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Edited Transcript of COMM earnings conference call or presentation 9-May-19 12:30pm GMT

Q1 2019 CommScope Holding Company Inc Earnings Call

Hickory May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of CommScope Holding Company Inc earnings conference call or presentation Thursday, May 9, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander W. Pease

CommScope Holding Company, Inc. - Executive VP & CFO

* Bruce W. McClelland

CommScope Holding Company, Inc. - Executive VP & COO

* Kevin J. Powers

CommScope Holding Company, Inc. - VP of IR

* Marvin S. Edwards

CommScope Holding Company, Inc. - President, CEO & Director

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Conference Call Participants

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* Ahmed Sami Badri

Crédit Suisse AG, Research Division - Senior Analyst

* Jeffrey Thomas Kvaal

Nomura Securities Co. Ltd., Research Division - MD of Communications

* Jim Suva

Citigroup Inc, Research Division - Director

* Mark Trevor Delaney

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Meta A. Marshall

Morgan Stanley, Research Division - VP

* Samik Chatterjee

JP Morgan Chase & Co, Research Division - Analyst

* Shawn Matthew Harrison

Longbow Research LLC - Senior Research Analyst

* Simon Matthew Leopold

Raymond James & Associates, Inc., Research Division - Research Analyst

* Steven Bryant Fox

Cross Research LLC - MD

* Vijay Krishna Bhagavath

Deutsche Bank AG, Research Division - VP and Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the CommScope First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the call over to Kevin Powers, Vice President, Investor Relations. You may begin.

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Kevin J. Powers, CommScope Holding Company, Inc. - VP of IR [2]

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Good morning and thank you for joining us today to discuss CommScope's first quarter 2019 results. With me on the call are Eddie Edwards, CommScope's President and CEO; Alex Pease, CommScope's Executive Vice President and CFO; and Bruce McClelland, the former CEO of ARRIS, now CommScope's EVP and COO.

You can find the slides that accompany this review on our Investor Relations website. Please note that some of our comments today will contain forward-looking statements based on our current view of our business, and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that can affect future performance. We will discuss certain non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website.

This morning, Eddie will provide a high-level overview of our quarterly financial performance and the overall market. Alex will then review a quarter -- Alex will then review first quarter CommScope results and segment performance in more detail, followed by the same for ARRIS' performance and end on a capital structure overview. Eddie will then provide an update on our integration progress and our outlook for the combined company. Finally, we will conclude with Q&A. (Operator Instructions)

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

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

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Thanks, Kevin, and good morning, everyone. This morning, we announced CommScope's first quarter result that were at the high end of our net sales expectations and exceeded our expectations on bottom line. Our results benefited from stronger volumes, lower input cost and favorable mix.

As we committed to you roughly 1 year ago, we have successfully managed the margin compression caused by recent pricing dynamics to deliver profitability in line with our historic range. Our solid operating performance speaks to our capacity to be nimble and execute with discipline in the face of what continues to be a difficult customer-spending environment. We remain focused on taking the appropriate and necessary actions to deliver both near-term results and long-term success.

We are excited to have closed our strategic acquisition of ARRIS in the beginning of April. Our strong market position, excellent customer relationships and differentiated solutions are immediately strengthened with this combination. We are confident that it will further enable CommScope to capitalize on many of the rapidly evolving industry trends.

While the ARRIS business is off to a challenging start of the year, it is driven largely by the significant reduction in CapEx spend by certain large cable companies, many of whom have commented publicly on 2019 network and capital priorities. We feel confident that these trends are transitory as operators will need to invest in their networks to remain competitive. In the face of these near-term headwinds, we remain optimistic about 2020 and beyond, given our technology portfolio, scale, customer relationships and leading position in many of our markets. As a combined company, we are now better positioned to provide the innovative solutions for our customers' need that neither CommScope nor ARRIS could provide on its own. We have an enhanced product portfolio that is focused on both service providers and the enterprise markets, and we

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to provide cost-effective network solutions to solve the need for low latency, high reliability, high capacity, increased security, cost control and customer experience. Together with ARRIS, we remain -- we aim to create a company that will shape communication networks of the future by operating a greater variety of technology and solutions. This will be enabled by tapping into a wider employee talent pool, all to provide additional value and benefits to our customers, partners and shareholders.

Now I'd like to turn the call over to Alex for more detail on our first quarter. Alex?

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

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Thanks, Eddie, and thanks, everyone for joining us on our call this morning. As Eddie mentioned, this morning, we were pleased to announce CommScope's first quarter results that were at the high end of our revenue range and slightly above the high end of the EPS guidance range.

First quarter 2019 sales declined 2% year-over-year. Excluding the impact of unfavorable foreign exchange, sales increased modestly. Net single-digit growth in the U.S. as well as low teen growth in CALA was more than offset by softness in the APAC and EMEA regions. Orders for the quarter were $1.13 billion, providing a book-to-bill ratio of 1.03, the second consecutive quarter above 1. For the first quarter, GAAP operating income decreased to $90.7 million, while adjusted operating income, which excludes amortization of purchased intangibles, integration and transaction costs and other special items, increased 1% year-over-year to $191 million or 17% of sales. The results were driven by volume growth and lower material cost partially offset by product pricing. Adjusted EBITDA was flat at $208 million, while adjusted earnings per share of $0.48 declined 2% year-over-year, primarily due to a higher tax rate, partially offset by higher adjusted operating income.

Turning to Slide 6 and the segment results for CommScope. Connectivity Solutions segment sales for the first quarter decreased 4% year-over-year to $646 million. Excluding the impact of unfavorable foreign exchange, sales declined 1%. Modest growth in North America was more than offset by lower demand in international regions, most notably in EMEA and to a lesser extent in APAC. As expected, results were negatively impacted by softness in the Outdoor Network Solutions business, driven by lower service provider capital spending and somewhat lower spending by enterprise customers. Orders of $621 million translate into a segment book-to-bill of 0.96, essentially in line with the prior quarter.

For the first quarter, adjusted operating income was down 12% year-over-year to $96 million or 15% of sales, driven by continued pricing pressure and the unfavorable impact of foreign exchange rates. These factors were partially offset by lower material cost.

Moving on to Mobility Solutions. Segment sales for the first quarter increased 1% year-over-year to $453 million. Excluding the impact of unfavorable foreign exchange, sales increased 3%. Results benefited from double-digit growth in both North America and CALA as well as modest growth in EMEA. These benefits were partially offset by a decline in APAC as we proactively take steps to manage our profitability and exit lower-margin business. Orders of $513 million translate into a segment book-to-bill ratio of 1.13, the second consecutive quarter above 1.

In the quarter, adjusted operating income increased 19% year-over-year to $95 million or 21% of sales. Results were driven by volume, favorable mix and a favorable impact of foreign exchange rates on costs, partially offset by pricing pressure.

Turning to Slide 7 and the results for ARRIS. Given its weaker-than-expected start to 2019, we are providing selected first quarter financial information for ARRIS in an effort to provide greater transparency into ARRIS' performance trends.

First quarter 2019 sales of $1.38 billion, non-GAAP adjusted operating income of $66.7 million and non-GAAP adjusted EBITDA of $85.5 million. Turning to Slide 8 for ARRIS' segment performance. For the Customer Premise Equipment or CPE segment, sales of $824 million decreased approximately 6% and AOI of $28.8 million increased 57%.

Lower CPE revenues were largely a result of a reduction in broadband product shipments related to the shift in production out of China to avoid the impact of U.S./China tariffs as well as lower North American service provider capital spending. Profit benefited from improved mix, higher telco spend and lower product cost.

In ARRIS' CPE business, shipments of video set tops were up 7% year-over-year, while shipments of broadband devices were down 35% as production lines in China were relocated. We have completed qualification of the new production lines and are now ramping output on schedule. Product costs continue to improve, further increasing our confidence for this business in the second half of 2019.

Network & Cloud segment sales of $440 million decreased 18%, and AOI of $70.6 million decreased 53%. I'd like to remind you that the decline in revenue and profit year-over-year is a difficult comparison due to the exceptionally strong first quarter a year ago and customers working through robust fourth quarter 2018 purchases. The comparison was further impacted by reduced CapEx spending at certain cable service providers. Network & Cloud business is experiencing an unusually slow start to the year with cable MSOs spending well below seasonal norms. While demand for ARRIS' HFC products remained solid, shipments of the ICTAT E6000 are down significantly. While we're disappointed with these results, we believe we have maintained share, and the decline is directly related to the generally lower MSO spend. Over time, we expect this trend to reverse with the consumption of DOCSIS 3.1 capacity deployed in 2018 and the ramp of associated DOCSIS 3.1 CPE devices.

In addition, the ongoing demand for bandwidth will require investments in network capacity that cannot be delayed indefinitely without impacting customer experience and subscriber growth. We expect over-the-top video will continue to grow, which would also put pressure on the active network as the year progresses, further supporting the expectation of the normalizing of capital spending over time.

Interest in distributor access networks remained strong, but industry deployments are still very limited. ARRIS has implemented a very elegant upgrade path to the deployed base of E6000 routers and HFC fiber nodes, which is both operationally and capital spending efficient. A fully virtualized version of the product is also an option for operators that prefer that path. We feel very good about our position to support the bandwidth needs of the future.

Moving on to the Enterprise segment's first quarter sales. ARRIS' Enterprise segment sales of $118 million decreased 30% with an adjusted operating income loss of $32.7 million compared to an AOI of $17.6 million a year ago. The ARRIS' Enterprise segment or Ruckus networks business experienced a very difficult and disappointing first quarter. Like the other ARRIS segments, sales to ARRIS' cable MSO operators at Ruckus were down significantly in the first quarter due to the factors we discussed previously. ARRIS also experienced a buildup of inventory in the channel in the second half of 2018 that had a negative impact on Enterprise sales through distributions.

Since closing the acquisition, we're off to a much better start in the second quarter. We continue to remain excited about the long-term growth in this part of the business as we think about the potential of bringing them a licensed and an unlicensed spectrum solution into the market. We believe this combined solution has the potential to solve many of the most demanding in-building, in-venue wireless challenges of the future.

Returning to the reported results for CommScope, I'll address our cash flow on Slide 9. During the first quarter, cash flow from operations was a negative $10 million, and adjusted free cash flow was $2 million. As a reminder, our adjusted free cash flow excludes the integration and transaction costs, restructuring costs and capital expenditures. For added context on our soft start to the year, it's important to note that historically, the CommScope stand-alone business would typically generate more cash in the second half of the year as we build working capital in preparation for our seasonally stronger second and third quarters.

For the trailing 12 months, we generated $449 million in cash flow from operations and $427 million in adjusted free cash flow. Now let's discuss the capital structure on Slide 10. We closed the quarter with net leverage at 4x, which excludes the acquisition-related debt incurred in February before the transaction closed. In the days following the quarter close, we completed the acquisition of ARRIS, bringing our net leverage ratio to 5.5x pro forma adjusted EBITDA, which includes the last 12 months of adjusted EBITDA for ARRIS as well as $150 million of anticipated cost synergies and $45 million of other cost-saving initiatives.

Looking ahead, our first debt maturity isn't due until 2021, and as we previously stated, our primary focus is paying down debt. To that end, we are planning debt repayments of greater than $500 million during the remainder of 2019. We're targeting to return our net leverage to approximately 4x within 2 years post close, and from a longer-term perspective, we expect to reduce the ratio to a range of 2x to 3x.

With that, I'll turn the call back over to Eddie.

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [5]

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All right. Thanks, Alex. I'm going to Slide 11. I want to extend a warm welcome to the new members of the CommScope team who joined from ARRIS in early April. We look forward to collectively growing as a team and proactively shaping communications connectivity and networks of the future.

In the short time since completing the acquisition, our teams have been working hard on the seamless integration to meet and exceed our targeted synergies. As I said earlier, we're incredibly excited about the strategic benefits of bringing these 2 companies together, and we're confident that the combination will be significantly stronger over the long term. The integration is going well. In the first few weeks, we had over 25 teams comprising hundreds of employees from both CommScope and ARRIS working together to execute a very successful day 1. We have received positive early customer feedback, and we're already seeing the benefits of the merger in terms of customer interest in our broader portfolio. The teams are working hard on executing their Day 100 plans as we work together to realize the upside profit and growth potential of the new CommScope.

As we integrate and look to transform our company, our strategy is simple. We want to create a new culture for the combined organization, focused on people, customers, profitability and growth. As part of this effort, we are focused on identifying additional top and bottom line synergy opportunities. While in the early days, we're very pleased with the integration and look forward to providing progress updates as appropriate.

Turning to Slide 12. Despite the weaker start of the year, we remain very excited about the combined CommScope and ARRIS portfolio. Together, we have a stronger and more diversified global platform for both service providers and enterprises. Together, we will have greater capabilities to shape the

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wireless communications, and we'll be well positioned to benefit from several key industry trends, such as convergence of wired and wireless networks, fiber and mobility everywhere, 5G, private networks, Internet of Things and rapidly changing network and technology architectures around the world.

Our combination has brought together 2 established and respected leaders in their respective markets, with a unique set of complementary assets and capabilities. Customers are eager to benefit from our collective capabilities, which we expect to include: convert small-cell solutions for licensed and unlicensed wireless spectrum via combined Wi-Fi and cellular capabilities; complementary wired and wireless communications infrastructure; integrated broadband access; private network solutions for industrial, enterprises and public venues

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connected and smart home solutions.

We believe our new company also creates numerous opportunities to cross sell, support customers in new ways and expand into adjacent markets. A few example we've already seen in the short time together since close include: increased share of Connectivity Solutions with certain cable operators, combined sales of Ruckus networking and Connectivity Solutions to hospitality customers, and multiple opportunities leveraging ARRIS' professional services and CommScope technology.

From a financial perspective, we continue to expect significant financial benefits in the first full year post closing. We continue to expect more than 30% EPS accretion and to generate nearly $1 billion in cash flow from operations, excluding purchase accounting charges, transaction and integration costs and other special items. As Alex mentioned and as has been our track record, we intend to drive down our leverage to approximately 4x in the second year post close.

And finally, we are targeting an annual return rate of at least $150 million in cost savings by the end of the third year post close, and we are on track to deliver greater than our commitment of $60 million the first full year following close.

Slide 13, turning to guidance. After a thoughtful and constructive evaluation of our business dynamics specifically that a significant portion of our revenue is derived from short-cycle and core project based engagements, our Board of Directors and executive leadership team have made the decision to transition away from providing the annual financial guidance. This decision had been under consideration for some time, and it's supported by several significant shareholders and covering analysts.

We believe quarterly guidance is more helpful in evaluating our company, and the timing to make this change is appropriately -- is appropriate as we integrate with ARRIS. With that said, I will cover, first, our formal second quarter 2019 guidance and then provide some additional qualitative color on the outlook for the full year.

Turning to the outlook for the second quarter. We expect revenue of $2.49 billion to $2.65 billion, non-GAAP adjusted EBITDA of $365 million to $405 million and non-GAAP adjusted earnings per share of $0.54 to $0.62. Additional assumptions include an adjusted effective tax rate of between 27% to 29% and weighted average diluted shares outstanding of 231 million.

Turning to Slide 15 and regarding our full year 2019 outlook. I'll provide some additional color to help you model our expectations. For CommScope, positive drivers include continued densification of 4G networks in preparation for 5G at the metro cell layer and ongoing FirstNet deployment and investment in the access layer. Pressure on indoor copper within our Enterprise business should be mitigated by indoor fiber growth, which includes continued hyperscale momentum. We expect lower material cost and cost-reduction initiatives are to offset pricing and unfavorable mix.

In the Connectivity segment, we expect annual sales to decline low single digits primarily due to weaker-than-expected cable collect operators for the remainder of 2019. The rate of decline should subside and be partially offset by other North American customers and an improvement in EMEA sales. In the Mobility segment, we expect sales to increase low single digits for the full year led by growth in metro cell, macro tower accessories and DAS. Sales growth should accelerate throughout the year as our new OneCell product solution should gain additional traction in the back half of the year. In general, we expect volume growth and cost reductions to more than offset pricing dynamics in the back half of the year.

For the ARRIS segment, annual CPE sales are expected to decline mid-single digits with trends improving in the second half of the year as the subdued payroll CapEx should ease as the year progresses. The supply chain initiatives, we're expecting to mitigate tariffs, specifically moving manufacturing out of China, are impacting near-term broadband device revenues Alex has mentioned. However, with the move expected to be completed by midyear, we will largely eliminate the impact of these tariffs. While CPE will continue to be pressured by low video volume, we expect increases in broadband spend and continued product and components cost improvements to help offset this weakness.

We continue to see ongoing customer investment in DOCSIS 3.1 product refresh cycle and positive trends at telco customers. Network & Cloud annual sales are expected to decline in low teens with trends improving significantly in the second half of the year.

Cable MSOs are beginning to wait for Remote PHY architecture to mature, which is impacting spending along with a general reduction in capital spend. With demand for bandwidth continuing to grow at an exponential rate, we expect this trend to reverse and for investment in network capacity to increase throughout the year.

Turning to ARRIS Enterprise or the Ruckus business, we anticipate sales to decline mid-single digits year-over-year due to slow start in 2019. We are seeing improved order velocity in the second quarter, and trends should improve in the second half of the year. To that end, we expect to return to growth by the third quarter, driven by the continued shift to managed services. In addition, Wi-Fi 6 is driving the access point and switch upgrade cycle, and we expect increased government-sponsored education spend where U.S. bid awards are up 67% year-over-year and should benefit sales in the second half of 2019. Lastly, in addition to the segment commentary, I'll provide a couple of full year assumptions to keep in mind. For the full calendar year 2019, we expect an adjusted effective tax rate of 28% to 30% and diluted average shares outstanding of around 223 million.

And with that, we will open the floor to questions. I'll turn it back to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Samik Chatterjee with JPMorgan.

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Samik Chatterjee, JP Morgan Chase & Co, Research Division - Analyst [2]

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Eddie, just wanted to check -- we understand the challenges on the ARRIS side of the business, given the moderating CapEx outlook from the cable customers. But how are you thinking in terms of what actions you need to take to deliver on some of the acquisition metrics, like the EPS accretion and the cash flow guidance you issued at the time of the acquisition, like the $1 billion of cash flow? What actions do you need to take to kind of meet those targets despite the lower CapEx outlook?

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

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Sure. I'll let Alex take that.

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

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Yes, Samik. Thanks for the question. I think it's important to note a couple of things. First of all, we're still within the range of the assumptions that we use to populate the deal model, and I think we still feel very good about the commitments we've made towards 30% accretion. We're on track. We have line of sight to over delivery of more than $50 million in cash savings in the first year. We also mentioned an incremental $45 million in cost-saving actions that we took at the beginning of the year to maintain our profitability. And then I think the third thing I'd point to is just the credibility of the management team in terms of consistently delivering on the expectations that we've set and over delivery on the benefits of large, strategic transactions like this. I think the last point I'd make is one of the real important drivers for this deal was the diversification of the portfolio. And while cable MSO spending has certainly been off, we've actually seen some tailwinds on the telco side of the business. We've also seen some tailwinds on the hyperscale side of the business. So the diversification of the portfolio, I think, provides an ability to mitigate some of the impacts. But again, I think in the first 12 months after the close, I think we still feel very confident in our ability to deliver on the expectations that we've set.

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Samik Chatterjee, JP Morgan Chase & Co, Research Division - Analyst [5]

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Got it. And if I can follow up with a question on China. Can you -- is it possible to quantify the impact the tariffs are having either on the top line and the margins at this point? And what are you assuming for tariffs going forward? Are you assuming a 10% rate or a 25% rate?

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [6]

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The tariffs that are currently in place are possibly going to increase tomorrow, I guess. We feel very good about that. We've mitigated virtually all of CommScope's exposure by moving things to other countries and still maintaining support of our customers. We have a lot of capacity to do that if the tariffs worsen. In the case of ARRIS, we have consistently said that by the end of the second quarter, which is about 6 weeks from now that completion of their mitigation to move out of China will be completed. That is on track. I think we've said in our prepared remarks that it is on track, and we feel comfortable about that, that by the end of that period that we will have little to no exposure within the tariff situation.

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Operator [7]

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And our next question comes from Sami Badri with Crédit Suisse.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [8]

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The one area I really want to address is given that if the ARRIS business continues to see pressure through 2Q and 3Q and usually -- I mean I'm talking N&C and Enterprise, would you potentially accelerate your cost synergy plan for 2019? And maybe you could just give us some more color in the event that what measures would you take if the business continues to show weakness throughout the year?

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [9]

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I think we have to match up our cost with our exposure of whatever we have, and we'll certainly do whatever is necessary to meet targets. We have a lot of confidence in the long-term capability of both of these segments, and we think that, that's a lot of what we've paid for. And so we want to do the things that are right for the long-term success. And so we have extremely confident and capable people. We have great products, and we want to continue to have that capability there. This is not an acquisition for a quarter or 2, this is staying for the long term. And we're going to make sure that we have the capability and support to manage through that.

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Alexander W. Pease, CommScope Holding Company, Inc. - Executive VP & CFO [10]

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But also just building on what Eddie said, I think just coming back to the diversification theme, there are elements of our business that are actually demonstrating substantial growth as operators are investing in the network. So the -- on the metro cell side of the business, as some of the telco operators are densifying the networks and investing in the depth of 5G, we're seeing strong growth on the venue where the backlog on the venue side of the business is actually quite attractive. And so we'll get the benefit of scale and improved mix from some of those factors as well.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [11]

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Got it. And then one other follow-up is -- meant to do with networks is you made a comment regarding further densification of 4G networks and then preparation for 5G. Based on your conversations you're having today with some of the major telcos and your MSOs, what percentage of the mix of deals or contracts would you say are more 4G versus 5G? And then how do you think this mix could change in -- by the fourth quarter of 2019?

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [12]

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Well, I would say right now, the fastest-growing but albeit the smaller part of our business is the metro cell expansion. That's where we see densification in the urban areas. That business is growing double digits quarter-over-quarter today. That is 4G frequencies, it's 4G applications, but it is preparation for 5G. And I think what we've talked about in the last 18 months to 2 years is that it's hard for us to tell what is a 4G or 5G unless you have a frequency change because our products are the same. And so we're seeing that buildup of what we said would come to prepare in the densified network, and that's growing at a rapid pace. We are developing new products like Massive MIMO and millimeter wave products working in due time with our customers to make sure that we're ready for any other applications outside of traditional deployments that they do today.

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Operator [13]

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And our next question comes from Shawn Harrison with Longbow Research.

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [14]

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I want to dig in first to the, I guess, the legacy CommScope business. It appears, Eddie, maybe that the wireless business is off to a better start for the year and maybe is not back half -- as much back-half loaded as you would would've thought 90 days ago. While it seems unlike the in-door copper business, at least compared to Belden and what Anixter put up, maybe you're underperforming in that market or walking away from more business to maintain profitability. But just any commentary there would help.

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [15]

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Well, I think when we (inaudible) FirstNet, I think, we spoke about in our remarks that started in earnest at the beginning of the year. So we're seeing that build out. As happened in '18, it will slow down in the back end of the year. But there is -- I think it's -- the spend between the telcos is probably a little more heavily weighted to wireless this year than what we saw in '18. So that business is picking up. Another part of it is our venue business has regained a lot of momentum as we have another Super Bowl coming and other things like that. So there's a lot of refresh cycles in the venue business that are happening today, and our installed base is good, so we're getting a lot of refresh there. The -- in the Enterprise wireless -- the copper business that you mentioned, we look at profitability more so than revenue, and I think that it's still generating a lot of business for us. And so we're okay with how it's performing. And...

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Shawn Matthew Harrison, Longbow Research LLC - Senior Research Analyst [16]

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Okay. And then just as a follow-up just on the Enterprise and cloud business of ARRIS. Is there any worry that there's an accelerated shift to kind of virtualized CCAP products out there that's maybe affecting this MSO spend. I know, Alex, you talked about virtualized solution, but is there a competitive threat out there that's shifting some market share and/or pausing this MSO spend that ARRIS has to accelerate investment in that type of product to regain growth?

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Bruce W. McClelland, CommScope Holding Company, Inc. - Executive VP & COO [17]

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Shawn, this is Bruce. I can take that one. What we think is happening this year is primarily a focus on minimizing the amount of churn in the network with our cable customers. Now there's been a lot of work going on over the last 18 to 24 months to increase capacity to get DOCSIS 3.1 enabled to drive fiber deeper, et cetera. And that's caused a lot of churn with customers, and I think there's a focus on letting the network settle and really focus on good customer experience. Of course, what drives the investment in our products in the infrastructure is the continued exponential growth in traffic and the amount of IP video streaming and those sorts of things. And that's constantly consuming the bandwidth that's in the network, and we'll drive our customers to do both network capacity upgrades as well as continued technology upgrades going forward. So we think while the start for 2019 is certainly below where we thought it might be that, that returns to more of a normal pace as the year progresses and we get into 2020.

In parallel with all those, clearly there's a network evolution going on from a more kind of traditional centralized distribution architecture to more of a distributed architecture. One of the big drivers behind that is the move from analog fiber distribution to digital fiber distribution and take more effective use of the fiber that's in the network. Along with that comes a trend towards moving more capabilities in software. So as Eddie mentioned, what we've provided, and Alex mentioned, is a very elegant upgrade path that allows our customers to take advantage of the installed base that they've invested in, evolve them in a natural fashion as they need to, to take advantage of the capabilities and move into digital fiber and distributed computing.

In parallel with that, we have a virtual version of the product as well where we take all of the goodness that's in the current platform and put that into a cloud-native software architecture and are testing that with customers now as well. So I think we've got a variety of different options that meet the needs of our global base of customers to allow them to evolve and not feel pressured to rip and replace and completely disrupt the network, which, again, back to my first comment, is a really big priority for them right now.

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Operator [18]

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And our next question comes from Vijay Bhagavath with Deutsche Bank.

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Vijay Krishna Bhagavath, Deutsche Bank AG, Research Division - VP and Research Analyst [19]

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A quick question that I have to ask you on CommScope and ARRIS. In the past, it was just CommScope. Still, Eddie, on the Connectivity side of CommScope, is there anything you can do in terms of go to market or product portfolio or potentially M&A to kind of get that business back to growth? I understand you have weak spending and demand trends. Still anything you can do in terms of go to market and product portfolio? And I have a follow-on.

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [20]

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Well, Vijay, the -- part of this is the Connectivity business that we have outside the planned products that are impacted by the cable operator lack of spend as well, no different than ARRIS. That's a major -- that's a drag for us for the quarter. We expect that, as I said, to pick up later in the year. I think that there is a lot of momentum that we're seeing there in the hyperscale, which is also helped -- while an Enterprise segment, it is helped by products that are developed by the Connectivity segment. So we think that is improving. We see a lot of improvement from that standpoint relative to the growth that we're seeing with the hyperscale customers, where we've had successful trials and won many. So we think that business will, on its own, continue to grow with the advent of bandwidth needs. That is a primary driver to support it.

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Bruce W. McClelland, CommScope Holding Company, Inc. - Executive VP & COO [21]

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Vijay, this is Bruce. Just a few other thoughts. One of the things we thought was really important day 1 was having a unified go-to-market approach, particularly around our large service provider customers. And so from day 1, we have a unified team from a marketing perspective and from a sales perspective, and they're focused on maximizing the entire sell-through of the whole portfolio. And we've already started to see some success where we're increasing market share around connectivity to a broader set of service provider customers. So I think you're right. I mean that's an important area for us to focus on. Similarly in the enterprise space, we think there's great opportunity to come to -- to sell the entire portfolio of licensed and unlicensed products to a broader set of enterprise customers.

If you've followed ARRIS, most of our focus has been through multi-tier distribution into kind of a broad array of managed service providers. The combination of ARRIS and CommScope provides us with a much larger presence with larger scale enterprise accounts so there's a focus there to increase sales. And then as Eddie mentioned as well earlier, I think we're seeing a really good opportunity to leverage the professional services capabilities of ARRIS to pull through a broader set of product into enterprise service provider, hyperscale and all of the different accounts that we're focused on. So there's some real positive things going on around the combination.

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Vijay Krishna Bhagavath, Deutsche Bank AG, Research Division - VP and Research Analyst [22]

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Perfect. Quick follow-on is on Wi-Fi 6 follow that product cycle very closely. So from a Ruckus point of view, Eddie, Alex and team, how impactful or actionable is it into the back half or is it really 2020?

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Bruce W. McClelland, CommScope Holding Company, Inc. - Executive VP & COO [23]

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Yes. This is Bruce. So I'm really surprised that the momentum around WiFi6 -- obviously, it's a much more advanced technology and a more expensive technology. But we're seeing strong demand and interest from both enterprise as well as from service provider. As Alex mentioned, some of the momentum around education from the E-rate programs, a lot of the demand there was coming on WiFi6. And of course, when you go to gigabit Wi-Fi networking, you need multi-gigabit Ethernet networking to get with that, and so there's an upgrade cycle around campus switching, and we've just got a perfect portfolio around that. Combine that with the structure cable that goes with that, and gosh, we've got a really powerful combination.

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Operator [24]

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And our next question comes from Simon Leopold with Raymond James.

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division - Research Analyst [25]

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I wanted to ask one sort of nearer-term trending question. Eddie, you gave us some good color on what you expected from each segment for the year, and you've given us the June guidance. I'm just trying to sort of triangulate what goes on with the mix in June, in particular, Mobility coming off of a very strong -- unseasonally strong March. How to think about that one? And then I've got a follow-up as well.

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [26]

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Well, I think in the Mobility, as I've said, we're seeing resurgence in DAS. As I've said, we have a large installed base with a lot of the venues in there. Some are doing refresh cycles, and some are doing a totally brand new -- from scratch. And so I think that momentum will continue throughout the year. The growth we see and the densification is meaningful and as 5G is becoming more of a reality than just trialing and so I think that's going to help us, too. I think we do see modest growth in Q2 in the wireless business, and I think that will continue for most of the year.

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division - Research Analyst [27]

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Great. And then as my follow-up, I wanted to see if maybe we could double click on memory cost as an important for the ARRIS business, particularly on what it's done for CPE. I understand looking at spot prices can be a little bit misleading because it takes time to affect your business. But if you could maybe, Bruce, give us some thoughts on how to think about the gross margin trends for the CPE business out maybe 6, 12 months, given what we're seeing in memory costs?

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Bruce W. McClelland, CommScope Holding Company, Inc. - Executive VP & COO [28]

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Right. Well, as you've followed us for a while, Simon, we've certainly struggled the last 24 months around increasing input cost, particularly on memory and MLCC. And as we've expected, there'd be a reversal at some point in that trend, and so we've started to benefit from that. Q1 was a bit of an odd quarter obviously with the transition of manufacturing out of China. And as Eddie said -- or Alex mentioned that we're down in our broadband shipments in Q1, about 35% year-over-year. Our video business was pretty robust. We were up about 7% year-over-year. So positive signs there. And we definitely expect to see ongoing improvements around memory as the year progresses. Of course, as you said, it's a little hard to put a specific number on it, and it changes a little bit month to month as it did when it was going in the other direction. And so that's an important element to success this year, and we'll try and take advantage of that as best as we can.

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Operator [29]

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And our next question comes from Jim Suva with Citi.

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Jim Suva, Citigroup Inc, Research Division - Director [30]

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I have a clarification question and then a more strategic question. So I'll ask them both and you can answer them in any order. On the clarification question, can you help us with just modeling, like interest expense run rate quarterly or interest rates -- I believe rates are may have changed a little bit since we initially got the indication of the combination of the company. So kind of a run rate would be helpful for quarterly model building. Then for the strategy question. You mentioned in your opening comments about the MSOs pausing their rollout yet, more demand needed for bandwidth and consumption and densification and all those various factors. So the question is -- a lot of that densification and consumption has continued to happen years and years. So the question is, do you have a lot of confidence in it? Or is there actually a technological shift that is causing the purchasing to be elongated?

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Alexander W. Pease, CommScope Holding Company, Inc. - Executive VP & CFO [31]

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So why don't I take the first question, and then I'll let Eddie and Bruce tag team on the second question. So the new debt that we raised, the cost of that debt was just over 6%, around 6.25%. We've fixed out around 75% to 80%, and so we have about 25% variable exposure. If you think about the incremental kind of cash interest expense, it's around -- as you look through the balance of the year, it'll be around a $100 million a quarter more than what you saw in the first quarter.

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Bruce W. McClelland, CommScope Holding Company, Inc. - Executive VP & COO [32]

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Yes. And kind of to try and answer the second question, Jim, fairly broadly, the trend that we see in both the telco networks, the mobile network and the fixed network, is pretty similar, right? The demand and the growth for bandwidth is increasing every year 35% to 40% and that spurs the service providers, if they want to stay competitive to invest in that network infrastructure. And while that can be a little bit lumpy as it will change depending on the technology upgrade cycles or other priorities in the business. So that trend will continue, and maybe someday, consumption of bandwidth will go down, but I don't know when that happens.

So in the mobile network, what does that mean? It means densification, as you said, right, and that's been a continuing trend for years, and I think it continues. It means technology upgrades, going from 4G to 5G NR, increasing the use of spectrum going from sub-6, including millimeter wave to get wired channels and more bandwidth. I mean all those upgrade cycles, I think, continue. And as Eddie mentioned, the metro environment, where you're really densifying down to light poles, right, is a -- I think that's the wave of the future. Of course, where you really need bandwidth is inside buildings. And so as Eddie mentioned, the increased momentum around DAS and the next-generation version of that product we have, including our new OneCell product and then combined with the work we've done with both the unlicensed Wi-Fi and CBRS gives us an incredible portfolio to go over that portion -- go after that portion of the business.

Similar trend happening in fixed networks, right? It's different technology, but it's the same concept, where you're basically driving connectivity and fiber deeper and deeper into the network. The last connection for the consumer is almost always wireless, and so the upgrade cycles around 802 11 going to Wi-Fi 6 is kind of the next generation. And I mean it's all those things that come together to give us confidence in the plan of the combined business going forward.

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Operator [33]

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And our next question comes from Jeffrey Kvaal with Nomura Instinet.

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Jeffrey Thomas Kvaal, Nomura Securities Co. Ltd., Research Division - MD of Communications [34]

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I wanted to return to the MSO CapEx question for a bit. It seems to me listening to their commentary on the quarter is that a lot of the CapEx reduction that they have underway right now seems to be more durable really than temporary. The tone of that suggests that much of that was on the CPE side. So I guess, I'm wondering how you are factoring that in. And I guess from a follow-up point of view, my assumption was that the CPE business wasn't where much of the margin was in the ARRIS business. And so I wonder if that's going to have some sort of different impact on the EPS line than it might on the revenue side.

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Bruce W. McClelland, CommScope Holding Company, Inc. - Executive VP & COO [35]

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Well, so yes, good comments. And I guess at the macro level again, what we're expecting this year is a step-down in capital intensity by several or many of our cable MSO customers. And I think they look at that envelope and obviously prioritize where to spend it. And CPE tends to be a success-based capital spend. If you want to add a new subscriber, you've got to put equipment in the home whether it's broadband or video. I think the capital intensity around CPE is a recognition that the types of video devices that they're deploying are becoming more capable and yet lower cost, right? They're moving to more Wi-Fi-, IP-type end clients. And I think that's where the capital intensity step-down comes from a CPE perspective. And I think the trend, as I mentioned, around kind of stabilizing the network and letting it operate is really the driver behind the reduced spend on the network side. Of course, as you know, I mean, as I just mentioned a minute ago, these technology upgrade cycles is what drives the business, and you've heard the industry talk about the initiative in the cable environment towards 10G. 10G is basically the branding name around the concept of getting to symmetrical gigabit services to residences.

And you might ask yourself, when am I going to need symmetrical 10 gig or 1 gig? And of course you asked that question probably 5, 6 years, when would you need 100 megabits or 1 gigabit? And what I know is the continuous demand around bandwidth is going to happen and the next generation of technology is just around the corner. We've already been doing some trials with some of our customers in Europe around 10G. So that's the next wave. And just short-term capital intensity is coming down here this year around cable, I believe. But again, if we're going to stay competitive, the next cycle is just around the corner.

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Jeffrey Thomas Kvaal, Nomura Securities Co. Ltd., Research Division - MD of Communications [36]

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And then Alex, perhaps, would you mind just telling us what debt level we should be expecting when you report through the first quarter after the deal's closed?

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Alexander W. Pease, CommScope Holding Company, Inc. - Executive VP & CFO [37]

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So what we've said is we're going to pay down about -- more than $500 million of debt before the end of the year. We have right now about $10.5 billion of debt on the balance sheet, and we're at about 5.5x leverage.

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Operator [38]

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And our next question is from Meta Marshall with Morgan Stanley.

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Meta A. Marshall, Morgan Stanley, Research Division - VP [39]

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I just -- on the Connectivity side of the business, I wanted to know if there was any impact from a large Tier 1 kind of switching from homes passed to homes connected kind of in the middle of this year? And then second, maybe on the Enterprise side of the business of ARRIS, just an explanation of kind of what that inventory buildup was. Is that old Wave 2 products? Was that the beginning of Wi-Fi 6? Just any explanation of kind of what the makeup of that inventory is and the roll-off of that?

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

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Yes. I'll answer the first one. Homes connected is a much better process for CommScope than homes passed. We are not the primary cable provider for the deployment and for that particular customer. We are a considerable position in the connectivity. That is what the presence of CommScope is in the fiber business primarily is the connectivity capability that we have to go along with our cabling. And so that would be a net positive for us as they transition.

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Bruce W. McClelland, CommScope Holding Company, Inc. - Executive VP & COO [41]

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Yes. And Meta, this is Bruce. So on the Ruckus business, of course, channel inventory starts to build up when sellout is less than selling effectively, right? And so what we had in the second half of last year was actually around some of the switching products as we started to put those through distribution inventory build there as that was the first time we started to put that through distribution. And I think obviously the sellout velocity wasn't what we wanted it to be, and so as we got into the first quarter, we consciously decided to work with our channel partners to try and bring that distribution inventory down, even though it was part of the core results in the first quarter. But again, kind of fundamentally, if we're not selling at a fast-enough rate as you've got to make those adjustments.

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [42]

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But Meta, we don't have an obsolescence (inaudible), and this is just getting the volume through the channel is really what we're focused on.

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Operator [43]

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And our next question comes from Mark Delaney with Goldman Sachs.

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Mark Trevor Delaney, Goldman Sachs Group Inc., Research Division - Equity Analyst [44]

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First one was on the traditional CommScope. Eddie, you spoke a few times about some of the improved strength in hyperscale. I know that's been a big focus area for the company. And in the past, there was really one hyperscaler that was the material part of that business. With the momentum that you're mentioning, is there more breadth now and more of a handful or several of hyperscalers that we should think about being material at your business going forward?

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [45]

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Yes. We have been successful in the trials that we've talked about for, I guess, almost a year. So those are done, and I think we can proceed -- we're proceeding well as a full-fledged provider now. And so that part is really good. We also have relationships with generally all of them today, maybe at different levels than some others, but it is a smaller business for us as we started late. But we are gaining momentum, and we're excited about where we're playing today.

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Bruce W. McClelland, CommScope Holding Company, Inc. - Executive VP & COO [46]

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Yes, Mark, a great thing about the combination, again, is that the ARRIS' professional services business had built up a discipline around data centers, whether it's hyperscale, cloud or multi-tenant data centers. And so the combined presence we have is pretty significant, and again, we're pretty optimistic about being able to grow the combined portfolio of product and services here.

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Mark Trevor Delaney, Goldman Sachs Group Inc., Research Division - Equity Analyst [47]

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Got it. That's helpful. My follow-up is on Network & Cloud within the traditional ARRIS' side of things at. And I'm just trying to already understand the guidance for this year. Maybe you can just help us understand how long you think it will take to use up the current capacity licenses on the CCAP that's already been deployed? And is there any change in the long-term growth rate? I think there was a target of low to mid-single-digit growth for that business when it was part of ARRIS. But again, as you transition from hardware scale-out to potentially more capacity licenses, so are there any ramifications, potentially lower longer-term growth in that segment?

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Bruce W. McClelland, CommScope Holding Company, Inc. - Executive VP & COO [48]

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Yes. Good question. It's a little difficult to answer specifically. As you know from our business last year we kind of surprised every quarter with the robustness around the capacity shipments. And clearly with the plan to try and steady the networks this year, the strategy is going to be to spend less on adding capacity and let the natural growth in traffic use that bandwidth up. And then again, I think we'll get back to a bit of the normal cycle in the context of the larger network topology changes over the next few years to move to more distributed access network and continue to drive fiber deeper.

What we've heard from our customers is that the growth in bandwidth and utilizations been increasing over the last 6 months. Maybe it slowed a little last year, but it's actually increased again. And just every day, you see new IP streaming services being launched. Big focus around the new Disney service. And so I mean all of those things start to really eat up the bandwidth in the network. And again, you can only wait so long. You've got to invest in it or you won't to have a competitive offering.

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Operator [49]

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And our last question comes from Steven Fox with Cross Research.

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Steven Bryant Fox, Cross Research LLC - MD [50]

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I'll keep it kind of brief. Just 2 questions real quick. On the cost savings, I understand that you're fine with the absolute dollar target. So I was just curious, in terms of the slope of the savings, when you realize it for year 1 and all the way through year 3, could you give us a sense of if it's changed. And if not, can you just remind us on how those savings come out roughly? And then as a follow-up, just on the broadband from a big picture standpoint, obviously, there's been times when you guys have been surprised, both sides, positively and negative on spending on broadband. And I'm just curious, how this looks different to the prior negative surprises if there are any differences?

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [51]

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Okay. Steve, in the cost savings, we're ahead of we're we thought we would be at this time. We'd had a good jump on day 1 as we planned prior to closing just some of the things we're doing. What we said is it would be $60 million realized in year 1, $65 million in year 2 and then $30 million in year -- $25 million in year 3. Our expectation is to outperform them as we have in the past. But I think our start is good and I think that on track to outperform in year 1.

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Alexander W. Pease, CommScope Holding Company, Inc. - Executive VP & CFO [52]

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Those numbers that Eddie quoted are in-year numbers. So they're not exit run rate numbers.

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [53]

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Right.

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Bruce W. McClelland, CommScope Holding Company, Inc. - Executive VP & COO [54]

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Yes. And perhaps on the question on the surprise, I think kind of going back to what Alex said a little earlier, right, the diversification that we now have allows us to kind of work through the surprises to some extent. And what we're seeing is a softer start on the cable MSO. The mobile space and the enterprise space look stronger for us this year. And it's a part of the value of the combination here and the robustness in the portfolio.

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Operator [55]

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And this concludes our Q&A session. I would like to turn the call back over to CEO, Eddie Edwards, for closing remarks.

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Marvin S. Edwards, CommScope Holding Company, Inc. - President, CEO & Director [56]

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Okay. Thank you. In closing, we're excited to have closed the transformational acquisition of ARRIS that will deliver a compelling value to all the stakeholder. While ARRIS' first quarter results were impacted by greater-than-anticipated pullback in cable MSO provider spend, we remain confident both in strategic and financial benefits of the combination. We expect these benefits to accelerate as we integrate ARRIS into the CommScope organization and as we become a stronger united team. We thank you for your ongoing interest and support in CommScope, and we'll see you next quarter.

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Operator [57]

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