CommScope Holding Company Inc (COMM) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Commscope fourth quarter 2003 earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time if you have a question, please press the star then the number one on your telephone. If you would like to withdraw your question, press the pound key on your telephone. As a reminder this conference is being recorded Thursday, February 19, 2004. I would now like to turn the conference over to Phil Armstrong, VP of Investor Relations. Go ahead, sir.

Thank you. Good afternoon and thank you for joining us on this call. Frank Drendel, CommScope's Chairman and Chief Executive Officer, Brian Garrett, CommScope's President and COO and Jearld Leonhardt, CommScope's CFO join me on the call. During this call, we may make forward-looking statements regarding CommScope, our new connectivity solutions business and OFS BrightWaves market and financial position, plans and outlook that are based on information currently available to managements beliefs and a number of assumptions concerning future events.

Forward-looking statements are not a guarantee of performance and are subject to a number of certainties and other factors which could cause the actual results to differ materially from those currently expected. For a more detailed description of factors that could cause such a difference, please see the press release we issued today and Commscope's filings with the Securities and Exchange Commission.

In providing the forward-looking statements the company does not intend and is not undertaking any duty or obligation to update these statements as a result of new information, future events or otherwise. After Jearld Leonhardt reviews fourth quarter results, Frank Drendel will make a few comments and then we will open it up for questions. Jearld?

Thank you, Bill. Today Commscope reported sales of $150 million and a net loss of $1 million or two cents per share for the fourth quarter, which was prior to the acquisition of the connectivity solutions business fo Avaya. The net loss included after tax equity and losses of BrightWave of eight cents per share related to Commscope's minority interest in this venture. In comparison to the fourth quarter of 2002 the company incurred a net loss of $4 million, or six cents per share, which included eight cents per share related to equity in losses of OFS BrightWave.

Commscope sales for fourth quarter 2003 were $154 million, compared to $136 million in the year ago quarter and $149 million in the preceding quarter. Sales rose year-over-year in all major product groups with particular strength in wireless and enterprise sales. Orders booked in the fourth quarter of 2003 were $149 million, compared to $133 million in the year ago quarter. The fourth quarter book-to-bill ratio was slightly less than one.

Worldwide broadband video sales rose 3% year-over-year and sequentially to $122 million primarily due to stronger international sales. International sales increased to $32 million, up 20% sequentially and up 25% year-over-year. International orders were $31 million and worldwide broadband and video orders for the quarter were $117 million. Domestic sales of broadband video products were relatively stable in the quarter excluding the sales of fiber-optic cable.

Sales to Comcast represented 17% of total company sales on the quarter. While we do not expect rapid recovery in the international market, we are cautiously optimistic because the global business environment appears to be improving. At the same time, we face increased pricing pressure for coaxial cable as a result of ongoing competitive pressures. We also expect ongoing pricing pressure and weak demand industry-wide for fiber-optic cable products for broadband applications. In contrast, enterprise LAN sales increased year-over-year primarily as a result of higher fiber-optic cable and apparatus sales and improved project business.

We are pleased with our LAN sales of $22 million for the quarter which rose 57% year-over-year from the depressed levels last year. LAN orders for the quarter were $23 million. SystiMax solutions, now a Commscope company, is the recognized global leader in the enterprise connectivity market. This addition, when combined with Commscope's strong capability in LAN cable including U.T.P., fiber and other network cable should enhance the reach of both organizations.

Enterprise solutions business is clearly now core to CommScope. We believe the combination produces a platform to develop exciting synergies for revenue enhancement as well as operational efficiencies. Our customers and channel partners have already given us very positive feedback about this combination. We look forward to reporting on the progress of our new enterprise solutions business in the future.

Wireless and other telecomm sales rose to $10 million for the quarter, up 44% sequentially and up 151% year-over-year. We believe that Commscope continues to make steady progress communicating the sale reach value proposition to customers like Nextel, Sprint, Singular and AT&T. We have also made progress internationally with new contracts in both Europe and Asia. While we expect project business to be somewhat volatile, we remain optimistic about our long-term global opportunities.

Gross margin for the fourth quarter was 20.2% compared to 19.4% in the year ago quarter and 20.6% in the preceding quarter. Improved year-over-year performance was primarily due to higher sales volume somewhat offset by lower sales prices and increased raw material costs. Selling, general and administrative expense was $23 million in the fourth quarter and includes about $600,000 related to the then-pending acquisition of the connectivity solutions business. SG&A expense in the fourth quarter 2002 was about $22 million.

R&D expense was approximately $1.5 million or roughly 1% of sales in the fourth quarter. Our equity method investee, OFS BrightWave, continues to face difficult global business conditions. For the quarter, OFS BrightWave had revenues of $27 million, a negative gross profit of $31 million and a net loss of $40 million. The net loss included charges of $16 million primarily related to ongoing restructuring activities which were mainly recorded in cost of goods sold.

Commscope recorded after-tax charges of $5 million, or eight cents per share in the fourth quarter for the equity and losses of OFS BrightWave related to Commscope's minority investment in this venture. Purakawa has recently stated that it believes it is in the last stages of restructuring the OFS business. Among other actions OFS plans to move certain cable production activities from the Norcross, Georgia facility to the Carrolton, Georgia facility in the next few months.

While CommScope believes that the OFS restructuring actions are appropriate, they could reduce Commscope's overall ownership interest in OFS BrightWave in this venture. However, such restructuring activity does not affect Commscope's contractual right to sell its ownership interest in OFS Brightwave to Purakawa in 2006 for a cash payment equal to its original investment. Commscope expects ongoing pricing pressure and weak global demand for fiber-optic cable products through 2004.

While we believe that OFS BrightWave has reduced its cost structure through restructuring, we continue to expect that OFS BrightWave to incur losses through 2004. Turning to Commscope's cash flow and balance sheet issues for the quarter. Net accounts receivable were $69 million, inventories were $33 million, and depreciation and amortization was $9 million.

Overall net cash provided by operating activities was $36 million for the quarter, which included receipt of about $13 million related to the assignment of Commscope's previously written-off trade claims against Aldelphia and its affiliates to a third firm. Capital spending was about $1 million in the quarter. For calendar year 2003, depreciation and amortization expense was $34 million, cash flow from operations was $91 million and capital expenditures were $5 million.

We ended the year with $206 million in cash and cash equivalent, up 72% from 2002. Prior to our acquisition of connectivity solutions, total long-term debt outstanding at December 31 was $183 million, or about 28% of our book capital structure. For 2004, we expect total Capex for Commscope including Capex for our new businesses to be approximately $30 million.

To put this in perspective, the connectivity solutions [inaudible] depreciation and amortization expenses prior to any pro forma purchase accounting adjustments was about $30 million for the 12 months ended September 30, 2003, and Commscope's depreciation and amortization expense was about $34 million for the same period. Now I'd like to spend a few moments talking about our recent acquisition.

Effective January 1, or January 31, 2004, Commscope acquired substantially all the assets and assumed specific liabilities of the connectivity solutions business of Avaya except for certain international operations that are expected to close later this yea. We believe this complimentary addition is an excellent strategic fit and a logical step in the continued growth and development of our last mile strategy. We expect to create significant synergies and new long-term opportunities as we build upon SystiMax solutions, our new enterprise connectivity company, and in CommScope Carrier Solutions, our new business group that provides cabinets, cables and apparatus to telecom service providers. Total purchase price for the acquisition consisted of $250 million in cash subject to post closing adjustments and approximately $1.8 million shares in CommScope common stock.

CommScope assumed current liabilities of the connectivity solutions business and up to $65 million of other specified liabilities primarily related to employee benefits. With regards to CommScope shares held by Avaya, we have received a demand registration and will work with Avaya to fulfill our obligations under the registration rights agreement. Cash portion of the purchase price consisted of $150 million from CommScope's existing cash balances and $100 million for borrowing under a new five-year $185 million senior secured credit facility.

A new credit facility which replaces by amendment CommScope's previous facility, is comprised of a $75 million term loan and a $110 million revolving credit facility. We intend to file an amended Form 8(K) by April 15, 2004, containing pro forma financial information reflecting the effect of the acquisition of CommScope's 2003 financial statements.

In the interim, we have provided certain information based on the connectivity business under Avaya that is unaudited and prior to any expected pro forma adjustments to reflect the acquisition. For this and other reasons, this information may not be indicative of the results to be expected from the business after the acquisition. For the 12 months ended September 30, 2003, connectivity solutions had sales of $542 million. Gross margin of approximately 26.4% of sales; SG&A expense of approximately 19.5% of sales; and R&D expense of approximately 5.4% of sales.

These results include approximately $48 million of corporate overhead allocated by Avaya to the connectivity solutions business primarily in SG&A. They do not reflect CommScope's expected overhead allocations, incremental one-time startup and transition costs and other potential pro forma or purchase accounting adjustments. These purchase accounting adjustments may be significant and are expected to affect results most significantly in the first half of 2004.

In contrast, we previously announced, we believe, as we previously announced, we believe that we can provide corporate services for $20 million less than Avaya's historical overhead allocation. We also believe we can improve working capital performance by reducing inventory. In order to achieve those objective, we expect to incur up to $25 million in expenses associated with startup, transition and other costs. We expect the bulk of these transition charges to occur during the first two quarters of 2004.

Regarding sales outlook, we expect first quarter 2004 sales in the $225 million to $240 million range. First quarter forecast reflects modest year-over-year growth for our historical business and two months worth of revenue or approximately $95 to $100 million from our recent acquisitions of the connectivity solutions business. While we do expect sales growth in the first quarter, we anticipate lower gross margin as a result of higher material costs and increasing pricing pressure for certain broadband products.

For example, prices of copper and polymers and have increased substantially over the past 12 months. As a result, CommScope SystiMax solutions increased prices for certain enterprise products by 3% to 8% during the first quarter. CommScope's enterprise price increase was effective February 10 while the SystiMax solutions price increase will be effective March 1.

An additional price increase of up to 10% for floor polymers base products will be effective mid March due to the significant increase in the cost of floor polymers. We do not plan to provide specific margin guidance at this time primarily due to all the transition activities in cost. However, in our next earnings release, we do plan to highlight special charges so that investors will better understand our business. Thank you and now Frank Drendel has some comments.

Thank you, Jearld. Welcome first of all, to all our new CommScope family members. As of this afternoon, we have approximately 4,448 employees in our company and we welcome all new members. Over the last two weeks, I have been traveling with Brian Garrett visiting all the key locations and key customers and in my 30 years of being in this business I have never seen a reception of both the combination of these two companies and the reception we had on the customer base and our channel partners. I know many of the channel partners are on this call and I want to thank you for the warm reception, especially all the projections that you have been giving us and it looks like we are beginning to see finally some recovery in this market.

This merger partnership with Avaya ACS puts in place one of the legs for our continuing belief that all the growth in telecommunications is in the last mile. We come to this party now the largest pat portfolio of any supplier in this business. The acquisition brought us 1,400 patents. Combined with the position we have with fiber and coaxial cable in the world we should have most of the opportunities in the last mile covered. So I believe that this is the beginning of a long transition to return the opportunity in growth in the last mile opportunity and after that I will open it up for questions.

Operator, we'll take questions now.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the star 1 on your telephone. If your question has been answered and you like to withdraw your registration, please press the pound. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. Our first question comes from the line of Steve Fox of Merrill Lynch.

Hi, this is Celeste Lorinzano for Steve fox. Given the price increases you've instituted on the networking cable products I was wondering if you plan on revisiting your pricing policy in regards to coax cable?

I would love to revisit the pricing policy of coaxial cable. But I would be lying if I thought you could execute a price increase given to the competitive nature of the market. Everyone jkeeps pointing to CommScope to raise prices while our competitors are lowering prices trying to take channel position in the broadband business. We have effectively maintained...the majority of our big customers are staying with us but we have seen pricing pressure around the world in those products. We will have to continue to improve our cost of goods sold and growing margins through that process until we see a little bit more realistic demand for the coax product. Now correctly so the SystiMax position and the LAN position that CommScope has in these products allowed us to do these price increases and they have been to date relatively well-received. Working through with our channel partners.

This is Brian Garrett. I may add one more comment to that, your question broadly about coaxial, there is a reasonably large amount of coaxial that goes into nonbroadband applications and particularly in plenem areas, we are going to receive price recovery or price increases in those segments and other coaxial markets outside of broadband.

Okay. If you can talk a little about the progression of the $20 million in cost savings actions and how it's going to roll out over the next few quarters?

All right. Well, we expect that we will improve right away on the corporate cost allocation, if you will, that is the genesis of that $20 million. As we stated, Avalay allocated $48 million of primarily SG&A costs to this business and we think the incremental cost to CommScope is going to be significantly less than that to replace that and provide services. So it's essentially in place from day one and we expect to, in fact we will probably have to increase some cost. All costs that we need to put in place aren't yet in place. So there might be some lag actually in us putting our costs in place. Does that answer your question?

Yes. I have one last quick question. I was wondering if you could discuss how you plan to leverage the two brand names of both CommScope and SystiMax in your distribution channel?

I will let Brian answer that because he executed the strategy since day one. They have an outstanding plan to continue, as you noticed, we continue to support and continue to use the SystiMax name because it is so well regarded in the market. Brian, you might want to go through some of our branding strategies.

First of all, Frank, you hit the key point and that is that in terms of assets that were purchased probably the brand SystiMax is one of the largest and we are going to great lengths to protect that brand. The strategy as it relates to North America is that there will be two separate sales organizations.

We'll have essentially the same sales organization that the SystiMax customers have faced for years in place and ongoing representing that product. And then on essentially a competing basis in terms of that market segment the traditional CommScope sales organization will remain in place. What we have is a SystiMax product and offering and sales team that's going to focus on the high value, high performance segment of the market, and then we'll have the traditional CommScope sales organization and 14 ends products focusing on really the mid tier, the heart of the market. The strategy as they relate to the rest of the world, we have not clearly defined or made any public statements about.

Okay. Great. Thanks.

Your next question comes from the line of Daryl Armstrong, Smith Barney.

This is Nigel Frankson calling in for Darryl Armstrong. Just one quick question, I was wondering, we've been hearing from other companies that there's been somewhat of a sales slowdown in the enterprise space in the latter half of January and I was wondering if you are seeing any of that in the ACS business?

I will repeat it for the audience. It's breaking up a little bit. You've heard or seen from other suppliers in the enterprise space a slow down in the first part of January.

In the latter half.

Latter half? Let me say it broadly, Nigel, we talked about this in the past. Fourth quarter for most people is a very strong quarter because of year-end sales incentives in the distribution channels. The flip for that is the situation for the traditional CommScope product end of that segment because of the nature of our incentives.

So it's a strong quarter for SystiMax and most others fourth quarter is a weaker quarter for CommScope product. Coming into the first quarter, I really don't want, let me say this, coming into the first quarter typically for those who have strong fourth quarter it would be a weaker quarter, if you follow me, because inventories and channel were building.

For CommScope traditionally the first quarter is the stronger quarter because inventories were actually dropping in the fourth quarter, channel inventories. So you have a mix of a proposition. I will say that in the quarter I think we are pleased with what's happening in both segments, in both, the traditional CommScope offering in the LAN and the SystiMax product line. I think they are both going to have attractive first quarters.

Thank you.

Yes, sir.

Our next question comes from the line of Jeff Beach with Stifel, Nicolaus and Company.

Yes, good morning, or good afternoon. A couple of things, I'd like to focus a little bit on the rising price of copper and other materials a little bit. I thought the fourth quarter gross holding above 20% was pretty impressive and I wondered if you would just talk a little bit, copper was up a good bit, plastics I think were still going up and if there were any offsets, any hedging, anything you did to put in what I thought was a pretty good performance and then come over here to this first quarter where particularly in the last week we've seen very sharp spike in copper and other materials are running and talk about maybe the outlook there.

You have the industry putting in price increases but if copper holds up here, it's up as much as it was up just in the last week in the entire fourth quarter and is that going to necessitate another quick round of price increases in enterprise and other cable products here in the next few weeks?

It's obviously a very complete question. We will take it one piece at a time. Clearly copper has jumped all over the place of late and Jearld will go through the hedging piece of that. But we will continue where we have the leadership position and the reception that we have in the market to raise prices to reflect the cost of materials sold and hopefully get some margin through that.

We do have problems hedging but our positions are usually relatively short so any sustained increase in copper price will be felt relatively quickly. But in a months period of time we have some flexibility.

Jeff, let me take another cut at it. The one advantage that we have achieved by putting these two companies together, we are the largest buyer of a lot of the materials that go into these products, giving us tremendous leverage with our suppliers. So our view is part of the synergies that we looked forward to all along will be having long-term supply chain arrangements that help mitigate some of those movements. Copper, of course, as a commodity is a commodity but other once you are look for with long-term arrangements, particularly with foreign currency.

Just to help us a little, two other follow-ups, can you give us an idea how much copper is as a percent of cost of goods just on the coaxial broadband?

Coaxial broadband is a very small percentage you don't have to lose any sleep on that one, especially given the integration of our copper clad aluminum facilities. I would imagine copper can't be more than six or 7%. Aluminum is by far the determinant metal and it should be somewhat different in SystiMax and LAN products, but still, there your covering material is by far the greatest portion of that and, of course, fiber, we have a great relationship with our fiber suppliers, although that market is still very difficult.

And one last, SG&A jumped about $2 million in the quarter, you mentioned $600,000. Were there any other one-time items outside of the acquisition costs or anything else that boosted SG&A in the fourth quarter?

Yeah, I think our increase on a year-over-year basis was about $1 million total, Jeff, maybe you're talking sequentially versus year-over-year.

There were some one time expenses, Jeff, that flow through that line item for legal and some of the work that was in process on the transaction.

All right. Thanks.

Yes.

Your next question comes from Daniel Ernst with Rodman and Renshaw.

Two questions. On the ACS business can you talk about revenue distribution, what percentage comes from contractual maintenance-type assignments versus project revenue and do you have any 10% customers in that ACS business on a stand-alone basis? And then second question on the broadband business, we're seeing the video war between cable and satellite heating up. Everyone is trying to roll out more high definition channels. Cable is still wrestling with VOD, when do you think that might flow down to demands for more infrastructure cable in the higher margin business, or do these guys have enough capacity to work through using new encoding systems and [inaudible] or splitting nodes, et cetera, do they have a lot of capacity they can work with or are they going, kind of kidding themselves about having to work on infrastructure soon?

We will start at the top and I'll let Brian take the ACS one, but I'll take the coax one.

The drivers for you might suspect Jeff for ACS business is clearly project business. The SystiMax, it is a day-to-day, month to month, generation of new projects. The other elements of the business that you are probably aware of includes cabinets , which I would characterize pretty much the same. Their business is driven by the particular DSL or wireless projects that we give an operator, and ditto for central office business. So long winded answer to your question, it is largely project driven business. As far as a 10% customer, our channel partner, Annexter Clearly, would be a plus 10 percent, customer of ours.

A follow up to this, what percent of the ACS businesses, Tellco versus Enterprise?

Enterprise has got to be 80%. Enterprise is 80% and cabinets and central office are each roughly ten for the past 12 months.

Great. Thank you.

On the broadband question, clearly the HDTV is finally arriving in full force. More broadcasters are transmitting with it and there is getting to be some degree of channel crunch taking place and capacity crunch taking place in the cable industry. I still think the cable industry has fairly good headroom with taking fiber deeper and expanding some of their nodes and then getting more capacity that way.

So I don't see that meaning necessary lift. We are tracking distribution cable on a higher margin. What I do see though is for the first time I believe you will begin to see some honest rebuild action in Europe. Malone has put together most of those properties over there, Liberty and some of those other partners so you will begin to see a rebuild of those projects because that plant is so old.

On the European question, we've been looking for that ever since this transaction started to happen and NTL restructured Telwest restructured and finally the German plant got sold and you guys got in there but are you engaged there or?

We are seeing a pickup in shipments. We are seeing a pick up in the interest in design of some of the things that are going on and I have talked about this about every quarter we've given reports. It is kind of the promised land that ever comes but if they are ever going to become competitive they are going to have an upgraded facility. I feel more encouraged this year than I have in a long time time.

Thank you, gentlemen.

Your next question comes from Larry Harris with Oppenheimer.

Yes, thank you. Just going through the balance sheet of the Avaya connectivity systems business both for September 30, December 31, is published in the 10(K) and the 10(Q) for Avaya. It looks to be that they have about $95 million in inventory that if one were to apply the traditional CommScope turnover, the inventories are perhaps higher than if they were part of CommScope. What drives that higher level of inventory and would it be possible to bring it down, say, within the next year?

I read your report. You did you more digging on that thing. Yes, part of our strategy is to get a better inventory terms through our channel partners and also remember we have a uniqueness of CommScope has as part of its distribution strategy [inaudible] to all of those other things. We would love to get to the same level as CommScope. We can't certainly promist that the first year, but that is one of our strategies is to get those terms closer to the terms that we have.

Those two shoulder businesses in Avaya. ACS has little bit slower turn but Brian's team has been working on that and I think given the strong reception, I can't overestimate that, the strong reception we had from our channel partners if that's a possibility using all our warehouses and getting it closer to the customer.

So it is a possibility within the next year or 18 months to bring those inventories down?

It is a big opportunity and well recognized, Larry. I tell you we will focus on it as we focused on our own businesses historically.

Absolutely. Are there any thoughts in terms of reassigning or reallocating production, perhaps moving some of the CommScope enterprise production to Omaha or vice versa, finding the best location, could we see some transfers of production of various product lines this year?

We have just generically, let me say that there's a tradition within CommScope quarter to quarter, we'll move production and capacity where we can produce it at the lowest cost. And when you look at now there's, what, we've got three more plants in the world here that come into that formula. And we've been very open and well supported by the many traditional ACS management to understand that we'll move capacity or production into capacity where we can produce it at the lowest cost. And I would say all the businesses; I mean there are advantages in all of these facilities. There's good attributes in every facility that we acquired.

I understand that. Charter today indicated that they expect to spend about $850, $950 million in Capex in 2004. Are you seeing signs of higher spending at Alephia or Charter?

Clearly Adelphia has picked up. I think potentially that bankruptcy will be cleared up by the end of the year and we have seen, that one's been a good pickup for us.. Charter has been up substantially this last quarter and it was up about ten to 15%.

I see. You think Comcast might be down this year?

I wouldn't be surprised if Comcast was down this year. I think that they are farther along and they've done a great job in integrating the AT&T transaction and they've done a great job in bringing those plants up to speed but again, I've always been a believer that it doesn't go to zero.

I think you will see that we are probably in a sustainable period of Commscope's business, the outside for Commscope's broadband coaxial product is exactly what Brian explained to you, we now have a series of channel partners around the world that are substantial and they are finding coaxial opportunities all over that we have never seen that are unique but they do use the same products we produce. They're for wired radio networks, for security networks and so the SystiMax sales force has picked up on carrying the cost of coax products and have found several attractive opportunities for us.

Finally on the raw materials front I believe at least with respect to the Legacy CommScope products and I know the mix can change here with the acquisition of Avaya, but about 75% of your cost of goods sold as I recall were in the raw materials category. Is it now substantially higher than 75?

I would say, I think that that would be a good working number, if you are looking at just the cost of material, cost of goods sold piece on the cost side.

All right. Thank you.

Your next question comes from Alan Metroney with Copper Beach Capital.

Hi. Several questions. What's a combined good tax rate to use going forward?

Alan, that's one of the things that we'll be sorting out but we think that there isn't a significant change expected in our current rates. Maybe if you wanted to be conservative you might tweak it up a hair but, a point or so, but we don't expect much change.

I was actually thinking of tweaking it down a point or so given the European exposure. Why would it go up?

It's a fair question but, again, the analysis is incomplete and I don't have a complete answer for you today.

Do you have any reason to think it's going to be up a point or so as opposed to down a point or so.

It could go either way. We are still in the process of understanding what credits and everything we can work through on that.

Okay. On the Capex side you talked about $30 million this coming year for the combined company.

That's right.

Can you give us a sense as to weather that's going to be back end or front end loaded to give us some of the benefits.

We usually trend, but our Capex trends toward the latter end but not a major difference. Most of it is in projects that ACS had underway that they working on. Most of these projects are for improvmenty in productivity and cost reduction and we have plenty of capacity. So they're all being worked toward better improving the back end loading part of this, so,and again we are, that's for all the companies.

And also you gave us ACS numbers for the connectivity business for the trailing twelve-month but could you tell us what it was in the fourth quarter revenues and gross margins?

In the calendar fourth quarter?

Calendar fourth quarter.

That's information that we weren't prepared to provide today, Alan. Avaya didn't release that information with their...on a gross margin basis with their segment information.

I have the revenue number, it was 138.

138. Okay.

They had that booked as a discontinued operation so they weren't required.

Here's what I'm asking. I'm hearing your numbers. You are saying in essence gross margins are going to come down sequentially. That is not for the combined company, correct? Because you are not going to have gross margin lower than 20.2%.

Well, the mix would indicate that that's, that your math would hold up.

Okay. But I'm trying to understand, ACS had higher gross margin in the fourth quarter than they had the rest of the year. Is that correct?

In the fourth quarter.

Of calendar fourth quarter.

Not their fourth quarter, not the December quarter, that's information again we haven't provided and don't have public information available.

Okay. Lastly maybe Frank, can you give us your sense of CET and Belden announced the merger.

I think, I don't comment on other people's businesses but I think you are seeing the trend that consolidation has started in this industry and I think it's good. I think all of these consolidations bring presence to the customer base and the channel base and pricing disciplines and technology discipline. For us, we've got the lead dog there is no question about it and we will continue to do that.

The one thing we are telling the public and our shareholders and our stakeholders that we are increasing the R&D investment in SystiMax to improve our lead and take additional opportunities in technology and market share. I think there will be some more. I think there will be some more combinations underneath this.

Are you guys still interested in being a consolidator from here?

Absolutely. Absolutely. If the right opportunity comes along we'll take a hard look at it.

Did I hear your answer correctly to Celeste regarding that $48 million of corporate overhead that was allegated by Avaya. Do you think they one, that's going to be reduced significantly?

I'm glad you did ask that question. I thought about that as well. There were two numbers mentioned and, in our materials, $20 million savings that we expect to get on corporate allocations plus a $25 million one-time cost related to transition and start up costs and those kind of things. So I understood the question just to be about the $20 million issue so, yeah, that portion we would get right away but we will incur significant one time transition and start up costs to get to that rate and to separate or finish the separation from Avaya.

So the $20 million in savings that you talked about which you expect to improve results that you expect to get day one?

Those are G&A, just allocated. Understand there's no human cost there. They are just allocation that we don't feel we need to allocate to run the business.

And you won't need to boost your own G&A to help support.

No, we will be increasing our costs but, again, not by $48 million.

Okay.

Is our point.

And the $25 million charge, first-year cost, is this a charge you are going to put in your next quarter that you quantify and can draw down from the reserve or is it something that's going to be expensed and you are going to let us know what's in there? Are there costs enough that you can quantify that you can put it in a charge?

Alan, we expect to detail the significant one-time costs that we incur as we report our results and we don't expect they will be based on a reserve. But as we incur them.

Okay. Thank you.

Your next question comes from the line of Bernie Mahen with Morgan Stanley.

Hi, good evening. I just have a quick question for you on the cash flow. You may have said it in the call but what was the cash from operation in the quarter and then what kind of I guess guidance can you give us for all of 2004? What do you think you can generate in cash from operations? Thanks.

Yeah, Bernie, cash from operations as I recall was about from operating activities for the quarter was about $36 million. And at this point we are not providing any guidance -- included in that $36 million was $12.5 million from the assignment of the Adelphia written off accounts receivable.

I guess not particulary for guidance, but do you think you will generate cash in 2004 or do you think you are going to use cash?

If you are talking about our CommScope business, historically our legacy CommScope business we would expect to be generating cash. Again we talked about significant one-time charges to complete the transition, those are essentially all cash charges.

So and we talked about $30 million of capital spending this year. So we think the business is long-term, obviously a positive cash generating business, has that capability to be and that's our expectation but we've got to work through the initial issues to get there. We've talked today about the opportunity presented in inventories, for instance, by reducing our investment there and we think that will offset some of these additional.

Understand we only actually owned the business for three weeks so we are working through the budgets with them and consolidating the numbers. But clearly historically these are both very strong cash flow businesses.

Okay. Great. Thanks.

Operator we will take one more question.

Your next question comes from the line of John Lynn with Pilot Roth Capital.

Hi, guys. Can you give us some color in terms of the OFS BrightWave and while you are being diluted on now and can I take that as you guys are planning on doing [inaudible] upside in the business?

Nothing is transparent yet but let's understand that there is just preliminary discussions of an opportunity for merging facilities that would lower costs get them more competitive. You may or may not remember but Purakawa was a participant in the fiber-optic business before the OFS transaction in the United States and they had a facility, a very elaborate and very cost-effective and modern facility in Georgia, not too far from the Atlanta facility. So the opportunity is to look at further consolidations.

As we stated before and I will restate for the audience and our shareholders, we will not put any more cash into that business. So for us it was to maintain a cash consideration or an equity dilution. So we elected to let them drive the business to a profitable state.

The one thing I was confused about maybe you can clarify for me is, I know the first call consensus for the first quarter sales is much higher than the guidance you just gave. Is that because the [inaudible] have a full three-month contribution from ACS?

Yea, understand, sir, we didn't...we only have the two months of revenue in the quarter. We didn't get the January. We closed on January 30 or 31, 30. So that's that the.

And lastly can you provide some more guidance on R&D? I noticed that the two businesses have two very different R&D levels.

Yes, they do.

Going forward do you anticipate closer to what ACS was or?

I think the traditional CommScope business will maintain one and one-half percent for sales R&D annualized budgets. Fortunately, we get all of the R&D SystiMax is doing for us because we partnered with them.

We get the coverage and the 1,700 pounds so if anything we get a lot more bang for our buck. What we are doing, though, is we are increasing some of the programs that fit our goal to be number one in the world in the last mile so we are increasing R&D budget by several million dollars in the business that SystiMax business and the other businesses to accelerate some of the very outstanding products in the pipeline.

I guess my last question is if you can elaborate a little bit on the European opportunities, I guess specifically Germany and some of the other cable companies.

I mean I hate to make any of these promises, because the other end of the story is its next year, it's next year and if you follow this as do, most of the restructuring has been accomplished in the debts and the bonds and the restructuring in all of those European companies and basically driven and it's my belief that they ended up making the acquisition so attractive on a per subscriber basis that if you are going to have a business you almost have to have a modern telecommunications network in order to have a revenue profile that would allow you to have a return in any of those European businesses because UBS is penetrating so deeply. You almost have to have a telephone DSL, high-speed, HSD, deep fiber-optic, HFC model to make it work. We do believe we are beginning to see some of those activities take place.

Thanks, guys.

With that I want to again thank all of the new CommScope family members and thank all of you for attending the call and we look forward to a very exciting year.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line #