I think you've said, it would be between 25% and 30% of Mobility. Just want to get a better understanding of where we are and where we're going?

Simon, I'll answer your first question. The approximate annual revenue for cable exchange is about 1% of CommScope's consolidated sales.

Okay, and the case of I would say the Das business, in which we believe has served by what the tower guys talk about small cell. As I said earlier, we participate if it's a DAS in the full complement of all the plumbing and concealment and all of that, that would be necessary. In the case of a small remote radio head, we would do concealment and the plumbing. And it's complicated as to the deployment by zoning and siding, and power and all those sorts of things. So that will be at a pace -- that's not something that we do normally. But that would be the pace that the operator can deploy at. In the case of what we would call small cell, that, that is an indoor product primarily. Although, our first deployment of it was in an arena, which is mostly outdoor but they're all protected. So that is different. Neither of these are related to what FirstNet would be in our perspective. FirstNet is a government-sponsored safety-oriented deployment. So everybody can have access to cellular coverage during emergencies. It will be covered by antennas as well as other plumbing or apparatus type products that we sell. And it's not just the antennas to us, it's all the deployment that goes up the tower.

Thank you, sir. And with that, I'd like to turn the program back over to Eddie Edwards, President and CEO, for any additional or closing remarks.

Thank you. While our second quarter results and outlook did not meet our expectations. We still firmly believe significant opportunity lies ahead and the CommScope has strong earnings power and cash flow characteristics. As a market leader, we intend to adjust our business as needed to adapt to customer spending pattern as well as technology migrations. We will also continue to focus on driving new solutions and adjusting our market strategies to reinvigorate our indoor network solutions business. We thank you again for taking the time to join us on our earnings call today. We appreciate your continued interest in CommScope. Thanks.

Thank you to our presenters, and thank you for all of our participants for joining us today. We hope that you found today's presentation informative. This will conclude the program, you may now disconnect.