CommScope Holding Company Inc (COMM) 2014 Q3 法說會逐字稿

Good morning. My name is Toni, and I will be your conference operator today. At this time I would like to welcome everyone to CommScope's third-quarter 2014 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Mr. Phil Armstrong, Senior Vice President of Corporate Finance. Sir, please go ahead.

Good morning and thank you for joining us today to discuss CommScope's third-quarter 2014 results. With me on the call today are Eddie Edwards, CommScope's President and Chief Executive Officer; Mark Olson, CommScope's Executive Vice President and Chief Financial Officer; Mark Huegerich, Director Investor Relations; and Jennifer Crawford, Manager Investor Relations. You can find the slides that accompany this review on our investor relations site.

Before we begin the presentation I'll cover a few housekeeping items. On Slide 2 you'll find our cautionary language related to forward-looking statements. During this conference call we may make forward-looking statements regarding our financial position, plans, and outlook that are 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 2014 10-Q 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.

Also 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.

Slide 3 is our agenda for this morning. Mark Olson will provide an overview of the quarter, highlight our three segments' performance, discuss balance sheet, cash flow and capital structure and then provide an outlook for the fourth quarter and year. I'll turn the call over to Eddie Edwards for comments before we open the line for Q&A.

To make sure that everyone has the opportunity to ask a question on today's call, we request that you ask one question and return to the queue for any additional questions.

I'll now turn it over to Mark Olson. Mark?

Thanks, Phil, and good morning to everyone joining us on the call. Now let's turn to slide 4 for a summary of our third quarter. We're very pleased to deliver third-quarter records for gross margin, adjusted operating margin and adjusted net income.

Here are the highlights. Sales grew 13% year over year to $1 billion. We're pleased that growth in all three segments contributed to the sales increase. As we entered the seasonally slower fourth quarter, orders booked decreased 2% year over year to $867 million, providing a book-to-bill ratio of approximately 0.9 times.

Third-quarter gross margin increased 130 basis points from the year-ago quarter to a third-quarter record of 36%. GAAP operating income in the quarter rose 51% year over year to $151 million.

Adjusted operating income, which excludes the amortization of purchased intangible assets and other special items, rose 35% year over year to $219 million. Adjusted operating margin increased 350 basis points year over year to a third-quarter record of 22%.

Our adjusted operating performance improved not only through higher gross margin but also a reduction in period overhead, despite a 13% increase in sales. We believe this is a great example of our commitment to cost reduction and focus on improved efficiencies.

For the quarter, the Company reported net income of $96 million, or $0.50 per diluted share. Excluding special items, non-GAAP adjusted net income increased 97% year over year to a third-quarter record $119 million, or $0.62 per diluted share. Adjusted EPS increased 63% despite an increase of 33 million shares in our diluted share count, primarily as a result of our October 2013 IPO.

Our operating results grew substantially year over year, primarily due to strong wireless performance and significantly improved broadband results. Both the wireless and broadband performance were driven by higher sales volumes and the benefit from ongoing cost savings initiatives.

I'll now discuss each of our three segments' third-quarter performance starting with the wireless segment on slide 6. In wireless, we are the global leader in merchant RF wireless network connectivity solutions and small cell DAS solutions. Our solutions, which are marketed primarily under the Andrew Brand, enable wireless operators to deploy macro cell sites and small cell DAS solutions to meet 2G, 3G and 4G cellular coverage and capacity requirements.

Wireless segment sales increased 15% year over year to $633 million, with our recent Alifabs acquisition contributing approximately $10 million of incremental sales. The sales increase was driven by growth in most regions with particular strength in the Asia Pacific region and Europe.

In the quarter, wireless adjusted operating income rose 33% year over year to $155 million, or 25% of sales. We continue to benefit from higher sales volumes and ongoing cost savings initiatives.

During the quarter we did see a softening in order trends and have reduced our fourth-quarter outlook, due primarily to a slowdown in activity by North American wireless operators. But despite the short-term volatility, we continue to believe we are in the early innings of global LTE investment.

We have seen three consecutive quarters of significant year-over-year growth in Europe and the outlook remains positive, as European operators rollout LTE and modernize existing 3G networks. We're also pleased to see meaningful growth in India and the Asia Pacific region, as operators are densifying existing 2G and 3G networks and are in the early phase of LTE deployments.

Moving now to slide 7, I'll discuss our enterprise segment. We're the global leader in enterprise connectivity solutions for data centers and commercial buildings. Our comprehensive solutions, sold primarily under the Systemex and Uniprise brands, include optical fiber and Twisted Pair structured cabling solutions, intelligent infrastructure software, network rack and cabinet enclosures, intelligent building sensors, advanced LED lighting control systems, and network design services.

Enterprise sales increased 3% year over year to $218 million, primarily driven by growth in the Asia Pacific and North American regions. In the quarter, enterprise adjusted operating income increased 6% year over year to $45 million or 20% of sales.

Our enterprise sales pipeline remains solid and we continue to see signs of modest improvement in the market. We're pleased with our enterprise operating performance and remain optimistic regarding our long term growth opportunities.

I'll now turn to slide 8 to discuss our broadband segment. We are a global leader in providing cable and communications products that support the multi-channel video, voice and high speed data services provided by multiple system operators, or MSOs. We believe we are the leading global manufacturer of coaxial cable for hybrid fiber coax networks, and a leading supplier of fiber optic cable for North American MSOs.

Broadband sales increased 20% year over year to $150 million. The sales growth was primarily driven by increased investment in North America, as cable operators invest to increase the quality of their video and broadband offerings and push fiber deeper in their networks.

In the quarter broadband adjusted operating income increased meaningfully year over year to $19 million or 13% of sales, primarily due to an increase in sales volume and the benefits realized from cost reduction initiatives. We're pleased with broadband's meaningful improvement and continue to work diligently to position broadband for success.

Next, I'll discuss cash flow and liquidity on Slide 10. During the third quarter, CommScope generated $211 million in cash from operations, up 66% year over year.

And we invested $9 million in capital expenditures, resulting in a record third-quarter free cash flow of $202 million. Adjusted Free Cash Flow for the 12 months ended September 30 was $361 million.

We ended the quarter with $616 million in cash and cash equivalents and had availability under our credit facility of $371 million, which combined with our cash balance, provided total liquidity of $987 million. We're pleased with our demonstrated capability to generate strong cash flow, which provides us with significant optionality.

On slide 11 I'll discuss our capital structure. Since the take private in January of 2011, we have reduced our net leverage ratio from 5 turns to 2.4 turns by substantially growing earnings and free cash flow.

We continue to expect to generate strong Free Cash Flow during the remainder of 2014, and our priorities for cash have not changed. As a reminder, those priorities are: first, to grow the business both organically and through acquisition; second, to reduce debt over the longer term; and third, to consider other shareholder-friendly actions.

Finally, I'll cover our fourth-quarter and full-year 2014 outlook on Slide 13. For the fourth quarter we expect revenue of $810 million to $850 million, or down 2% year over year at the midpoint of the range.

Adjusted operating income of $125 million to $145 million, down 6% year over year at the midpoint. And adjusted earnings of $0.30 to $0.35 per diluted share, up 8% year over year at the midpoint, and based on a diluted share count of 192 million shares.

Our fourth-quarter guidance leads to a 2014 calendar-year outlook as follows: Revenue of approximately $3.8 billion to $3.85 billion, up approximately 10% year over year at the midpoint of the range. Adjusted operating income of $795 million to $815 million, up approximately 30% year over year at the midpoint. An adjusted effective tax rate of 36% to 37%. And adjusted earnings per diluted share of $2.15 to $2.20, or up 36% at the midpoint and based on a diluted share count of 192 million shares.

We also expect to continue to generate strong free cash flow, which reflects growing net income, disciplined working capital management, cash taxes that are below the effective tax rate, and modest capital spending. Consistent with our prior expectations, this guidance assumes typical seasonal slowdowns in enterprise and broadband and lower second-half North American wireless operator spending that we have highlighted throughout the year.

Despite the end-of-year pause in wireless, we are very pleased with our strong year-to-date performance and longer-term opportunities. We believe our industry-leading technologies, global sales force and ability to ramp with customer demand has increased our relevance and position in the market.

Finally, although we are currently in the process of developing our 2015 operating plan and expect to provide full year guidance when we release our fourth-quarter results, we currently expect modest sales growth that is more concentrated in the second half of the year. With that, I'll turn the call over to Eddie before the operator opens the call for Q&A. Eddie?

Thank you, Mark. I want to start by thanking the global CommScope team for their outstanding performance in the third quarter of 2014. We're pleased to deliver a strong quarter, as our wireless enterprise and broadband segments all delivered solid results.

As previously highlighted, while we will see lower sales in the second half of 2014, we believe continued investment in LTE coverage and capacity over the licensed spectrum will remain a strategic initiative for wireless operators over the long term. The broadband team delivered an exceptional quarter with significant improvement in both revenue and adjusted operating income. We are working hard to build on this momentum to sustain long-term margin improvement.

In enterprise we believe our performance is indicative of a continued market recovery. Enterprises are investing in data centers and the intelligent building market is showing signs of modest improvement. We continue to invest in iTracks, Redwood Systems, and our Data Center on Demand solutions and customer feedback is very positive.

The first nine months of 2014 have been strong with particularly robust wireless performance. Despite wireless orders that had slowed as we worked through the third quarter, we are pleased with our performance and outlook for the total year.

We are confident that our industry-leading wireless solutions and position in the market provides meaningful long term opportunities.

Now we'll be happy to answer your questions, and I turn it back to you, Toni.

(Operator Instructions)

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

Hi guys, thanks for taking my question. A couple questions, but first can you talk about general visibility entering Q4? Perhaps help us understand how we should be thinking about Q1 seasonality, so we have a baseline for how to get the growth for 2015? And what's providing confidence the overall business will grow next year?

Sure, Jess, and good morning, thanks for your question. Maybe if we talk through it a little bit by segment, first we did have some nice growth in our broadband business. We wouldn't encourage you to continue to think about 20% growth going forward, but we do have a little bit of a tail wind in that business right now.

From an enterprise perspective, as Eddie had commented, this is fundamentally our third consecutive quarter of growth in enterprise. It will represent the first year in three that we have seen growth in that segment. So we are optimistic with the momentum that we have in that business and we see that continuing moving forward.

Finally, in wireless, we started the year exceptionally strong. We had 26% growth in wireless in the first quarter and 23% in the second. As we've guided throughout the year, we expect, and have now begun to see, a pause in wireless spending here in the second half.

We do believe that that is temporary, that it will take a quarter or two to work through what we're seeing as an expected second half slow. Carriers, and again it's a US North American carrier consideration here, that like us they have budgets and they're working through those. Those will be reset just like ours will next year, so we do expect the continuation of spending in the US next year. Hopefully that provides is some color as to momentum.

Would you also expect the wireless business to grow next year? Can you help us understand the dynamics? Given the strength in North America this year, it seems like it might be difficult for the North American wireless business to grow.

Is that an accurate assessment? Can you help us understand the breadth of the uptick you're seeing in Europe? To what extent that is giving you confidence that the wireless business can grow next year? Thanks.

Sure. Maybe if we think about that geographically. You mentioned Europe, and this was the third consecutive quarter of very strong growth in Europe. We see that continuing unabated as we move into 2015.

In Asia, we've also had very nice growth throughout the year, very strong quarter in the third quarter. We see that continuing as well.

When we talk Asia, China for us is a relative small portion of our wireless segment. 3G and now initial LTE builds in countries like Taiwan, the Philippines, Myanmar, it's broad-brushed across -- and India as well has now -- returns to demonstrated strength over the past several quarters. We see that continuing as we move into 2015.

In the US we do see growth in North America in our wireless segment. We do see that more second-half oriented, as carriers reload budgets and get their capital spending plans configured. We do see growth in wireless in North America next year.

Mark, before I let you go, I didn't hear a comment on Q1 seasonality. Should we be thinking that Q1 is flat, up, or down relative to Q4? Any help there, in terms of how we build our models for 2015?

Yes sure, Jess. While, again, we're still in the midst of working our 2015 operating plans and we don't have calendarization fine tuned, we will have difficult comparatives, in particular in wireless, in first two quarters coming off of about 25% growth in each of those two. We will have, again, the presumption of growth for the full year, but we would encourage you to consider that as more second-half oriented.

All right, thanks guys.

Thank you very much, Jess.

Your next question comes from the line of Brian Modoff with Deutsche Bank.

Good morning, guys. Can you give us your definition numerically of what you think modest growth is? Is this low single-digit, the way to think of it? Mid single-digit? Any clarity on that?

At this point, Brian -- and good morning, thanks for your question. We would guide more toward low single-digits at this early stage in our planning process.

And then, in looking at the enterprise space into next year, you've been seeing a little bit of a pick up in that business. How should we think of that as a driver for next year?

What kind of seasonality will you be seeing there? That seems like that's a more steady business than wireless, and didn't have the (technical difficulty) that wireless had during this year.

No, I think that's a fair point and we would expect to see the continuation of growth in that business. It is much more linear, of course, than our wireless business is.

We are seeing growth both in the US and outside the US. Data center activity, we see that continuing at a good pace next year. We do expect that our iTracs and Data Center on Demand businesses will be more meaningful contributors to us as we move throughout 2015.

And then looking at wireless in Q4, I know that we've been talking about seasonality in Q4. This seemed to be a bit more, as you've been saying this almost from the beginning of the year, expecting the back half to be down. What happened in this quarter that caused you to think about it being down more material than previously?

Brian, this is Eddie. I think what we saw and I think it's not a secret to anybody on the call, is that we had a pause in one and a slowdown in another, over our US carriers. The US is a meaningful part of our business, so that was greater than what we saw and I think a surprise in the market somewhat at the time we issued our guidance for the quarter.

I think, as Mark just said, January 1 is the start of a new budget year. We have seen this phenomenon before. January 1 is a new budget year and we fully expect there's no shortage or lack of demand in the bandwidth need and these guys are going to have to spend money.

We've heard nothing in the marketplace that says they are going to curtail spending. I think, based upon what the tower people say, they see a vibrant utilization of this business going forward.

Lastly, can you talk a little bit about the DAS systems, first take up of the new product? And then, overall trends on your DAS business as we look into Q4 and then next year. And that's it, thank you.

It grew at double digits during the course of 2014 and we would expect 2015 to not be a materially different than that. The advent of the -- we introduced INU, which is both low power and high power. It is in place with a couple of carriers right now and the reception is very good. This, I guess, is the first transition toward more software-managed DAS systems.

The INE, which we introduced in Barcelona which you saw, we're in the final throws of trialing in Europe. We have one system in the headquarters of one of the carriers that's operating. We should start seeing, I think early in the year, business from that part of the world.

We are in conversation and have had several meetings with the larger US carriers, and very good response. The guys are blown away at the ease of deployment as to what our system will do. We would expect those trials to start possibly by the end of the year, certainly early in the first quarter.

Okay, thank you.

Our optimism in that part of the market is unabated.

Thank you, next question, Toni?

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

Thank you very much and good morning, folks.

Good morning, Amir.

Wanted to touch a bit more on the spending environment currently. Particularly if we start to think about where carriers are discussing priorities right now, it does seem as though we are shifting a bit from more of a coverage to a capacity type purchasing environment.

Certainly, when we look at certain initiatives such as the AWS auctions taking place today and where they see spending trends going forward. Would love to hear a bit more about how you folks are positioned to capitalize on that, particularly when it comes to the solutions that we should think about that will help them meet their needs and how we should think about that positioning.

Okay, thanks, Amir. LTE is still less than 40% of our macro business as well as our DAS business. It is the fastest growing by far, but the bulk of our business outside North America is still in 3G. Although Europe is well under way and we see that happening.

Where do we benefit from this capacity part of your question? We have metrocell-type devises, antennas and radios on a pole, street lights, things like that, that would enable you to go from a macro environment to a smaller cell site capability. Those products are available today and they're shown to our carrier base, and I think well appreciated.

That market is not yet developed. What you would see if you go out into some of the areas, you see a radio nailed to the side of a telephone pole with an antenna nailed to the top of it. That's not going to pass the approvals of the municipalities that people have to work with.

So site-solution, power and back-haul are really the drivers of that. Our designs and capabilities offer answers to that problem.

The second one is as the cell sites get even smaller, our small cell DAS offerings that we have, all of which are multi-frequency I think you know, will play a big place in that, as they do today. We've been in that smaller cell environment for a long time here in North America and in the DAS business for over 20 years around the world. We have offerings that take us from the macro site, which is the bulk of our business, to an intermediary size and then to the smaller cell sites with DAS.

Thank you very much, that's very helpful. If I think about your prior commentary in looking at cash priorities right now, you'd mentioned some shareholder initiatives and stuff along those lines. I was wondering if you could outline where you stand today relative in terms of your priorities for cash utilization. Are we still focused on tuck-in M&A-type acquisitions? How should we think about the near- and perhaps mid-term priorities for cash?

Our priorities are the same. I would say they have been adjusted somewhat and that we have a capital structure today that is really not indicative of wanting to repay debt back in the same fashion as we did before.

The number one priority, and has been and still is, is the growth of the Company, whether it be tuck-ins or possibly larger acquisitions. We have an active work being done and lots of interest out there of people talking to us.

That is the first priority. If we don't find the right thing, then shareholder actions would be considered after that.

But Amir, as you know, we are carrying over $600 million of cash on the balance sheet right now. The second half of the year is our strong cash generation half and we do expect to be cash-flow positive in the fourth quarter. Our working capital requirements for cash are broadly in the $200 million range. We do not expect to carry quantities of excess cash on the balance sheet for lengthy periods of time.

Excellent, that's very helpful. Thank you very much.

Thank you.

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

Yes, hi, thanks for taking my questions. This is Ashwin on behalf of Rod. I wanted to build on a previous question about wireless weakness in Q4.

The two largest customers here in the US actually increased 2014 CapEx towards the high end of the range. Right from the middle of this year, it was well telegraphed that wireless spending will be weak in the second half.

I was hoping you could help us bridge the gap between what the carriers had to say and the lowered Q4 guidance. Is it concentrated to just one or two carriers? Or is it pretty much a broad based weakness here in the US? Also any thoughts on phasing off European [LP] will be the same?

Well, that's a lot of questions. I'll forget some before I finish talking, but you can remind me. If you look at the whole year, which is how we judge at the end of the day. Our wireless business has far exceeded what we thought it would be and we're extremely pleased as to what we've seen.

How that happens per quarter is less scientific and really dependent upon how these guys do their spending. You can't listen to what they say, as far as I'm going to spend X, and really relate that to what that means for CommScope, because it depends on what they're buying when.

I think you would see that, as some of the OEMs earlier in the year had challenges, while we were absolutely running wide open. So the timing is not the same.

We have no concern about the fundamental basis of what wireless is and what it's going to be in the future. All of us have multiple devises that we carry around every day, and that's not going to abate. We have absolutely no concern as to the long-term future of the business.

How it happens per quarter is less precise, as we sit here right now. We have to work with our customer base as to how that's going to flow out. They're not always exactly accurate as to how they tell us and what really happens.

The biggest material effect is here in North America, with more than one carrier. But one is paused and one is slowed, and so that does impact us.

I think as Mark said in his commentary, we saw substantial growth in Europe and also in the Asia-Pac region, which is much stronger than we've seen in years. The other promising thing is, as part of APAC, India seems to have a resurgence. We look forward to that as we're located there.

We talked before about our transition from North America into Europe, as LTE coverage is going to capacity, and Europe is going to start with 4G builds. I think Everything Everywhere yesterday announced their LTE advanced introduction, I think.

We're part of that so we're seeing how that is working along with other carriers throughout the whole of the continent. Nothing different than what we've said.

Timing differences, yes, are the extremes in timing differences. But on an overall basis for 2014, we're exceedingly proud of what our people have done across all the segments that we have.

Okay, thank you. If I could ask one more question, it would be on the broadband segment. Obviously strong growth there. I was trying to understand why would we not see continued growth in that business maybe in 2015? If you could comment on that, that would be helpful.

Okay, what we have talked about in broadband historically is it's been primarily a maintenance business. Certainly in our legacy products, that being hybrid fiber coax, coax primarily.

What we saw in growth in our broadband business was a lot of fiber-oriented products, as they have bills from across the universe of the domestic is suppliers for their broadband backbone. There's alternative providers out there and they're reacting to that somewhat.

As Mark said, we currently have tailwinds in that business, but and you shouldn't think about that as a growth business. We're still in the process of cost containment and margin improvement.

We're looking at the geographies that we sell in outside of North America to understand which ones we need to continue at what pace. And also to look at the products that we sell. In some of the more commoditized products we would expect to see a change in approach, whether it be delivery, how we deliver those products to the customer, or whether we need to continue to make them.

A lot is happening in that business. We don't see it currently as a huge growth engine, as we do the other two, but we think the performance we saw for this quarter is significant. I think if you look, it's probably the best performance we've seen since 2007. These guys have done a great job in what they've done to improve this business this year.

Thank you, Ashwin.

That's good, thanks.

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

Thanks. Given all the multiple question everybody else has asked, most of mine have been asked, but I want to clarify one thing. This is for, I guess, both offer you.

As we look for next year, what you're trying to, I think, tell us is you do expect some moderate growth for the organization. You expect the wireless business to grow. You expect the North American wireless business to grow, but that growth is pretty much second-half loaded.

Actually I want to clarify that before I have my main question. Is that correct?

Yes, Kulbinder, that's our outlook right now.

Okay, great. My question then is, you have the confidence around that, basically the reacceleration implies. I understand that CapEx pounds at carriers, and I agree with you, tend to be revised every quarter. And what they guide for and what they spend can really change, as we've seen positively and negatively this year.

But the confidence it gives you that growth for next year, can you talk about the process that you have done to give us that confidence? I assume it's not based upon your orders, your book-to-bill is less than one right now.

So what would be the factors? Is it projects you're in discussions with? Is it indications you're getting from them?

I'm just trying to understand -- what I want to mitigate is the risk that as we get to January and this pause in the US is actually deeper and longer for a few more quarters than we think. I'm trying to think that confidence in terms of your best outlook now, how you're arriving at it.

I think our relationship with the four carriers here has only improved over the course of the last few years. The position that we have in the market and the scale that we have is different than others, and so we appreciate the benefits of that.

The breadth of products that we have across the macro and the DAS side is also different in scale than the other people, certainly in the macro part here in North America. And the appreciation they have for our technology and what we do going forward there, I think, adds to our confidence.

I think, furthermore, from a generic point of view, is we've heard or seen nothing as to I'm going to stop spending. I think I said earlier that this bandwidth appetite is only increasing, and that plays well to what we do. We don't see a fall off in the business today.

I think as Mark has said multiple times, we're still in the early process of our budget process, you'll get more clarity in February. But we see nothing there that says that the US won't be stable.

Outside of the US, as we've said, we see significant growth as a percentage both in Europe and Asia-Pac during the quarter. We'd expect that to continue as these build-outs of 4G LTE in Europe and the continuation of improvement in the 3G applications in most of Asia-Pac.

Thank you very much for the question, Kulbinder.

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

Good morning and thanks very much for taking the question.

Sure.

Good morning Mark.

You mentioned wanting to grow the business as the first priority for use of cash. Eddie, I think you mentioned even potentially larger acquisitions, and I haven't heard you talk about that recently. The commentary in the past, at least from my understanding, was more about tuck-ins.

I'm hoping you can help us understand what types of assets or product areas that you're considering in terms of acquisitions. And then what type of leverage you'd be willing to run at if you did do a larger acquisition?

Sure, thanks Mark. We have talked -- the question has come up, I think on every call since we've gone public, Mark, as far as whether or not acquisitions are a part of our long term strategy. And yes, they have been and they will continue to be.

We've always talked about that running the gamut from tuck-ins to consideration for things that could be more transformational. You're not hearing anything new as far as strategy in that area today.

From a leverage standpoint, we have been levered as high as five times, twice in the last six or seven years. Once following the Andrew acquisition, and once about three and a half years ago when we were taken private.

One of the strengths of the Company has been its history of strong free cash flow generation. So in prior years, as you know, that's been in the $200 million to $250 million range.

That has moved up. We will generate north of $300 million this year, and we continue to see that grow going forward. That gives us great optionality in how we deploy that cash.

Anything in the acquisition world would not be far afield from what we do today. From a segment standpoint, we would tend to invest more in the enterprise and wireless segments than perhaps in broadband.

Thank you very much.

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

Thank you very much. I wanted to ask what I hope are two simple questions; one, maybe a little bit more complicated.

On the simple side, obviously when you have some volume reduction, your gross margins come in. If you could talk about what you're thinking about for gross margin in the fourth quarter.

Then more broadly, 2015 you're expecting the modest sales growth. How are you thinking about gross and operating margin expansion in 2015?

What I was hoping to follow-up with is, within the wireless business I'd like to try to understand concentration issues. Either customers, and I'd like to think about end customers, so I know you sometimes sell with partners and sell direct, but end customer concentration or product concentration.

I'm trying to understand how much of the weakness you're seeing is strictly about a product category like DAS, which had been really strong in the beginning of the year. Or whether it's just very broad, thank you.

Let me take-- which part was the easy one? I'll do that one. (laughter) I'm going to take the last one and then Mark can have the one I think is harder.

I think as we've said, we sell to, we think, every carrier in the world where we can do business. We sell in China, which we've also talked about. We sell selectively there with products that we can actually make a profit on and it's not something to churn money.

That's a market that we deal with differently than the rest of the world. It's a large market, we appreciate, but it's not a market that we want to sell in unless it's on a profitable basis. But we do have relationships with all three carriers as well as both of the OEMs.

Given that we sell to everybody in the world, you can rack up outside of China, who are larger, and that possibly would be indicative of how we sell to them. I'm not going to answer your question directly, but I think you can put on the list of who the big guys are around the world, and you can assume that they are larger to us than the smaller people. We do have positions with each of them and we appreciate that diversity, both from a customer standpoint as well as a geographic standpoint.

And from a product perspective within wireless, is it more concentrated in DAS, cabling, antennas?

Okay, in the macro site, they generally, when they buy, I think for the most part all of them, when they buy an antenna they are usually buying our cabling, our filtering, our combining equipment, connectors and all of those things. When you see a decline, you're going to see it across that universe.

In DAS, it would be more project-oriented. It really depends upon -- unless they're in a pause or a slowdown, it depends on what projects were under way as opposed to the ones in planning. Our end customers have a way of controlling one differently than the other.

And then the margin questions, please.

The operating margin, Simon, in the fourth quarter, we've guided to a slight pressure on operating margins compared to last year's fourth quarter. It's primarily due to mix, so we expect to have a heavier mix of international versus US sales for all the reasons we've talked about. I'm looking ahead into 2015, on growth in the range that we had described before, we would expect relatively stable margins on a year-over-year basis.

Thank you very much.

Thank you.

Your next question comes from the line of Mark Sue with RBC Capital Markets.

Thank you. Good morning, gentlemen. Just a quick question on your working assumptions for price declines overall next year. How does the negotiations actually work with customers? And how should we think about unit growth, volume growth versus price declines in 2015?

Well, we participate in RFPs in the bidding process with customers. Our DAS business is really project-oriented. We're not selling pieces of things, we're selling a unit.

In our enterprise business, it's end-to-end solutions that we warrant. It's not selling feet of cable or meters of fiber cable, things like that. So it's really all different.

In broadband, we have generally annual or periodic contracts, supreme agreements which we understand are positioned relative to others. That's done on a bidding process.

Our intent is not to have declines all the time. We do a lot of reengineering of our products to make them better and more efficient and get our costs down and maintain our margins. I think you can see over the course of time, we've done not a bad job of that.

We're proud about our cost reduction capability and our ability to engineer. We spend about $130 million a year in development, so it's important to us within the confines of our business to continue that.

Our intent is not to be in the commodity price-only marketplace, because we do believe that we have leading technology in the businesses that we serve. And we believe that we need to be appropriately rewarded for that.

Thank you very much for your question.

And then if I look at your cost structure, you did a commendable job at the overhead cost reductions on the fixed side. Anything else to look at the fit to make the cost structure more variable?

Considering that the one thing that we are not sure of is the duration of the downturns that we go through, and the length of the upturns that we see historically. So what makes your cost structure more flexible?

Sure. We manufacture about 85% of what we sell. Much of the componentry or sub-assemblies of that are made by some other people. So we have a lot of variable costs in that model. Our expectation is that that will continue.

We need to be close to our customers for things that don't ship well. That's more of a fixed version. The things that we can ship are done in low cost environments, a lot with temporary workers. I think we would continue that process as well.

Thank you very much for your question, Mark.

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

Hi, George.

Good morning, George.

Good morning. I want to ask about Europe. You've mentioned it quite a few times on the call, and it sounds like it's really improving.

Can you help us better understand exactly what's changing there? How many operators are deploying LTE relative to the number of operators over there in total?

Is it more about the competitive response vis-a-vis Vodafone getting out in the marketplace earlier? Can you give us more detail on what you're seeing? Thanks a lot, guys.

Well all four in the US are. Europe is starting, certainly Vodafone is the leader. Everything Everywhere certainly is a leader. The other carriers are doing that. It's going to be at a pace that they set, not us, but that will come.

We expected that Europe would start up. I think what we've seen in the recent months is it's accelerating. Our position with those carriers are improving.

I don't have in my pocket a list of the number of them that are doing LTE. We do know that less than 40% of our business globally today is LTE, so the 3G market is still important to us.

George, we're seeing good growth. As we count them, there's a little bit north of 40 carriers, wireless carriers, in Europe. Our revenue growth is not concentrated.

Vodafone and Project Spring, of course, captures the headlines. But our growth there is much broader than that. The growth itself is focused on LTE. There's still good network modernization from a 3G standpoint that we see.

We're also pleased with the timing and the performance of our Alifabs acquisition. That happens to fit in very nicely, by design, with growth in wireless spending now in Europe. So broad brushed, not focused on any single carrier.

Thank you.

Thanks, George.

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

Hi. Clarification then a question. If DAS will be up double-digits in 2015, that implies your macro site solutions have to be down maybe mid single-digits. Is that a correct assumption?

Second, while I understand the need to invest in organic growth and M&A opportunities, if leverage is coming down and the view on your business continues, you continue to be positive on it for 2015, why not more strongly consider buyback? Particularly just given the cash flow you're generating right now?

Sure. Unless you want to jump in?

I want to answer the easy one first. Our DAS business has out-paced the macro business for some years. It's still in the 20% range relative to the total wireless business. It's not a new phenomenon that will out pace the growth of the macro site.

We did have significant growth in our active wireless business, that being antennas and filters, during the course of 2014. That would be something that would be more moderated, I think, during the course of 2015.

But, I think as Mark said now more than once, that we haven't done our budget yet. We're in the process and as we get more granularity, we'll certainly share as much as we can with you.

And then, Shawn, the other part of your question on capital allocation. Again, we've got $600 million-plus of cash on the balance sheet. We're in somewhat new territory, as far as size of cash balances. We expect those will expand as we move into the fourth quarter.

Our priorities have not changed, first to reinvest. Paying down debt for us is not a rational economic decision in the near term. So therefore, other shareholder-friendly actions would be right behind reinvestment. We don't expect to accumulate large quantities of cash on our balance sheet for long periods of time.

Thank you very much, Shawn.

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

Hi, good morning. Just one question for me. Could you guys speak to the quality of the wireless backlog during last quarter and into October and how that has trended over the last several months? That would be helpful, thanks.

Sure, Steven. With a book-to-bill overall at 0.9 times, it was below that for our wireless business. And so we have eaten into backlog a bit as we have moved through the third quarter.

I'm sorry, I guess my question is, are you seeing cancellations? Or are you seeing orders slow significantly and has the pace bottomed yet?

No, we aren't seeing cancellations. It's order slowdown as far as new orders deliverable in the fourth quarter.

We did have, during the initial pause of one of our carriers, some of the tourists requested to do that. We did not accept cancellations, we're still shipping. I think the balance of inventory is getting well in hand now, and we don't really see it as a problem.

Great. That's helpful, thanks.

Your next question comes from the line of Brian Coyne with National Alliance.

Good morning, thanks for taking my call. I really just wanted to follow up on George's question earlier. Which is, with wireless growth having shifted towards Europe and APAC, and obviously understanding your historical presence and strength in markets outside the US, still wondering if you see any opportunities or intend to shift meaningful resources, either to Europe or APAC or any of the other geographies that are growing faster, perhaps to capture a greater share of that growth?

We already have meaningful resources in all those places. We've manufactured in Asia-Pac for close to 20 years. We've been in Europe for something a lot greater than that, Mexico, North America.

We build where we need to from a standpoint of either technology or close to the customer. We use lower-cost environments for things that travel well.

Wherever the resources need to be, we will place them, whether that be technology resources where we design things all over the world on each of the continents we do business. So whatever is necessary to balance our business, our cost structure with our customer, base we'll do.

To put that in perspective, Brian, we have about 15,000 employees in the Company. About 12,000 of those are located outside the United States. That includes Research and Development, sales, manufacturing.

That's great, thanks. And if I could, just a clarification on earlier. Not sure that I heard the commentary on current visibility into wireless, versus exiting last quarter, versus the typical visibility that you have at this time of the year. Thanks.

Sure. Best visibility for us, of course, are orders in backlog that are going to ship within the next month or two. And as we had talked, our backlog has come down a bit.

A lot of our visibility, though, comes from customer relationships. That's what gives us the capability of being able to ramp up when you see volumes spike, as they did in the first half of the year.

We're also skilled in being able to take down that capacity as volumes slow, as they are currently. So our ability to ramp up and down is something we believe gives us a competitive edge and shows up in our bottom line.

And Brian, if you're just being specific to wireless, we deal both with the headquarters procurement organizations to give us indicators. We have people in every region of every carrier that see them probably on a daily basis. They cross check what those indications are to make sure that we don't go out and either under-build or over-build.

That doesn't cause us exact preciseness on pauses, but I think in the course of normal business it gives us a good indicator of what we need to do. Our coverage base, we have in total, over 700 people in our sales organization. They have very close contact across all three segments with our customer base. Thank you.

Thank you.

Operator, I think we have time for one more question, if one is available. If not, we'll turn it over to Eddie to conclude the call. (Operator Instructions)

Okay, we thank you for your continued support and interest in CommScope. We look forward to talking with you at the end of next quarter with our year-end results. Until then, we'll see you.

Thanks, all.

Thank you for your participation. This does conclude today's conference call. You may now disconnect.