Edited minutes of the conference call or presentation of the COMM result from November 7 to 7:30 p.m. (GMT)

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Hickory, January 3, 2020 (Thomson StreetEvents) – Edited transcript of the conference call or presentation on the outcome of the CommScope Holding Company Inc Thursday, November 7, 2019 at 1:30 p.m. GMT

* Alexander W. Pease

CommScope Holding Company, Inc. – Senior Vice President and Chief Financial Officer

* Kevin J. Powers

CommScope Holding Company, Inc. – VP of IR

* Marvin S. Edwards

CommScope Holding Company, Inc. – President, CEO and Director

Nomura Securities Co. Ltd., Research Department – MD of Communications

* Meta A. Marshall

Good morning, ladies and gentlemen, and welcome to the CommScope third quarter 2019 conference call. (Operator Instructions) I would now like to hand over the conference to your host, Mr. Kevin Powers, Vice President, Investor Relations. Mr?

Kevin J. Powers, CommScope Holding Company, Inc. – Vice President of IR [2]

Good morning and thank you for joining us today to discuss CommScope third quarter 2019 results. With it are Eddie Edwards, President and CEO; and Alex Pease, Executive Vice President and CFO.

The slides for this report can be found on our Investor Relations website. Please note that some of today's comments will include forward-looking statements based on our current view of our business. Actual future results may differ materially. We refer to our most recent SEC filings, which list the main risks and uncertainties that could affect future performance.

Before I hand the call over to Eddie, there are only a few household items to check. Today we're going to discuss some adjusted or non-GAAP financial metrics that are described in more detail in the winning materials available this morning. Reconciliations of non-GAAP financial measures and other related information are included in our winning materials and published on our website.

All references during today's discussion refer to our adjusted results. Also note that third quarter 2018 results include historical ARRIS results that reflect certain classification changes that are aligned with the CommScope presentation. All quarterly growth rates described in today's presentation relate to the previous year unless otherwise stated.

I will now call our President and CEO, Eddie Edwards. Eddie?

Marvin S. Edwards, CommScope Holding Company, Inc. – President, CEO and Director [3]

Thank you, Kevin, and good morning everyone. We reported third quarter sales today that were in line with our expectations, and adjusted EBITDA and earnings per share that were at the upper end of our expectations. Our results met our expectations, with the exception of some sales of Network & Cloud products expected in the fourth quarter and weak sales at Mobility due to a break in spending related to an upcoming merger of large network operators.

Overall, our results reflect our ability to deal with short-term headwinds while maximizing profitability in a challenging environment.

We made progress in several areas during the quarter as we continue to implement our strategic plan to achieve shareholder value. From a financial perspective, even though pro forma sales were down on the previous year, we successfully stabilized the adjusted EBITDA margin at 15.5% and generated adjusted free cash flow of over $ 500 million.

This strong cash flow performance enabled long-term debt repayment of $ 200 million during the quarter and gradual repayment of $ 200 million in the fourth quarter to date.

As Alex will explain later, we continue to expect strong positive cash flow for the fourth quarter. CommScope is still a strong company. These results show that, despite major challenges in the industry, we can act agile and meet our short-term and long-term financial commitments.

Examples of proactive efforts to maximize our profitability and stabilize our business include: We are exploring every opportunity to accelerate business-related cost synergies.

As a result of our efforts to date, we are on track to achieve at least $ 75 million in cost synergies in the first year after graduation and our $ 150 million in annual savings before the third anniversary of the ARRIS graduation surpass transaction.

In addition to the business-related synergies, we have taken critical measures to implement our previously announced plans to generate additional costs of $ 30 million in the second half of 2019. While we continue to work on increasing efficiency, reducing costs and improving the integration solution in the short and long term, we coordinate and integrate all LTE work indoors and use the traditional switch know-how. This will enable us to serve an emerging but important CPRI and eCPRI aggregation market, among other programs. As this general headwind in the industry subsides, CommScope will be strategically positioned to capitalize and return to growth as we have seen in the past. We continue to believe in the long-term potential of the business and strive to achieve shareholder value.

Now I come to the concrete business development. At Connectivity Solutions, indoor fiber sales remain under pressure in the quarter as company data centers move to the cloud. However, we continue to look for ways to continuously improve the performance of CommScope. Due to the strong focus on data protection and security, for example, we see that financial services customers are more likely to adopt a hybrid approach that is used both in the company's own data centers and in the cloud. We have a long track record of success in corporate data centers and believe that financial services sector investments represent an attractive opportunity for CommScope.

In addition, sales of Hyperscale data centers remained robust and more than doubled in the first quarters. In a market that is expected to grow in the low double-digit percentage range over the next 5 years. Our strong performance can be attributed to two factors: growth in the overall market and strategic expansion of our position in the product segments for high-fiber connectivity. One of the main concerns of Hyperscale customers is rapid global scaling to meet customer demand. CommScope has demonstrated superior research, development and operational capabilities to deliver complex, high-density solutions on a global scale and to keep pace with hyperscale requirements.

While sales of indoor copper companies continued to decline in line with the industry, we are concentrating on maintaining and strengthening our market position and positioning our products for new applications. To secure our leadership position, we invest in innovations that deliver the best performance in the industry and help our customers master the connectivity challenges of today and tomorrow. This includes solutions for connectivity and the increased power requirements of devices such as Wi-Fi access points, the Internet of Things and small inner cells. As a result, our on-site cellular sales through the corporate channel grew significantly year over year as our corporate sellers and channel partners work together to sell more CommScope products and services.

With the breadth of our industry-leading portfolio, we continue to be well positioned to meet these growing needs and we expect our rate of decline to subside over time.

As expected, network cabling and connectivity remained weak in the quarter, mainly due to the headwind of North American Tier 1 cable and network operators. However, we see growth opportunities in other market areas. The US Tier 2 and Tier 3 markets remained strong as they expanded their networks to target regional markets that were under-served by other major players.

In addition, from an international perspective, we see a continuation of fiber deals in several markets. We recently won fiber-to-the-home deployments in the Philippines, Germany, Puerto Rico and the Middle East. All in all, we assume that cabling and connectivity among cable operators will deteriorate slightly in 2020.

In Mobility Solutions, we continue to support operators in the design of their sell-side architecture for 5G. For this purpose, we offer our operators in the antenna business for base stations – we will continue to help them – our customer operators the possibility to use more and more frequencies efficiently within the even more limited space at the top of masts, buildings and towers, which will improve network performance.

The average port density of our antennas, which we deliver this year, is almost 50% above the value of 2 years ago. We expect this investment cycle to continue over the next ten years and we are well positioned to take advantage of this opportunity.

In our Metro Cell business, which includes small cells, we have now fully integrated Smart Poles, which are used in several key US markets, including Boston, Dallas and Los Angeles. These solutions are designed to solve challenging location detection problems for network operators by combining complex connectivity installations with urban street furniture.

Our solutions are used in over 10,000 integrated metro cells across the country. Deployments are growing rapidly as we get zone and architecture permits by extending them to communities. To this end, we have made investments to more than double our production capacity and provide a wide range of solutions that meet the needs of almost all city planners. It is important that these integrated smart pole solutions generate additional product sales. These include fiber, connectivity, RF infrastructure and power. We are incredibly excited about this business as a growth engine for CommScope in the short and long term.

We are making good progress in several areas in our business with distributed antenna systems and small inner cells. Our next generation digital DAS solution called Era is an RF over fiber distribution system that extends the traditional DAS architecture with centralized or C-RAN functions. It is important that Era simplifies the installation of wireless solutions in buildings. The system has a smaller footprint and saves space. It is easier to manage and less expensive to operate in other systems, while providing operators with neutral hosts and businesses with the space they need to grow as 5G technologies and applications come to market.

I am pleased to announce that we have received cellular coverage for the 2020 and 2021 Super Bowl stadiums. We have thus confirmed our fully digital Era DAS platform as the industry's leading solution to bring maximum spectrum and bandwidth from multiple operators to full swing in public venues.

Next, our OneCell small cell C-RAN offering recently received official approval from a major North American Tier 1 carrier. Formal approval was obtained after several attempts at different locations. We have already signed a contract for use in Turkey with an extensive pipeline of different buildings and venues. OneCell is our innovative solution for small cells in buildings that supports multi-bands and multi-operators. OneCell is based on a 5G architecture and significantly reduces the operating costs for the internal cellular coverage. Because 5G relies on the successful coverage of interiors, OneCell opens up a completely new and very large pool of addressable markets in small buildings and venues for us, as well as a solution of the right size for the provision of mobile phone services.

In addition, OneCell is based on an IT-friendly architecture, with which the solution can be provided and operated by an IT ecosystem, which opens up further scaling options. We also expect OneCell's revenue to grow significantly in 2020 and continue to grow as the need for more reliable and affordable indoor mobile coverage for 5G increases. This product also extends the operational functions for the FirstNet footprint.

By switching to CPE, we successfully launched new video products in the third quarter, including a set-top box for Altice that combines far-field microphones and speakers with traditional set-top functions. This combination creates a new class of smart media devices and enables the integration of digital home services with video. During the quarter, we also launched 4K set-top devices at several European operators.

When switching to broadband, we are pleased that our fixed wireless broadband gateway is in the final phase of laboratory approval with two American mobile phone providers. We continue to focus intensely on developing next-generation PON and DOCSIS solutions that are expected to be available in 2020.

We continue to support the gigabit broadband service rollout with Vodafone in Germany and see strong additional demand for this service in the newly acquired Unitymedia regions. We also introduced the Mercury V2 DOCSIS gateway, which supports Liberty Global's GigaCity service. From a cost perspective, there are some set-top values ​​that are listed in List 4A and will come into effect in September. Additional tariffs will come into effect in December. We felt the impact of these List 4 tariffs in the third quarter, which we expect to continue in the fourth quarter. However, we expect the impact to be significantly cushioned by the first quarter of 2020.

Finally, we saw sequential increases in gross CPE margin and EBITDA due to cost containment and material cost improvements. This expands the profits, gross margin and EBITDA achieved in the second quarter, and we expect further improvements in the fourth quarter. We continue to drive positive changes in the organization to improve efficiency and focus heavily on cost management.

As expected, Network & Cloud sales improved in the third quarter from the previous quarter as cable spending increased and some orders were placed earlier than expected. While business was weaker than expected this year, we achieved several notable milestones in the quarter. As the market leader in installed nodes, advanced technologies, and fiber and copper connectivity, CommScope continues to be a good choice for upgrade modules because operators want to upgrade to a distributed access architecture. For this purpose, we recently launched our new optics aggregator and optics termination products at a North American Tier 1 cable operator.

These new node-based products are of great importance as they will be a key component in upgrading this operator's distributed access architecture. The first products were installed on site last week. Deliveries will be made this quarter.

In addition, we were asked to jointly hire a large Tier 1 MSO and a large chip manufacturer for their next-generation remote PHY device. CommScope has been recognized with this project for its industry-leading capabilities and economies of scale that are essential to the success of a project of this importance.

With vCore, our virtual CMTS platform, we are currently testing with several operators and will be ready for commercial launch at the end of the year. We are making great strides and are very happy with our schedules and positioning. Third-party forecasts predict that the virtual platform market for 2020 is expected to be relative and small, with most of the spending on DOCSIS infrastructure continuing to be on current traditional platforms. All in all, we do not expect our commercial scheduling to have any impact on our long-term market positioning and will continue to use our current generation CCAP products.

Finally, we continue to expand our portfolio with new Remote PHY device modules. In the first half of 2020, we plan to launch our new Remote MAC-PHY module, which will be plug-in compatible with our node platforms. This enables us to support either a vCore plus Remote PHY architecture or a fully distributed Remote MAC-PHY architecture.

As for Ruckus, Ruckus has made progress across all product lines with an active quarter. Following the launch of the R750, the industry's first Wi-Fi 6 certified access point, we introduced several additional products, including the R650 and the C750, that not only improved network throughput for up to 3 gigabits with new compatible clients, but also The capacity for existing AC customers can be improved by up to 30%. This proves to be incredibly valuable for our customers with high demands such as schools, which continue to be a very important business area.

We will continue to improve our counter portfolio according to our plans. The ramp of our high-end campus switch ICX 7850 is progressing faster than expected. We believe that with the need for 10 Gigabit-per-second capable switches to see Wi-Fi 6 access points, these products will see significant growth.

For CBRS, we further expanded the support of private networks through test systems and the combined technical efforts with our OneCell product line in the reporting quarter in order to be able to offer solutions for licensed and unlicensed frequencies. Our CBRS business was in full swing when the SEC announced it was going commercial. One of the first publicly announced CBRS deployments was in Times Square, New York, incorporating Ruckus technology. Just yesterday, Ruckus CBRS technology was demonstrated as part of Microsoft Azure capabilities for private LTE networks during Microsoft Ignite.

For Cloud and Analytics, we have released a beta version for all new cloud and analytics platforms that combine both our licensed and unlicensed, wired and wireless products on a single sheet of glass and help our customers manage and manage their networks optimize. This platform will be launched in the first quarter of 2020. From a market perspective, we've made great strides by adding our wireless products to federal certification for release next year. We have positioned the Internet of Things, Wi-Fi 6 and analytics in the hospitality markets and have continued to focus our offerings on all levels of the education market.

After completing our successes in the third quarter, we are making further progress on our ARRIS integration plans. The tasks of day 100 have been completed and we have defined our new visions and values ​​for the combined organization that are to be embedded in an aligned culture.

We also implemented a 3×1 website integration that creates a more unified communication platform and experience for all stakeholders and makes our shared customer base accessible to our entire portfolio. We generated over 400 cross-selling leads in the quarter and used the breadth of the product portfolio. This has the potential to generate significant sales synergies in the next few years.

I mentioned earlier that we are still on the right track to generate at least $ 75 million in cost synergies in the first full year after the transaction is closed. USD 50 million of this will be realized in calendar year 19.

From an organizational perspective, we have restructured our CEOs' reporting relationships to simplify organization and strengthen accountability. I am happy with our first results, but we have the opportunity to make further improvements to better position the organization.

Before I call Alex, I want to stress how excited I am about the unique opportunity we have to shape the future of network connectivity. We have made a number of changes this year that will reposition the company to achieve a faster return and we are confident that we will keep the strategic and financial promise of the ARRIS acquisition. We have already made remarkable progress at ARRIS and continue to believe that this successful integration will position the company for long-term success.

We are still strong with our portfolio of industry leading products, strong customer relationships, a talented team and the long-term potential to drive the transformation of communications connectivity.

Now I want to transfer the call to Alex for a financial discussion. Alex?

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Alexander W. Pease, CommScope Holding, Inc. – Executive VP & CFO [4]

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Thank you Eddie and good morning everyone. Today, I will start by looking back at the third quarter financial results and will discuss our fourth quarter forecasts and our preliminary estimate for 2020. Then we open the queue for questions. So let's get started. Third quarter net sales increased to $ 2.38 billion, primarily due to the ARRIS acquisition profit, which contributed $ 1.34 billion.

Third quarter ARRIS sales include a $ 14 million decrease in sales related to an adjustment to deferred income accounting. Pro forma net sales decreased 15%, including a 1% impact from unfavorable exchange rates. Third quarter sales declined across all geographic regions as we continue to be impacted by cable operator expenses, geopolitical trade tensions and a temporary break in spending due to an upcoming telecommunications merger.

Consolidated orders for the quarter were $ 2.35 billion, a book-to-bill ratio of $ 0.99.

In the third quarter, adjusted EBITDA increased 55.5% to $ 369.8 million, or 15.5% of sales. Pro forma adjusted EBITDA decreased 13.5% to $ 369.8 million, but we were still able to increase margins slightly.

Adjusted EBITDA was mainly due to lower volumes, especially Network & Cloud, CMTS software licenses. We were able to partially offset this weakness in sales with favorable raw material and raw material prices as well as lower operating costs, which can be attributed to our aggressive measures to maintain profitability, since we are dealing with a difficult operating environment.

Our cost synergy and cost saving measures for the year continue to be well above the plans and commitments we made at the beginning of the year. We also expect to exceed the $ 150 million annual savings before the third anniversary of the closing of the transaction.

At the end of the income statement, net interest expense of $ 160.7 million was recognized. Excluding the amortization of bond issuance costs and the $ 7.4 million OID, interest expense would have been $ 153.3 million. The adjusted effective tax rate in the quarter was 28.1% compared to our expected range of 29% to 30%. The positive development in the third quarter was due to the unexpectedly low US tax burden on foreign profits.

Adjusted net income for the quarter was $ 127 million, or $ 0.55 per diluted share, compared to $ 115 million, or $ 0.59 per diluted share, in the previous year. Reminder: Our diluted third quarter 2019 stock count includes the assumed conversion of Carlyle's convertible preference shares resulting from the $ 1 billion investment to fund the ARRIS acquisition.

I now move on to our segment results and start on slide 7 to discuss the results for the connectivity and mobility solutions.

Connectivity Solutions revenue in the second quarter decreased 13% year over year to $ 635 million. Excluding negative exchange rate effects, sales decreased 12%. In North America, sales decreased about 14%, with the remaining geographic regions weak. As expected, earnings were impacted by weakness in the network, cable and connectivity business, which was due to the continuing trend of lower cable investments by certain North American cable operators and cutbacks in major projects by North American airlines. In addition, Enterprise sales declined in both the copper and fiber markets, particularly in Europe and China, with a decrease of 12% and 31%, respectively.

In terms of profitability, adjusted EBITDA decreased approximately 25% year over year to $ 121 million with an adjusted EBITDA margin of 19.1%. Despite the impact of lower sales volumes, we were able to partially offset this pressure through continuous cost savings and efficiency programs.

Mobility Solutions segment revenue decreased 3% to $ 406 million in the third quarter. This was mainly due to a break in spending related to an upcoming merger of North American airlines. This delay in orders impacted Mobility's sales by almost 5% in the third quarter. Excluding negative exchange rate effects, sales decreased 2%.

From a geographic perspective, earnings benefited from growth in North America and EMEA, which was offset by declines in CALA and APAC. While RF sales with macro towers – product sales declined primarily due to the uncertainty surrounding the merger of the carriers, our business with macro tower accessories and Metro Cell increased by around 30%. Our DCCS business followed this growth with project profits in EMEA and North America. Operators are increasing spending on densifying their 4G LTE networks in preparation for 5G, and we expect this momentum to continue.

Quarterly EBITDA (Mobility Adjusted EBITDA) increased more than 8% to $ 83 million or 21% of sales. This is an improvement of 220 basis points over the previous year and further evidence of the team's ability to manage costs and protect margins in the business. The results were based on a combination of a low-cost product mix, optimization of the manufacturing site and other cost-cutting initiatives to improve profitability.

Now turn to the performance of the ARRIS segment slide 8. CPE's net sales for the second quarter were $ 826 million, a decrease of 12% compared to the pro forma same period last year. While revenue decreased year-over-year, adjusted EBITDA increased 55% to $ 60 million. The 7.2% EBITDA margin of sales represents an improvement of 310 basis points over the previous year as the team worked tirelessly to control raw material costs, eliminate controllable overheads through personnel optimization and stabilize prices. Lower CPE revenues were again largely due to the weakness of our broadband business, as we continued to face pressure from cable operators' lower spending and weaker demand from a tier 1 carrier.

Im Laufe der Zeit glauben wir weiterhin, dass das Volumen von Breitbandgeräten wieder auf ein typisches Niveau zurückkehren und eine Chance für Wachstum bieten wird, wenn die Monetarisierung von DOCSIS 3.1-Investitionen stattfindet.

Die Video-Auslieferungen für das Quartal gingen im Jahresvergleich um 1% zurück, verbesserten sich jedoch sequenziell um mehr als 6%, da ausgewählte Betreiber ihre Technologie-Aktualisierungszyklen fortsetzen. Trotz dieser Faktoren gehen wir davon aus, dass die Kombination aus laufenden Maßnahmen zur Reduzierung der Zölle und dem anhaltenden Wachstum in Nordamerika über den Top-Trends hinweg voraussichtlich einen Gegenwind für die Zukunft darstellen wird.

Im Segment Network & Cloud belief sich der Nettoumsatz im dritten Quartal auf 377 Mio. USD, was einem Rückgang von 29% gegenüber dem Vorjahr entspricht. Das bereinigte EBITDA belief sich auf 95 Mio. USD, ein Rückgang von 31%. Die bereinigte EBITDA-Marge ging auf 25,2% des Umsatzes zurück. Unser Umsatz im Segment Network & Cloud war rückläufig, was auf eine Reihe von Faktoren zurückzuführen war, darunter kundenbedingte Fusionen und Übernahmen, starke Kapazitätserweiterungen Ende 2018 und in geringerem Maße eine vorübergehende Unterbrechung der Ausgaben, da sich die Branche auf einen Weg zur Virtualisierung ausrichtet .

Wir sehen weiterhin ein starkes Wachstum der Bandbreitennachfrage und sehen unser Netzwerk- und Cloud-Geschäft als gut positioniert, um eine breite Palette von Architekturen zu bedienen, wenn die Auswirkungen dieser vorübergehenden Faktoren nachlassen. Zu diesem Zweck ist eine Zunahme der CMTS-Lizenzkäufe bei einem großen Tier-1-Kabelnetzbetreiber in Nordamerika zu verzeichnen, da die Kapazitäten seit dem letzten Jahr aufgebraucht sind. Dies ist ein guter Indikator für den fortgesetzten Kauf aktueller CMTS-Produkte in absehbarer Zukunft.

Fahren Sie mit den Ergebnissen des dritten Quartals von Ruckus fort. Der Nettoumsatz im dritten Quartal belief sich auf 137 Mio. USD, ein Rückgang von 23% gegenüber dem Pro-forma-Umsatz vor einem Jahr. Das bereinigte EBITDA betrug 10,8 Mio. USD, ein Rückgang von 19%. Trotz geringerer Verkaufsmengen und eines historisch hohen Fixkostengeschäfts verbesserte sich die bereinigte EBITDA-Marge von 7,9% gegenüber dem Pro-forma-Vorjahr um 43 Basispunkte, da wir unsere Kosteneinsparungs- und Effizienzpläne unternehmensweit umsetzen. Wir bleiben zuversichtlich in das langfristige Potenzial von Ruckus und erwarten, dass Trends wie die Einführung von Wi-Fi 6 und Cloud-basierter Architektur Rückenwind für das Geschäft bringen.

Während der Umsatz von Ruckus schwächer als erwartet blieb, sind wir durch die Verbesserung von über 30% im Vergleich zum ersten Quartal ermutigt. Vor uns liegen eine zusätzliche Nachfrage nach E-Raten, die jüngsten Erfolge im OEM-Kanal, die Einführung von Wi-Fi 6, das schnelle Hochfahren einer Cloud-basierten Architektur und mehrere jüngste Kundengewinne, die alle auf die starken langfristigen Wachstumsperspektiven hinweisen des Geschäfts.

Darüber hinaus freuen wir uns weiterhin über das langfristige Wachstumspotenzial von Ruckus als Teil unserer neuen Fähigkeit, lizenzierte und nicht lizenzierte Spektrum-Lösungen für den Markt anzubieten.

Wir glauben, dass diese kombinierte Lösung für 5G äußerst relevant ist und das Potenzial hat, in Zukunft viele der anspruchsvollsten drahtlosen Herausforderungen in Gebäuden und Veranstaltungsorten zu lösen. Es wird auch als entscheidendes Element dienen, um das volle Potenzial privater Netzwerke auszuschöpfen, was einen wesentlichen Wachstumsmotor darstellt, wenn sich 5G entfaltet.

Zurück zu den konsolidierten Ergebnissen von CommScope gehe ich auf unseren Cashflow auf Folie 9 ein. In den letzten zwölf Monaten haben wir einen Cashflow aus laufender Geschäftstätigkeit von 393 Millionen US-Dollar und einen bereinigten Free Cashflow von 590 Millionen US-Dollar erzielt. Im dritten Quartal belief sich der Cashflow aus laufender Geschäftstätigkeit auf 522 Mio. USD und der bereinigte Free Cashflow auf 535 Mio. USD. Diese Beträge enthalten keine Barzahlungen für die Transaktions-, Integrations- und Restrukturierungskosten.

Der Cashflow im dritten Quartal hat sich gegenüber dem Vorquartal erheblich verbessert, wobei sich der Cash-Conversion-Zyklus deutlich verbessert hat. Zum Beispiel verbesserte sich unser ausstehender Lagerbestand durch ein funktionsübergreifendes Lageroptimierungsprogramm auf 65 Tage. Durch die erfolgreiche Implementierung dieses Programms haben wir die endgültigen Konfigurationen verzögert, den optimistischen schnellen Transport von geringem Volumen und hochwertigem Inventar vorangetrieben und die Verfolgung und Verwaltung des Inventars verbessert, was zu einer flexibleren Produktlinie und einer geringeren Verwendung von Bargeld geführt hat. Wichtig ist, dass wir für das vierte Quartal weiterhin einen positiven Free Cashflow erwarten. Dies bestätigt unsere bisherige Erwartung einer deutlichen Verbesserung in der zweiten Jahreshälfte. Besprechen wir nun unsere Kapitalstruktur auf Folie 10.

Wir haben das Quartal mit einem Netto-Leverage von 6,1x pro forma bereinigtem EBITDA abgeschlossen, das das bereinigte EBITDA vor der Akquisition für ARRIS für die letzten 12 Monate sowie 120 Millionen US-Dollar für die Erwartung von Kostensynergien und weitere 20 Millionen US-Dollar für andere Kosteneinsparungsinitiativen umfasst.

Aufgrund einer signifikanten Cashflow-Generierung im dritten Quartal haben wir 200 Millionen US-Dollar an Kapital für unsere – 5% vorrangig besicherten Schuldverschreibungen zurückgezahlt, die im Jahr 2021 fällig wurden. Kurz nach dem Ende des dritten Quartals haben wir weitere 200 Millionen US-Dollar zurückgezahlt die 2021-Banknoten, die am 20. Oktober aktuell sind.

Wie bereits erwähnt, erwarten wir mit der Erwartung einer bedeutenden Cash-Generierung in der zweiten Jahreshälfte weitere Schuldentilgungen im vierten Quartal. Despite temporary headwinds we experience in the current operating environment, we continue to deploy the traditional CommScope playbook, tactfully adjusting the operating models of each segment to maximize efficiency and cash flow generation. The most recent redemptions of our 2021 notes emphasize our ability to execute in a challenged environment and our commitment to deleveraging with the utmost urgency. Longer term, we remain committed to returning to a net leverage ratio of approximately 4x and eventually to 2 to 3x.

Now moving into our fourth quarter guide on Slide 11. For the quarter, we expect revenue of $2.2 billion to $2.24 billion, non-GAAP adjusted EBITDA of between $275 million to $335 million and non-GAAP adjusted earnings per share between $0.27 and $0.37. Additional assumptions include an adjusted effective tax rate between 27% and 28% and a weighted average diluted share count of approximately 232 million shares.

Turning to Slide 12 regarding our fourth quarter outlook by segment. In our Connectivity segment, we expect sales to follow our normal seasonal pattern declining sequentially for the fourth quarter. We expect the softness to be driven by weaker network cable and connectivity as well as decline in the enterprise copper and fiber. In our Mobility Solutions segment, we expect sales to follow our normal pattern and sequentially decline in the fourth quarter. However, in addition to the seasonal trend, we are accounting for the temporary spending uncertainty associated with a large North American carrier merger that will materially impact Mobility results. This pause in spending impacted Mobility sales by about 5% in the third quarter, and we expect that impact to increase in the fourth quarter, which is largely timing related.

In our CPE segment, we see strong demand for gateways and IP set-tops at key North American cable operators, but we're currently experiencing supply constraints that will prevent us from achieving the full upside potential. In addition, we're seeing impacts from lower capital spending at other operators due to declining pay TV subscribers, a shift from capital spending to content acquisition and the shift to lower ASP IPTV set-tops. As such, we now expect fourth quarter revenue to be modestly down sequentially from the third quarter. For Network & Cloud, as a result of some expected fourth quarter customer orders that we booked in the third quarter, we now expect fourth quarter sales to be relatively flat for the third quarter.

In our Ruckus segment, we expect net sales in the fourth quarter to modestly decline in the third quarter. While we remain confident in the long-term growth trajectory of this business, we're focused on optimizing the cost structure to align to current sales trends to preserve profitability.

Before I open the call up for questions, I'll provide a few early thoughts on our business outlook for 2020. Given what we're hearing from around the industry and from our customer conversations, cable operator spending is anticipated to be largely unchanged from 2019, but the mix of spend is extremely important for CommScope. We see an opportunity for a modest uptick in network infrastructure spend next year, while CPE spend will continue to be constrained.

While we expect CPE sales decline likely in the double digits in 2020, we have and are taking significant action to address our cost model, and we expect continued EBITDA margin improvement. From a carrier standpoint, we currently expect wireline spend to decline next year, but importantly for CommScope, our business is more dependent on wireless spending.

While early, we'd expect to continue network transition to 5G to drive steady wireless spending next year. Additionally, while we're experiencing short-term headwinds due to a pause in spending related to the pending merger of 2 large carriers, over the long term we expect this to benefit CommScope. We are well positioned to provide an industry-leading set of solutions to enable their potential sell-side architecture.

From a geopolitical standpoint, beginning with tariffs, we've mitigated the majority of the impact but we still have a few items remaining to address, mainly filters in some of our distributed antenna products.

In addition, by the end of the fourth quarter, nearly all CPE video set-top box production is expected to be out of China. Moreover, we expect the U.S.-China trade tensions to continue to impact Chinese spending levels on our enterprise fiber and copper products. In consideration of these factors, while still very preliminary and based on what we know today, we would expect our sales to decline modestly in 2020, primarily driven by a decline in CPE.

Again, while early, we believe there's an opportunity for our remaining segments to be stable to growing in 2020. From a cash flow standpoint, our primary focus will continue to be debt pay down. While we're not providing firm cash flow or debt pay down guidance at this point, our second half results should be a good indicator of what we think we can deliver in 2020.

Thanks, again, for your time this morning. And operator, can you please open the call up for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jeffrey Kvaal of Nomura Instinet.

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Jeffrey Thomas Kvaal, Nomura Securities Co. Ltd., Research Division – MD of Communications [2]

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I guess my first question begins with the shift in revenue out of the fourth quarter and pulling into the third quarter. Could you gentlemen give us a sense of how sizable that shift might have been and what that tells us about the outlook for 2020?

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Marvin S. Edwards, CommScope Holding Company, Inc. – President, CEO & Director [3]

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I'll take the first part of that and Alex can quantify. There is a significant — I think, from standpoint of the carrier business, we're a large provider to all the carriers here in North America. So we had a shift in Q3 and we're going to have a shift in Q4. We would expect in 2020 that, that will come back depending upon timing of the merger or depending upon — as they anticipate when the builds may restart. So I think Alex mentioned that was 5% or so in Q3 and Q4 will be a number bigger than that.

So the other is the MSO-related spend in Network & Cloud. These carriers spend depending upon needing to add licenses to their systems and that's not necessarily in our control. So they spend more in Q3 than we have anticipated. We had planned for it weeks ago to be a Q4 revenue generator, but that would — that just happened early. So it's not a loss of business or anything relative to the market, it's just timing as to how the large operators do their spend cycles.

I think with the wireless carrier, we've talked about their pauses and shifts and starts with — when these mergers happen, and so we probably will see others as we get through the next year.

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Alexander W. Pease, CommScope Holding Company, Inc. – Executive VP & CFO [4]

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And so Jeff, let me take the second half of your question around implications for 2020. The short answer is, there really aren't any implications for 2020. The merger-related delays that Eddie mentioned, that's business that we'll get as soon as the uncertainty of the merger is behind us, and we know that from conversations with the customers. So we're anticipating that basically being an additional opportunity in 2020 when that deal finally gets approved. It's not atypical at all for the purchases of these license agreements to migrate from one quarter to the next because it's a nearly instantaneous purchase. The fundamental thing is the underlying bandwidth demand, which is continuing to grow at 30% to 50%. And so as capacity gets consumed in the network, we'll see operators add licenses, which will return the Network & Cloud business to its more historical levels. So we're really just in the process of working through this capacity in the network.

The overall guide for 2020, really with the exception of CPE, you're looking at stable-to-modest growth across all of the segments. The Mobility would be the — probably the leader in that trend and then some recovery — some modest recovery in Network & Cloud and then cable or — Connectivity probably being more on the flattish side. Although all the significant wins we've made recently in hyperscale should provide some tailwind, which I referred to.

And then really the big top line headwind will be the decline in CPE, which we've been managing through, although we do anticipate maintaining EBITDA across that. So overall, even in a kind of slightly declining to flattish top line environment, you should see an improvement in overall EBITDA performance. So hopefully, that helps.

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Jeffrey Thomas Kvaal, Nomura Securities Co. Ltd., Research Division – MD of Communications [5]

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Okay. And I guess should we translate that EBITDA performance slight improvement into free cash flow slight improvement? Or is there — are there some fluctuations on the balance sheet we should be aware of? Or how do we think about that for next year?

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Alexander W. Pease, CommScope Holding Company, Inc. – Executive VP & CFO [6]

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Yes, it's safe to assume that, that would translate to free cash flow. I mean the only offset for that would be capital spending, but we don't anticipate a large amount of capital spending next year unlike what we normally do.

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Operator [7]

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

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George Charles Notter, Jefferies LLC, Research Division – MD & Equity Research Analyst [8]

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I wanted to ask about the Network & Cloud division and that's the business that historically has been much more predictable in terms of the revenue run rates, $500 million to $600 million a quarter if you look back at the last few years within ARRIS, and yet the step down is still really significant. And I guess I'm kind of wondering what you think the kind of normalized revenue run rate for that business might look like. And I understand there is a lot of moving parts here in the industry with, obviously, the large customer there dialing back capital spend. You've also got a lot of technology confusion, I think, around. But is there some kind of normal levels of sales and EBITDA run rate you think you could ultimately get out of that business?

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Alexander W. Pease, CommScope Holding Company, Inc. – Executive VP & CFO [9]

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Yes, let me take a crack at it and then Eddie can elaborate. So I think — really you should think about probably 3 drivers of what we're seeing in Network & Cloud right now. So the first is that kind of large investments in capacity that happened over the course of 2018 and that capacity is latent. So there's probably a year or 18 months as bandwidth demand continues to grow 30% to 50% to consume that capacity that was introduced in 2018 before you need to continue to invest in a meaningful way. That's the first driver.

The second driver is this uncertainty around virtualization and distributed access architecture and a bit of a freeze in spending as folks want to understand how that evolution is likely to unfold. And as Eddie mentioned, this is going to be a multiyear journey. And is it true that we're a month or 2 behind in starting that journey? Yes, but it's equally true that we're building off a base of 20 years of experience in the industry-leading position in both CMTS and access technologies. And we believe we have an extremely competitive product that Eddie talked about in his remarks.

And then the last piece really has to do with an FDX architectural decision and really one of the major large operators that typically leads the industry in these choices, choosing to go one direction versus the rest of the operators, kind of, waiting and seeing. And that's led to, sort of, a broad-based pause in spending. You'll know that a lot of that pause is likely behind us as it's just become clear that this architecture becomes very, very expensive for a number of the operators and so they've decided to pursue a different option. So what does all that mean? Really it means that we see — we don't see a structural shift in the Network & Cloud business away from the historical performance of Network & Cloud. What we see is a temporary soft patch that will likely persist through the balance of 2020 and perhaps into 2021, but there is no reason to believe why this business can't get back to its historical quarterly revenue and earnings potential as we work through these challenges. Eddie, what would you…

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Marvin S. Edwards, CommScope Holding Company, Inc. – President, CEO & Director [10]

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I think you covered it well. I think the important thing I'd like to reiterate is that there's been much said about us not being in the virtualized network. I think what I tried to say is that we have a deployable product right now. We believe that, that will be in the market in Q1. We don't believe that market is going to be strong. We have a relationship with all of the customers, but one of them has a special relationship with one of our competitors. So we'll deal with that. But we will have in the marketplace competitive product to provide full offering to all the customers.

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Operator [11]

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

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division – Research Analyst [12]

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I wanted to just get a quick, I think, important clarification from you on the 2020 commentary. I want to make sure that the baseline for 2019 is pro forma for ARRIS being with you for the entire year as opposed to the fact that you had acquired it in the spring. Just if we could get that…

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Alexander W. Pease, CommScope Holding Company, Inc. – Executive VP & CFO [13]

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Nein nein Nein. But thanks for that. It's an important clarification. Yes, it's a pro forma as if we'd own the company for the full year.

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division – Research Analyst [14]

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Big. I think that everybody can breathe now. Appreciate that. Wanted to see if we could talk a little bit about maybe a shorter-term perspective on 4Q cash flow from ops and delevering. Because it looks like the very strong cash you generated in 3Q was a little bit coming from working capital. So just wondering whether there's sort of timing issues there, how we should think about the fourth quarter cash from operations.

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Alexander W. Pease, CommScope Holding Company, Inc. – Executive VP & CFO [15]

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Yes. It's a good question. So you'll remember, cash flow generation in Q2 was actually a little bit light. So there's a combination of things happening in Q3. The first is all the proactive steps we're taking on inventory management that I mentioned in my script and that is enduring and there is still work to be done on just getting inventory out of the channel and using that as a source of cash.

There was also some very strong customer collections activity, which was related to some of the softness we saw in Q2. So that would certainly be more of a timing issue. I would just — we didn't guide cash flow for Q4. I would expect it to be fairly significantly weaker than Q3 given the strength we saw in Q3. A lot of that will depend on the collection — the customer collection cycle. It's not unusual to see the customer collection cycle bridge from the end of the year to the beginning of the year. And that can have significant fluctuation. But we do anticipate, as I mentioned, continuing to pay down debt, and we'll focus all the cash flow to continue to pay down those 2021 and derisk the balance sheet.

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division – Research Analyst [16]

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And then just one last one and a quick clarification, which I think I interpreted from your comments on the Network & Cloud segment results for 3Q. It sounded like the 2 sources of strength here were really licensing sales for capacity into CCAP and then transmission business being quite strong. Just want to make sure I heard that correctly.

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Alexander W. Pease, CommScope Holding Company, Inc. – Executive VP & CFO [17]

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The first point absolutely correct. I'm not sure exactly what — when you say the transmission business what you're referring to.

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division – Research Analyst [18]

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Well, basically, the things that aren't services and aren't CCAP?

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Alexander W. Pease, CommScope Holding Company, Inc. – Executive VP & CFO [19]

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Yes, that's fair, yes. I mean, overall, I would say, on the Network & Cloud piece, Simon, we are seeing that business firm up. We are seeing capacity being added to the system. So I think there is some positive things. And then the really positive things just to reiterate, as Eddie mentioned, we rolled out our virtualized solution, we got Remote PHY nodes being deployed in the field. We're making a lot of progress on this next generation of technology.

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Operator [20]

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Next question comes from the line of Samik Chatterjee of JP Morgan.

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Samik Chatterjee, JP Morgan Chase & Co, Research Division – Analyst [21]

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If I could just start off on the Mobility Solutions group, you had positive comments about the outlook for that group next year. Just looking to see if you can dive a bit into the pipeline for Metro Cells and the OneCell product? And how should we be thinking about the timing of the ramp here? And if you can give us a sense of how big you think these businesses together can be for CommScope in 2 to 3 years?

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Marvin S. Edwards, CommScope Holding Company, Inc. – President, CEO & Director [22]

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What I've said is that, that businesses, we have 10,000 sites that have some type of coverage. What we've seen of late is really a full stacked, fully compatible cell site is just in a telephone pole or street light, and business is rebuilding itself about every other month right now. So we have very high expectations. I think the 3 cities that I mentioned where we have coverage are good examples of what we can do in difficult environments.

We have the ability to sell the full capability. We understand RF. We understand power and backhaul, and that's something that we strive to continue to outperform. So we think it can be multiples of what the current macro sites are because with 5G coming, you're going to need these sites to be closer, you're going to need that for latency issues as well as coverage, and we think that we're just at the beginning of what this is going to be. So we haven't quantified it in relation to the macro, it will be less per site but many times more in coverage. So we're very excited about it, and we've gotten some really accolades from some of the cities where these things have been deployed, also because of the aesthetics, the ability of better coverage and the invisibility of these poles.

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Alexander W. Pease, CommScope Holding Company, Inc. – Executive VP & CFO [23]

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So Samik, let me just hit on the kind of sequential growth. So when we talked about the Mobility segment, as Eddie mentioned, the — where the growth is going to come from are these Metro Cell and OneCell in-building solutions. So that's more back half — back half weighted. We typically would see Q1 as being one of the weaker quarters of the year. But in addition to that, the growth in the segment will come from the back half as these things start to ramp. So I think it's realistic to anticipate a reasonably soft Q1, which would not be atypical.

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Samik Chatterjee, JP Morgan Chase & Co, Research Division – Analyst [24]

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Okay. Alex, if I can just quickly follow up with you on the long-term operating cost model. I mean you're planning towards some improvement in the top line trends for certain segments next year. But if some of them were not to materialize, like how should we think about the long-term cost model. You're running at about 1.7, I think, at this point and you have synergies and savings of around $200 million. Is that, like, the right level of cost model for the business going forward?

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Alexander W. Pease, CommScope Holding Company, Inc. – Executive VP & CFO [25]

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Yes. So as Eddie mentioned, I believe in his remarks. We're aggressively going after cost and not just synergies but also broader cost actions. So the business that's probably we're focused on most is within the CPE business where you do have a declining top line environment and our commitment is to maintain profitability first and foremost and if that means that we are deliberately exiting certain programs that aren't profitable, then that's a trade-off we're willing to make. So the business is in the process of building a combination of a revenue optimization plan as well as a cost takeout plan to maintain profitability despite that top line environment. In the other businesses, we're continuing to evaluate the cost structures. And as I mentioned, even in a modestly declining to flat top line environment for 2020, we should anticipate relatively healthy EBITDA performance.

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Operator [26]

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

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Steven Bryant Fox, Cross Research LLC – MD [27]

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My first question was on the Connectivity business. I'm not quite sure I understand all the negative leverage that was produced in the quarter. So I understand sales volumes being down, drove some of the margin decline. But can you explain what else contributed to the 25% year-over-year decline in EBITDA?

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Alexander W. Pease, CommScope Holding Company, Inc. – Executive VP & CFO [28]

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On Connectivity, really, it's largely volume related. So this is a relatively high fixed cost business since we own the manufacturing assets, and so if we're not keeping the assets full, then you have an absorption issue. So that's really what the issue is there. What I would point to, which is extremely positive sign, is the growth that Eddie mentioned in the hyperscale. So what we've said is that copper is going to be in a business that's in structural decline over time. We believe that the growth in fiber will offset that decline and return Connectivity to growth. And so the fact that we're now — we've doubled the size of that business in the quarter on a year-over-year basis and are now extremely active in 4 of the 5 hyperscalers really shows that the momentum is building, which we feel very good about.

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Steven Bryant Fox, Cross Research LLC – MD [29]

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Okay. And then in terms of the Sprint merger, I mean, the expectations are that after the transaction is completed, there's an immediate recovery in spending on your products or like historically there's still a pause post deal? Are we carrying on any business recovery there for 2020 with your comments? Or should we, sort of, exclude that for now?

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Marvin S. Edwards, CommScope Holding Company, Inc. – President, CEO & Director [30]

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Well, I think, Steve, the comment made about a combined merger being the reason for delay in antenna spend in the third and fourth quarter, we — I think Alex further said that we — that's not loss, that's just delay. And we think that, that will be caught up. And so these mergers are all different and some take a pause. I think a lot of work's been done in this one beforehand. So I think it's just a matter of getting approval or near approval before the spend will start back in earnest. So I think there's opportunity for catch-up volume. We have to see. That's something that's not been communicated to us yet. But it's something that we're close to and well positioned with both sides of the merger.

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Operator [31]

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Next question comes from the line of Meta Marshall of Morgan Stanley.

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Meta A. Marshall, Morgan Stanley, Research Division – VP [32]

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I just wanted to get a sense of whether some of these mid-band spectrums getting completed, prevent some of the spending that you would expect on macro cells or if you would expect it to be an accelerator afterwards. And then maybe just diving into kind of the Ruckus segment and when you would expect to kind of see some upward movement from the Wi-Fi 6 upgrade?

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Marvin S. Edwards, CommScope Holding Company, Inc. – President, CEO & Director [33]

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Meta, in the macro environment, unless they change frequencies, the antennas we sell today are the same ones we sold yesterday. And as I said, we're selling much more complex antennas today than we did years ago. We have 32-port antennas today and some looking at even larger and we're doing it in a smaller form factor, so we save our customers' money from the rental standpoint. So we see that continuing at a reasonable pace. I think we do see an uptick in what our densification is going to be.

I think we see an uptick in OneCell as AT&T wants to do work with FirstNet to make sure that they have a more efficient network. So I think a lot of positives are going to be there as we see from all the different ranges of products or sizes within Mobility segment. So we're very bullish. I think next year, we'll be weighted more toward that side than the wireline side.

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Meta A. Marshall, Morgan Stanley, Research Division – VP [34]

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Got it. And then just on Ruckus and Wi-Fi 6.

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Marvin S. Edwards, CommScope Holding Company, Inc. – President, CEO & Director [35]

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Okay. So we were the first in the market, and we're excited about the take rates that we're starting to see. We're getting a lot of really good momentum between both sides of the company as we've combined the sales forces. So we have the full range of capability of the partner part of our historical enterprise business. So that's taking off, and we're getting a lot of cross-selling, and now I'd say, 400 or so, much of that is in the enterprise Ruckus side of the business. The ability of us to go and have a wired and wireline or license and nonlicense capability is unique in the marketplace and a lot of our partners and installers and all that see the benefit of that. So it's — a lot of those questions are some of the first things that the people I see with the customer base talk about. And so we think that's going to be — as Alex said, we think that has a lot of potential next year and years after.

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Operator [36]

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Our last question comes from the line of Jim Suva of Citi.

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Jim Suva, Citigroup Inc, Research Division – Director [37]

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I have 2 questions. They're a little bit related, so I'll ask them at the same time. And that regards the December quarter guidance. Three months ago, you mentioned that it would be up and now it's going to be down. So what really changed so fast in 3 months that caught you by surprise? And then my second question related to that is it looks like the December quarter earnings or the profitability of the company quarter-over-quarter really takes a pretty big or abnormally big step down. So what's — from Q3 to Q4, what's really pressuring the margin to the earnings so much? Is it fully attributed to tariffs or mix or ASP pressure? It just seems like the earnings is pressured more than just simply the sales?

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Marvin S. Edwards, CommScope Holding Company, Inc. – President, CEO & Director [38]

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I'll talk about maybe the revenues. The biggest factor in the difference between what we would say last maybe even 2 weeks ago is the merger impact in the wireless — the Mobility side of the business that went from possible acceleration to stoppage or at least a slowdown until next year. That would be the biggest part of the top line and that would — certainly those volumes in that product line would be impactful to the bottom line as well. That also is affected because of the utilization of our factories. Alex mentioned that in one of his other comments. So we do make all the antennas that we sell. So if we don't have the demand, we don't make them and the plant is underutilized somewhat. Second part of the question.

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Alexander W. Pease, CommScope Holding Company, Inc. – Executive VP & CFO [39]

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Yes, if I understood the question — your line is a little muffled, but I think you're talking about the margin compression from Q3 to Q4 sequentially. And so assuming that was what your question was, it's really driven by a handful of things, the first and biggest driver would be a mix shift. So this license sales revenue that we've been talking about carries with it substantially higher mix than the manufactured products. And so to the extent there was more of that in Q3 than in Q4, you would see a big mix shift. The second would be sales decline in the CCS business, which we pointed to, and also in Mobility. And so as Eddie just mentioned, the deleveraging effect of those — that top line decline is causing some margin compression, but for Mobility, in particular, I just want to reiterate what Eddie said. This is purely timing related. This is related to the merger, and we anticipate that business coming back. We have the product ready to go as soon as the customer is ready to buy it.

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Marvin S. Edwards, CommScope Holding Company, Inc. – President, CEO & Director [40]

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Okay. Thanks, everyone, for your interest in CommScope. We appreciate your continuing attention, and we look forward to talking to you next quarter. Thanks a lot.

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Operator [41]

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Ladies and gentlemen, this concludes today's conference. Thank you for participating, and have a wonderful day. You may all disconnect.