Vistance Networks, Inc. (VISN) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to CommScope Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call may be recorded. I would now like to turn the conference over to your host, Jennifer Crawford, Director of Investor Relations. The floor is yours.

Thank you, Andrew. Good morning and thank you for joining us today to discuss CommScope's fourth 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 Web site. Now to our housekeeping items. On Slide 2, you will find our cautionary language related to forward-looking statements. During this conference call, we will make forward-looking statements regarding our financial position, plans, and outlook based on information currently available to management, management's belief, 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 2017 10-K 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. Eddie will first provide an overview of 2017. Then Mark will review our fourth quarter and segment performance, discuss cash flow and capital structure, review our capital allocation priorities and provide our outlook for the first quarter and full year 2018. Eddie will then discuss our favorable business environment and provide closing comments before we open the line for Q&A. To make sure everyone has the opportunity to ask a question on today's call, we request you ask one question and return to the queue for any additional questions. I will now turn the call over to Eddie. Eddie?

Thank you, Jennifer, and good morning. We take pride in the strength of our business and track record of generating significant amount of cash through various economic cycles. And as you’ll see in 2017 we executed on a number of initiatives to optimize our solutions, our operations and our approach to serving our customers for the future. Slide 4 highlights the significant progress we made in 2017 in strengthening CommScope for the long term, despite a challenging year across the industry. This progress exemplifies our team’s ability to build upon our existing strong foundation and strive for continuous improvement through all cycles. We remain confident in CommScope’s ability to drive long-term shareholder value, in part due to these 2017 achievements. We substantially completed the complex IT system and business process integration and including migrating from 11 legacy BNS IT systems into one common global system. We delivered on our two-year cumulative BNS cost synergy target of greater than $170 million and expect to generate at least another $30 million in savings in 2018. We’ve continued to drive our product development which included introducing our high-speed migration platform to enhance our data center solutions and developing a number of multi-band antenna systems to further enhance our leadership position in the FirstNet deployment. We extended a long-term optical supply partnership with OFS to secure access to a premier supply of optical fiber. This will allow us to develop innovative fiber cabling products for global wireline and wireless networks. We completed the acquisition of Cable Exchange with the goal of continuing to improve our agility, which is a core company value. Cable Exchange helps us serve data center customers with more speed and efficiency and with deeper capabilities to support the growing high capacity, multi-tenant and hyperscale data center markets. And lastly, we proactively managed our capital structure. We strategically reinvested in the business and met our two-year debt repayment target, which was approximately one-third of the acquisition debt in addition to returning capital to shareholders. Now I’ll turn it over to Mark to discuss our fourth quarter performance. Mark?

Thanks, Eddie, and good morning all. Let’s begin on Slide 5 with our fourth quarter results. We’re pleased to deliver results consistent with our expectations despite lingering volatility and customer order patterns and near-term raw material costs pressures. Fourth quarter 2017 sales declined 5% year-over-year, as expected, with growth in the Europe, Middle East and Africa region and Central and Latin America region. This growth was more than offset by declines in other regions, most notably in the U.S. Foreign exchange rate changes positively benefitted revenue by about 1% year-over-year. Year-over-year revenue decline was due primarily to softness in spending at certain North American wireless operators and project timing in the Asia Pacific region. Orders for the quarter were 1.90 billion, which provided a book-to-bill ratio of 0.97x. This book-to-bill reflects a marked improvement in the Mobility Solutions segment of 1.01 compared to 0.84 in the year-ago period. The Connectivity Solutions segment book-to-bill was 0.95 which was consistent with the year-ago period. We have since seen a further uptick in order rates in the first quarter, most notably in U.S. Mobility. For the fourth quarter, operating income was 92 million. Non-GAAP adjusted operated income, which excludes amortization of purchased intangibles, integration and transaction costs, restructuring costs and other special items, declined year-over-year to 199 million. Declines in both GAAP and non-GAAP adjusted operating income were primarily driven by lower sales volumes and the impact from higher commodity costs. In addition, unfavorable geographic mix negatively impacted margins in the quarter. These declines were partially offset by the benefit of cost reduction initiatives and lower incentive compensation. Net income for the quarter was 54 million while non-GAAP adjusted net income was 91 million or $0.47 per diluted share, which was consistent with our expectations, although slightly lower adjusted effective tax rate than originally anticipated. Fourth quarter non-GAAP adjusted effective rate was 35% which did not reflect any benefit of U.S. tax reform. And as I’ll discuss shortly, we expect that rate to improve significantly in 2018 and beyond. Turning to Slide 6 and results for our Connectivity Solutions segment. Segment sales for the quarter increased 2% year-over-year to 694 million with growth in the international markets more than offsetting a modest domestic decline. These results were led by year-over-year high-single digit revenue growth in outdoor network solutions which accounts for slightly less than half of Connectivity Solutions net sales. This growth was partially offset by a modest decline in indoor network solutions. Foreign exchange rate changes positively impacted revenue by about 1% from the year-ago period. We are pleased with our fourth quarter outdoor network solutions sales and expect continued growth in 2018. We also expect typical quarterly volatility due to project timing and believe that sales growth will be weighted towards the back half of the year. In the indoor business, we expect growth in fiber to outpace declines in copper in 2018. As we’ve said last quarter, we have increasing confidence around our solutions and services for the data center market. As you may recall, data center and fiber solutions account for nearly a third of indoor network solutions net sales. In the quarter, our Connectivity Solutions segment GAAP operating income was 48 million while non-GAAP adjusted operating income declined 10% year-over-year to 125 million. GAAP operating income benefitted from lower integration and transaction costs and a lack of an impairment charge in 2017. The decline in non-GAAP adjusted operating income was primarily driven by higher commodity costs, partially offset by the benefit of cost reduction initiatives. As we’ve said on our third quarter call, we have implemented price increases on select products within our enterprise business to begin to mitigate higher input costs. We are currently reviewing our pricing structure and may institute additional price increases to help further offset the pressures from higher costs. Now let’s discuss the results of our Mobility Solutions segment found on Slide 7. Mobility Solutions segment sales in the quarter declined 14% year-over-year to 427 million. Growth in India, in Europe, Middle East, Africa region was more than offset by declines in other regions, particularly in the U.S. Foreign exchange rate changes had a positive impact of about 2% on sales compared to the year-ago period. While 2017 was challenging for our Mobility Solutions as certain North American service providers spent cautiously due to a variety of factors, we are beginning to see these factors abate as evidenced by our improving order book. We expect an improving customer spend environment as the year progresses and this is based on both increasingly constructive conversations with our customers as well as public commentary that you have likely heard. As we noted during our third quarter conference call, one North American wireless operator had a significant impact on our year-over-year results in 2017. We expect a return to more normal customer order patterns as the year progresses and expect meaningful growth from this customer in 2018. Furthermore, we remain confident in our ability to maintain our leadership position supporting the FirstNet opportunity. We expect FirstNet orders to ramp during the first quarter and expect meaningful FirstNet revenue beginning in the second quarter of 2018. And finally, we remain cautiously optimistic regarding growth in certain international markets. In the fourth quarter, Mobility Solutions GAAP operating income was 43 million while non-GAAP adjusted operating income declined 35% year-over-year to 74 million. Both GAAP and non-GAAP adjusted operating income were impacted by lower sales volumes and unfavorable geographic mix, partially offset by lower incentive compensation expense. Next, I’ll discuss cash flow and our capital structure on Slide 8. During the fourth quarter, CommScope generated 242 million in adjusted free cash flow. The timing of cash tax and interest payments as well as customer payments received late in the year that were not due until 2018 contributed to this strong performance. On a full year basis, adjusted free cash flow was 568 million bringing our two-year cumulative adjusted free cash flow to $1.2 billion. We’re very proud of these achievements and our overall capital structure. The chart on the right shows major debt maturities over the next decade with our next maturity not due until 2021. We believe we have created a solid and flexible capital structure that ensures adequate liquidity for business operations. Additionally, this will facilitate further deleveraging while positioning us for ongoing investment and acquisition opportunities. Turning to Slide 9 and continuing on the theme from Slide 8, we’ve outlined our priorities for cash as well as the actions that we took in 2017 to prudently allocate capital. The left side of the slide shows our priorities for cash; reinvest in the business, reduce debt and return capital to shareholders. In terms of specific achievements in 2017, we invested 185 million in R&D and 69 million in capital expenditures. Our ongoing focus on reinvesting in the business has led to the launch of our high-speed migration platform as well as development of our full suite of FirstNet antennas to name a few. We’re proud that CommScope ranked third behind Cisco and Qualcomm in our recent IEE Spectrum Patent Power Pipeline Index for Internet and communications sector. This ranking compares the intellectual property of various companies for their originality and overall impact on the industry and other companies’ patents. The ranking also reflects CommScope’s emphasis on investing capital toward innovation. Second, we acquired Cable Exchange for 105 million which enhances our data center portfolio. We reduced debt by 210 million and delivered on our goal of more than $1 billion of debt repayments since the BNS acquisition. And finally, we repurchased 175 million of our common shares. Turning to Slide 10, I’ll discuss our first quarter and full year 2018 guidance. For the first quarter, we expect revenue of 1.85 billion to 1.135 billion, GAAP operating income of 93 million to 108 million, non-GAAP adjusted operating income of 175 million to 195 million, GAAP earnings per diluted share of $0.13 to $0.16 based on 196 million weighted average diluted shares and non-GAAP adjusted earnings of $0.44 to $0.49 per diluted share. As we discussed during our third quarter earnings call, we continued to expect unfavorable geographic mix and higher material costs to pressure margins in the first quarter. As price increases, gain traction in our enterprise business and the FirstNet deployment ramps, we expect these headwinds to abate. As you may recall, our Mobility Solutions segment delivered a strong first quarter 2017 performance with 60% of revenue coming from the U.S. On the right-hand side of the slide, we outline our full year 2018 guidance. We expect revenue of 4.675 billion to 4.825 billion or up 4% at the midpoint of guidance. This is expected to be driven by North American wireless and fiber deployments as well as growth within the hyperscale data center market. We also expect GAAP operating income of 615 million to 660 million; Non-GAAP adjusted operating income of 935 million to 985 million, or up 9% at the midpoint of guidance; GAAP earnings per diluted share of $1.46 to $1.58 based on 196 million weighted average diluted shares; adjusted earnings per diluted share of $2.56 to $2.71, up more than 20% at the midpoint of guidance. Finally, we expect cash flow from operations of more than $600 million. We currently expect our non-GAAP adjusted effective tax rate for 2018 will be in the range of 29% to 30%. As a full U.S. taxpayer, we are pleased with this enactment of tax reform. While it won’t have a meaningful impact on our cash taxes in the near term, we do expect to have more cash to reinvest in the business and pay down debt over the longer term. And with that, I’ll turn it over to Eddie for a few comments before we start Q&A.

Thank you, Mark. As you can see on Slide 11, we see positive signs in our markets over 2018. At the top of the list is FirstNet. All states and major territories have opted in, and we began receiving orders late in 2017. We are well equipped to serve this customer and ramp quickly with this program, which we expect to reach levels of scale in the middle of 2018. We’ve invested heavily to maintain our leadership position with this customer and others in North America. We stand ready to ramp the capacity quickly and service them effectively as they build critical security infrastructure in the United States. Next, fiber deep network deployments are expected to be another favorable driver this year, albeit more heavily weighted to the back half of the year. We are confident that the customer demand requires service providers to push fiber deeper into their networks and that we will see higher customer connection rates. We believe we’re well positioned to take advantage of this development with innovative solutions to support customer needs. There was significant uncertainly last year related to customer spending patterns due in part to customer M&A. While we are still mindful that M&A buying among our customers can cause positive in spending like we saw in 2017, we currently expect more normal spending patterns in 2018. Other items we are keeping an eye on are the repeal of net neutrality which could further spur investment from our customers and the transition toward 5G which is a demand driver in both our Mobility and Connectivity businesses. Turning to other business dynamics. As Mark previously said, we expect unfavorable geographic mix and higher material costs to impact our first quarter margins, but we believe margins will improve meaningfully from first quarter levels in 2018. Next, we expect strong indoor fiber growth to be more than offset by the expected market decline in our indoor copper business to more than offset the expected market decline in our indoor copper business. We have increasing confidence around our hyperscale opportunity with high-speed migration launches and our Cable Exchange acquisition, which improves our ability to efficiently meet increased customer demand. While we are still cautious on the international markets, we see positive signs with certain international markets, particularly in EMEA where fiber demand is growing and wireless operators are deploying more spectrum bands driving for more complex antennas. And finally, under the recently enacted U.S. tax reform legislation, CommScope expects to benefit from the lower adjusted tax rate, as Mark discussed. In addition to our beneficial tax rate, certain CommScope customers have announced their intent to increase CapEx spending due to the passage of tax reform and we would expect to benefit from this higher level of spend. With the combination of our strong foundation supplemented by multiple emerging opportunities, we believe our world-class differentiated solutions and services positions us well for value creation in 2018 and beyond. Before we open the call for Q&A, I would like to give a special thank you to Randy Crenshaw and Mark Olson on behalf of the entire Board of Directors, management team and the over 20,000 CommScope employees. Randy, our former COO, retired at the end of 2017 after 32 years at CommScope. He capped his distinguished career by successfully overseeing our massive and complex BNS integration efforts. And shortly, Mark will conclude a terrific 25-year career with our company in which finance and business acumen helped successfully guide us through multiple acquisitions and business cycles. I wish Randy and Mark the best in retirement and thank them for their service, leadership and friendship. Our search process for our new CFO is progressing with the assistance of a leading executive search firm to help identify candidates best suited for the role. On another note, I’m happy to welcome Morgan Kurk as our new COO. His extensive background and strong track record with CommScope and elsewhere has prepared him for this top operational role. And with that, we will open the floor for questions. Andrew, I’ll turn it back over to you.

Thank you, sir. [Operator Instructions]. Our first question comes from Vijay Bhagavath with Deutsche Bank. Your line is now open.

Good morning, Eddie, Mark.

Good morning.

My question is really on the cloud data center opportunity and also wireless and broadband. It seems like this is core to the growth story of CommScope here, so helpful to get your view, Eddie and also Mark please join in, on any detailed color or further color you can give us on customer engagement, project activities? Any new design wins you’re pursuing in data centers in particular? And then also how do you anticipate product mix and margins to pick up and improve as we head into the rest of the year? Thanks.

Vijay, thanks for the question. We’ve talked about a multi-tenant data center alliance that we formed with the real estate folks in this business. I think that’s going to drive – help with the designs and drive demand there. The addition of Cable Exchange I think has given us an opportunity to participate in the hyperscale market unlike we’ve had before. We’ve talked a lot about we had one customer that came with BNS. We still have that one customer but we have gained access to the entirety of the universe of the hyperscale customers. The other thing I think that adds to the benefit of CommScope is these hyperscale opportunities see a lot of growth opportunities not just here in North America but globally. And with that increased demand, they want to make sure that they have a source of supply that’s dependable. So we believe that most, if not all of them, will be converting from primarily sole-source to multiple-source opportunities. I think that is great for CommScope. We’re ready to serve that we’re heavily engaged with several of these people right now. So I think those are two examples of what gives us confidence in the cloud side as well as growth in demand of making more traditional data centers as well.

And anything, Eddie, on the broadband side in terms of fiber build-outs?

On the broadband side, the demand is increasing. The customer – we talked about one customer last year and the deployment they were doing and transitioned from fiber deep to their other architecture and [indiscernible] architecture. We’ve had conversations with others and they are poised to begin deployments this year. We think that the demand on the MSO side is going to be there. And so we stand ready to support it. Our position with that marketplace is excellent and we think that would be a good growth opportunity for us this year.

And I think maybe just to add to that, Vijay. We think that the capital expenditure outlook provided during the recent earnings cycle here has been very constructive in this industry. It’s certainly pointing to strong growth in the back half of the year that will help us expand margins as we move throughout the year. And then there’s activity outside the U.S. as well, be it in Europe and in the Middle East and even in Africa that we think will be a benefit to us as we move throughout '18.

Thank you, Vijay. Andrew, can we have our next question please?

Our next question comes from Amir Rozwadowski with Barclays. Your line is now open.

Thanks very much and just wanted to wish – well wishes for Randy and Mark as you make the next transition and everything that you’re going after, so best of luck. A question on sort of the guidance outlook. Thinking about the different moving pieces, particularly when it comes to some of the mix shift factors and some of the higher input costs or commodity costs that you folks have seen, I’m just trying to get a better assessment of how we think about the prospect for margin improvement going forward. Is it really largely dependent on some of the pricing increases that you folks have implemented? It feels like in the past, typically when those pricing increases were implemented, they were received. So that provided good visibility in terms of margin improvement. And then how are you feeling about sort of the mix shift to higher margin products going forward embedded in your 2018 guidance?

Sure. Thanks for the question, Amir. As far as our margin outlook, we’ve historically pointed to three or four factors that drive our margin rates and volume would be at the top of that list. And so as we move throughout '18 and we see traction in FirstNet, in fiber deep builds and, as Eddie had described, the opportunities that we have with the hyperscale data centers, even modest improvements in volume will drive meaningful margin expansion. The second factor that we talked to is geographic mix. In the fourth quarter, we have the lightest mix of U.S. revenue that we’ve seen in two years. We also have the heaviest mix of volume from India that we’ve seen in that period of time. And so there are differences in the margin profile between developing and developed markets. People point to pricing and certainly that’s a part of it, but it’s as much the technology mix. And so the complexity of the products and the product mix that we sell in the U.S. is different, much higher DAS content both in the U.S. and European markets than what we see in developing countries. So we see not only volume but that geographic mix improving as we move throughout the year. And I think your final question was around executing price increases in our structured cabling business. And we have been here many times before. It’s certainly not the first time and we talk commodities. This is obviously copper. And typically we will lag. We don’t adjust pricing each time. Copper might move by a few cents. But it has moved up meaningfully. It appears to be sustained. We have executed price increases that we begin or will begin to see the benefit of in the latter half of the current quarter and a more meaningful contribution from those in the second quarter and beyond.

And I’d just like to add. If what we’ve done so far is not sufficient, we’re fully prepared to do this again. It’s not just the screen price that determines what these products sell for, it’s a negotiated offer with us and competitors and they sometimes don’t follow logic. So we have to see how that goes. But we are seeing pretty good acceptance we think to the 3% to 7% price increase that we announced.

Thank you very much for the mental color.

Thanks, Amir.

Thank you. Our next question comes from Shawn Harrison with Longbow Research. Your line is now open.

Hi. Good morning, everybody. I wanted to follow up on Amir’s question and I had something on just kind of Mobility spending in the U.S. But if I look at the full year guidance either at the midpoint or at the high end, it’s still only about a 40% EBIT drop through. And so if volume’s kind of one of the biggest factors, I’d assume that you’d have a higher leverage point at the upper end of the sales guidance for the year. And so wondering if there’s something I’m missing with that or if it’s just because it’s so backend weighted, you don’t get the uplift on the incremental sales as the year progresses?

Yes, volume certainly is the key factor there, Shawn, as we move throughout the year. And look, I’ll comment on it upfront. We are going to guide the year somewhat cautiously as we start. We’re very cognizant of the fact that a year ago as we started 2017, we gave mid-single digit revenue guidance and the year didn’t turn out that way. This year we believe it is much different, FirstNet being at the top of that list, no longer a concept. We have orders in backlog. The order flow is ramping. And for us achieving that growth in volume as we move throughout the year is very much a factor of the pace of the acceleration of the FirstNet ramp. So we’re going to be a little bit cautious here as we start '18 and we’ll see how the year unfolds.

Good to hear on the cautiousness. On that FirstNet ramp and I guess Mobility spending in general, is your view of kind of what U.S. wireless spending can represent in terms of growth for 2018 improved over the past 90 days as more things come into focus?

I think everything we’ve read, the discussions we’ve had with our customers gives us confidence that the year could be good or better, certainly an improvement over what we saw last year. We had one customer that was materially different than what we have historically adjusted to and we think that they will be back on a more normal pattern. If you take FirstNet, I think our position there is maybe better than what we anticipated at one time. And so we look forward to that as the year progresses. That’s not a first quarter thing. We do have orders. We started getting orders in October I think as I said. And that revenue will not reach scale until late this quarter or early second quarter. So I think we’re in good position and I think we have a lot of trust among the big users of CapEx in our marketplace.

Thanks, Eddie.

Thank you. Our next question comes from Meta Marshall with Morgan Stanley. Your line is now open.

Thanks. Just to kind of ask the question in another way, looking into your guidance does the – the international/U.S. mix for '18, does that imply kind of greater than 50% U.S. share of that is kind of the first question? And then the second question just on the fixed wireless announcement you guys made yesterday, what is the timing to kind of get into trials with that product? Thanks.

Meta, I’ll answer the first part but in a nutshell, the answer is yes. Our 2018 guidance does imply that the mix of business between U.S. and international markets will improve from what is today 50-50 to a heavier weight toward the U.S. moving forward.

And we introduced a 28 gigahertz 5G capable antenna, more active oriented than what our primary [ph] antennas are. I think we have this expertise given what we have supplied both in end user as well as the OEMs. I think this shows the expertise of what CommScope has. This is not something that’s going to generate enormous revenue during the course of this year. It will be ready in midyear. But it will be shown next week in Barcelona. So any of you all are there, you’re welcome to come by and look at it and talk to our technologists about its capabilities. So it is a new deployment product for us and so we’re excited about it. But I do reiterate that it does show the technical capability of what CommScope can offer in the marketplace.

Got it. Thanks.

Thank you. Our next question comes from Stanley Kovler with Citi Research. Your line is now open.

Hi. Good morning, everyone. I just wanted to start off with a question on industry consolidation. Some of your competitors have acquired some businesses that have a bit of a larger copper presence. I guess you could argue that they’re buying some footprint. What is your appetite at this stage for adding acquisitions that add footprint to your business? And I have a follow up. Thanks.

I think it depends on what kind of footprint it is and where it might be. We added a lot of footprint. You mentioned copper. We added a lot of footprint in copper last year. We saw some of that go to others as our customer base wanted to have alternatives. And in some of those markets we had a reasonably good position. We look all the time at our consolidation or adding a footprint and that would be something that we will continue to do. But I think it needs to be in technologies that we probably understand if it’s in consolidation, but we do have an appetite for growth. We understand that our growth is dependent upon both organic and inorganic needs and we stand ready and are active in looking at opportunities out there.

Thanks. And then follow up just going back to the outlook but looking at it in terms of market share. Last year there were some volatility with market share and here I think Mark mentioned that with FirstNet already with you that your position is looking even better than you expected. Are there other areas that you can also comment with respect to 2018 outlook where you think you’ll be in a position to regain some market share? Thanks. And Mark, great working with you.

Thank you, Stanley. And maybe I’ll take a first swing at that and Eddie can add on. But as far as market share, what we would point to is the increased capability that we have developed throughout '17. You’ll see us add to that in 2018 in the hyperscale data center business. So two new product offerings, a new acquisition in that space. We would concur with the general market outlook that this is a high-single digit growth market, albeit project oriented it can be lumpy. But that is one of the areas that we would anticipate becoming more meaningful in, in 2018.

And I think we don’t talk much about market share on these calls, but our position in the market modulates because of what’s happening in general demand in the market. We did see shrinkage in some products but it was not necessarily market share loss that was delayed in spending and things like that. So we feel comfortable generally with our market position on the global basis. There are parts of Asia-Pac that are more challenging to do business in to-date than they have been in the past years. And so I think we’ll see some change there as we determine what we do in some of those markets. But we’re comfortable with where we are from a standpoint of how we interact in the marketplace, vis-à-vis our competitors and think it’s only strengthened.

Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Your line is now open.

Good morning. Thanks for taking the questions. First question is on the tax rate guidance. I appreciate the guidance of 29% to 30% for this year is a nice improvement versus the historical tax rate. I’m curious, Mark, if you think there’s opportunities to further improve on that number beyond 2018 and maybe with some additional tax planning and recognizing more profit out of the U.S.?

Sure, Mark, and thanks for the question. If I could, maybe I’ll give just a little bit of color around the components of that 29% to 30%. And so you might think about it this year and that while it may fluctuate a bit from year-to-year, generally we generate about 60% of our pre-tax income in the U.S. And so you apply the statutory 21% rate to that plus 3 to 4 points of state tax and then the remaining plus or minus 40% from outside the U.S. And we do business and generate pre-tax income in dozens of countries that have tax rates that range from 12.5% to near 40%. But the blended average of our international tax rate is in the upper 20s. And so you put those two together and you get about a 26%, 27% type range. And then in addition to that, we do repatriate from countries like India and China the charge withholding taxes which under the prior tax regime were tax deductible. They no longer are. So that puts maybe a point of pressure on the rate. And then the U.S. tax on foreign earnings which will put somewhere in the range of 1 to 2 points of pressure on the rate there. So all of that gives you 29 to 30, down 500 to 600 basis points from where we’ve been historically. And then to answer the question around what can move that? That answer really is no different. It’s the mix of earnings between jurisdictions. And so it used to be more earnings in the U.S. drove a higher tax rate. Going forward, it will be the inverse of that, but not only international versus U.S. but now which country. So Ireland has a different tax rate than India does, for example. So jurisdictional mix will continue to be the single biggest factor that can drive that rate.

That’s very helpful. Thanks, Mark. For my follow-up question I wanted to better understand FirstNet. I appreciate the company’s now seeing orders. And I think in prior calls it was talked about as a multiyear opportunity. How linear do you think the FirstNet spend is going to be and does that change your expectations for seasonality at all within the Mobility segment this year?

What we’ve said is that we think it will start in – we’ve seen some revenue. We think that revenue will build as we get to the end of the quarter and continue to build as we go through the balance of the year. We have a better understanding of sort of where we are relative to others and we feel that we’re at least where we are with that customer as we are in our traditional business. So we feel good about that. And so is there upside? Possibly. We have yet to see but we’re entrenched with every engineering organization within the customer and we keep in good close contact. We have all the designs necessary to serve the market and we have proven scalability to service in as necessary. So we feel good about where we are. We’ll have to see how the order rates go, because that’s something we don’t dictate. But they have a lot of work to get done by the end of September for their first payment. And so I think we’ll see a lot of activity in the next few months from an order standpoint certainly and then tax our operations to get the antennas out as soon as possible.

Thank you.

Thank you. Our next question comes from Simon Leopold with Raymond James. Your line is now open.

Great. Thank you very much. I wanted to see if we could talk a little bit about the longer-term outlook for 5G contributions? It sounds like the U.S. we’re going to see some foundational spending where you should benefit. If you could help us understand your perspective on how that might play out, the 5G contributions in '18 and then longer term? And in that answer I’d like some help thinking about what components of your business benefit because it may not be quite so obvious in that I think some of the new technologies include integrated antennas which might be a headwind but the need for cabling sounds like a tailwind? Thank you.

I think the last two comments were accurate. I think it has more impact on the Connectivity side than what we’ve had in the past because the fiber deployments, the densification of the markets to make sure that you get the antennas all placed where they need to be to be efficient. I think with the introduction of our 28 gigahertz antenna yesterday shows that we are developing technologies that adapt CommScope’s portfolio to what’s needed in the future. The backbone will continue to be the LTE network that has been built over time. We are a leader in what we do in that deployment, whether it be here or other parts of the world. So as 5G transitions around the globe, I think it would be good for CommScope. It will change the dynamics for some of the products that we make. I think I’ve said before on these calls is that it is likely we will form some relationships with some of the people that are maybe new to what the cellular world has been in the past. I think those relationships are initiating. Morgan’s on the board that is determining what that standard may be. We have a position there. And so we get a view into what the feature is going to bring us. So we have capability to balance sheet to support what we need to do to grow and we stand ready to do that as long as it’s in the technologies that we understand or can participate with our partners then.

And in terms of when it becomes material to your business, is it something you can outline? Is it 2020 --?

So it’s 2020 probably if you had to have one year. This year – and material may be the wrong word. I think this year is going to be still trials we believe and much of that is done by the OEMs. We do have product in that that from a material standpoint would not be great. We are busy just helping densify the networks to get ready. So from that standpoint, it’s working outside of the trial but maybe cooperating with. But we don’t determine that. These trials are going to be met with some level of success or otherwise and we’ll have to see how they progress. But it’s a different pace depending on where you are, but we will have to make ready to be there to support the industry as necessary. I don’t think in the near term we would say it’s going to be a big game-changer from our revenue standpoint.

Thanks. I just want to extend my thanks to Randy and Mark for their help over the years and wish both of them luck. And thanks for taking my questions.

Sure. Thank you, Simon.

Thank you. Our next question comes from Jeff Kvaal with Nomura Instinet. Your line is now open.

Thank you very much. With the balance sheet and cash flow progress that you made this year and suggested for 2018, that brings us a little bit back to one of the possibility that you’ll be able to make some incremental acquisitions. I’m wondering if you wouldn’t mind reminding us a little bit of the characteristics of what may be appealing for you and in particular how that might have changed since the last time around.

Jeff, I don’t think it has materially changed since the last time around. We have an active program. We’re engaged with people talking on a current basis. And so power backhaul and site access, anything in that realm that would work well with our current portfolio, we’re excited about. What I’ve also said is something in the $100 million to $300 million to $500 million range would be something we could easily do with our balance sheet. If we found the right transformational acquisition, we certainly are stand-ready to think about that. So we’re open for business and we are engaged and that’s been a big part of our growth over the 40 plus years that the business has been here. We have a great platform from which to build and a discipline I think in these acquisitions to do things the right way and I think that will only continue.

Could I – I had a clarification question and that is the upticks in – the guidance that you had issued last time around loosely for 2018 was mid-single digits. This time around are you including the Sprint and AT&T CapEx upticks in that guidance for the year? Thanks. Just to clarify.

Sure, Jeff. We consider all the factors in the marketplace when we give our outlook here. And again as I had mentioned, we’re very cognizant of the fact that we had offered mid-single digit growth guidance to start 2017 and the year didn’t play out that way. And so we’re going to be a little bit cautious here as we start 2018.

Okay, got it, Mark. Thank you both very much.

Thank you. Our next question comes from Steven Fox with Cross Research. Your line is now open.

Thanks. Good morning. First, I’m wondering if you could just unpack the operating margins a little bit in the first quarter either year-on-year or quarter-over-quarter based on your guidance looking down. So how much of that is just due to raw material pressures on your margins versus different mix issues or anything else that might be affecting it?

Sure, Steven. You should think about Q1 as being very similar to Q4 in a number of dimensions. Sequentially, revenue is different only by about 1% or so. But geographic mix we expect will be very similar in Q1 as what we saw in Q4. We had talked about the prosecuting price increases in our copper business and we have done that. We begin or expect to begin to see the impact of that for the tail end of the quarter but much more meaningful in Q2 and beyond. So revenue levels, geographic mix and commodity pressures all very similar on a sequential quarter basis. There are two things that are different. One is incentive compensation. And as you know at the start of each year, we anticipate that we will achieve our full year targets. And so we accrue incentive compensation at the full year budgeted basis. And from an operating margin standpoint that’s the one factor that drives the difference between Q4 and Q1. The other difference that I had pointed out simply is the order rate which is ramping as we move through Q1.

Great. That’s helpful. And then just real quick on the price increases, so can you just sort of put us in context of where you think that puts you versus competition or your – how well caught up do you think you are versus raw materials with this latest increase?

Well, again, this is not the first time by any stretch that commodity costs have moved meaningfully in this market and the typical pattern is that they will follow as far as price increases following cost increases by a few quarters. And then it takes a little time. These are all projects that are quoted. Some need to be now re-quoted. Eddie had distinguished screen pricing versus project pricing, so these things take a little time to get fully ingested into the marketplace. But we expect to see an impact beginning in Q2.

Great. Thank you very much.

Thank you. Our next question comes from George Notter with Jefferies. Your line is now open.

Hi, guys. Thanks very much. I guess I wanted to ask about the indoor copper business. I think you said that this quarter it declined modestly. Can you just talk about the secular headwinds in that business? I know in 2017 you were consolidating some BNS product lines in there as well and I guess when I just parse through it all, I’m trying to better understand what a longer-term growth rate or rate of erosion might look like in that indoor copper space? Thanks.

Yes, I’d like to talk about it generally and Mark can maybe give some numbers around it. But what we’re talking about is technology as opposed to copper by itself. We’re talking about primarily the enterprise business. We are fortunate to have I think both sides of the enterprise market. The demand for copper products is not growing and the demand for fiber products is growing. And so we have the ability to balance that. I think Mark talked earlier about we will reach a point shortly where fiber eclipses copper as the standard of what our enterprise business has been and will be. I think that’s good for CommScope in a long-term basis. But we have to make sure that we watch our cost structure on these businesses that are not growing and do the appropriate things to support them. But it is a total business that we look at. We do have to focus on the parts that maybe create more challenges and we’re certainly going about that.

Yes, I guess longer term, George, we don’t see this, as Eddie said, as a growth business. Somewhere in the low to mid-single digit rate of decline over time is what we would anticipate. But keep in mind that we believe we are the market leader in this space. We do generate good profit and very good cash flow from this business.

And I’d like to – further to the acquisition, we did acquire considerable copper assets when we did BNS. They were both here and other parts of the world. We determined that some of the parts of the world the margins that realized were not – have not been our expectations and we exited some of those markets. And some of them I’ve said earlier today and I know in previous calls is that the customer base in the enterprise market likes to have options. In many cases we were one and BNS was two. And now there’s another number two. So that’s something that – a natural cushion when you do these consolidations happen. But I think that the world has normalized today and I think it’s more on an even queue.

And, George, just to put all of that into context within our indoor space, keep in mind that the rate of growth within our fiber business will eclipse the rate of decline within copper. So we’ve now reached that crossover point.

Great. Thank you.

Thank you. And our last question comes from Avi Silver with Silver Point Advisors. Your line is now open.

Hi. Good morning. Thank you for slipping me in and Mark and Randy thanks for your support. I wish you both all the best. Just wanted to – two questions, one follow up to Steve’s on cable pricing. In the past you mentioned the price increase should help after Q1 to offset the higher material costs and my question is, what are others doing? Have they followed suit? Are you seeing anything in the market competitively that could impact share if others don’t play along? That’s my first question. I have a follow up. Thanks. [Technical Difficulty]

Hello. Andrew?

Yes, you are live.

Okay. Can we have Avi re-ask his question please?

It does appear he disconnected.

Okay. We’ll turn the call back over to Eddie for our closing comments.

Okay. Thanks all of you. We’re very confident that last year’s market dynamics are behind us and we’re expecting a more normalized customer order pattern in 2018. We believe there’s significant opportunities ahead and are confident in our ability to leverage FirstNet and fiber deep network deployments, expansion within the hyperscale data centers and our compelling quick-turn capabilities. In addition to our executing on our strategy, we will maintain our balanced approach to capital allocation through strategically reinvesting in the business, paying down debt and returning capital to shareholders. We expect to capitalize on numerous global developments discussed earlier to ensure we return to growth in 2018. We thank you for taking your time to join our earnings call today and we appreciate your continued interest in CommScope. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may all disconnect. Everyone, have a great day.