CommScope Holding Company Inc (COMM) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CommScope's third quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Thursday, October 26, 2006.

I would like to turn the call over to Phil Armstrong, Vice President of Investor Relations.

Good afternoon. Thank you for joining us on this call. Frank Drendel, Commscope's Chairman and Chief Executive Officer, Brian Garrett, Commscope's President and Chief Operating Officer, and Jearld Leonhardt, Commscope's Chief Financial Officer, join me on the call.

Through this conference call, we may make forward-looking statements regarding our financial position, plans, and outlook that are based on information currently available to management, management's beliefs and a number of assumptions concerning future events. Forward-looking statements are not a guarantee of performance, and are subject to a number of uncertainties and other factors, which could cause the actual results to differ materially from those currently expected.

For a more detailed description of factors that could cause such a difference, please see the press release we issued today in CommScope's filings with the Securities and Exchange Commission. In providing 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. Please note that all dollar figures and percentages are approximations.

Also please note that Commscope intends to host an Analyst Meeting at our Richardson, Texas facility near Dallas on Monday, December 4. We will provide detailed reviews of our enterprise and carrier business, and conduct research and development lab tours. Institutional investors should contact me or Mark Huber ich in Investor Relations at 828-431-2540 to register for this event. Please see the press release we issued today. After we review third quarter results, and Frank makes some closing comments, we'll open the lines for question.

Jearld?

Thank you Phil. Today CommScope announced record third quarter results for the period ended September 30th, 2006. The Company reported record third quarter sales of $466 million, and net income of $44 million, or $0.61 per diluted share. The reported net income includes after-tax charges of $2 million related to restructuring costs. Excluding these special items, adjusted earnings were $46 million, or $0.64 per share.

Sales for the third quarter of 2006 increased 35% year-over-year, primarily driven by increased demand and price increases, in response to higher raw material costs. Enterprise segment sale rose 42% year-over-year to $238 million. Sales rose across essentially all geographic regions with particular strength in the European region.

The strong third quarter growth is primarily due to unusually strong orders received during the second quarter, and price increases resulting from increased commodity costs. CommScope was also essentially completed the previously announced global manufacturing initiatives for this segment, which contributed to the increased production capacity during the third quarter.

We believe the channel inventories have been restored to more normal levels. Strong shipments in the third quarter, additional production capacity, their reduced lead times and the normal fourth quarter seasonal slowdown, have all contributed to an enterprise book to bill ratio of 0.78 times for the quarter.

We expect sales to decline sequentially at this time of year as they normally do. Despite this we remain very positive about our overall prospects in the enterprise market, due to the impact of two global trends. First, new bandwidth intensive applications, such as video streaming, and the rapid growth in network traffic have combined to put greater demand on many local area networks. As a result, companies are upgrading their IT infrastructure.

Second, businesses are moving towards consolidated data centers for better control, lower costs, and improved security. We believe that Chief Information Officers and Network Administrators understand that high performance connectivity can improve network performance, while cutting operational maintenance and down time costs associated with their networks. We believe that our ability to offer and globally support a full portfolio of fiber optic, twisted pair, and wireless solutions, as well as realtime infrastructure management, gives us a competitive advantage.

Broadband segment sales rose to 144 million, up 18% year-over-year as a result of higher prices for coaxial cable products, increased global sales volumes, and a product line acquisition announced earlier this year. We believe that we have successfully integrated the MC squared product line into our product portfolio.

Overall, Broadband sales continue to be positively affected by competition between cable television operators and telephone companies, as they compete for retail customers with their quadruple play of services. The broadband book to bill ratio was approximately 0.95 times for the quarter. Carrier sales rose 53% year-over-year to $85 million, due to substantially increased demand for integrated cabinet solution products. ICS sales increased as the domestic telephone companies continued investing in their infrastructure to support video and high-speed data services.

While we remain bullish about the outlook for our Carrier segment, we do not expect to duplicate the significant third quarter sales growth performance again in the fourth quarter. We expect modest fourth quarter spending by our customers, as they work through major acquisitions, refined technologies, and manage year end budgets. As we have stated a number of times, we expect quarterly volatility in this segment, but also expect strong long-term growth. The Carrier book to bill ratio in the third quarter was approximately 0.83 times.

Total international sales rose 22% year-over-year to $137 million, and represents approximately 29% of the company overall sales. Orders overall booked in the third quarter of 2006 were 393 million, up 7% from the year ago quarter. Overall, the book to bill ratio for the quarter was 0.84 times.

Our gross margin for the third quarter rose to 30%, up more than 250 basis points year-over-year, and up more than 350 basis points sequentially. Gross margin improved sequentially primarily due to higher sales volume, and selling prices, favorable product mix, and the positive impact of the Company's global manufacturing initiatives.

Our Sales General & Administrative expense for the third quarter of 2006 was $63 million, or 14% of sales, compared to 51 million, or 15% of sales, in the year ago quarter. SG&A spending increased primarily due to higher compensation expense, and costs associated with the unsuccessful acquisition activities during the quarter that totaled $1.3 million pretax. SG&A spending in the year ago quarter reflected a special employee benefit adjustment of nearly $1 million pretax. SG&A declined as a percentage of sales primarily due to higher sales levels.

Research and development was $9 million for the quarter, or approximately 2% of sales. R&D spending increased year-over-year due to ongoing CommScope investment in new products and solutions, such as foil twisted pair solutions, new fiber solutions, and realtime infrastructure management software.

CommScope's third quarter 2006 results reflect pretax restructuring charges of $3 million, or 2 million after tax, primarily for equipment relocation costs associated with the Company's global manufacturing initiatives. The Company has essentially completed the enterprise portion of the initiatives. The Broadband portion of the initiatives is expected to be completed in the first quarter of 2007.

Overall, so far we have achieved roughly three-quarters of the savings we have projected for this major project. These initiatives have improved factory efficiency, lowered overhead, and should enhance customer service, not to mention contributing to higher gross margins and operating margins.

CommScope also recently announced that it's wholly owned subsidiary, Connectivity Solutions Manufacturing, had closed on the sale of real estate consisting of 70 acres, and a 580,000 square foot manufacturing building at the CSMI facility located in Omaha, Nebraska. The sales price for the land and building was approximately $11 million. The sale will be recorded in the fourth quarter of 2006.

Operating income for the third quarter of 2006 was $65 million, or 14% of sales. Excluding restructuring costs, operating income would have been 68 million, or 14.6% of sales. In the year ago quarter, operating income was $20 million, or 6% of sales. Excluding special items, operating income would have been 34 million, or 10% of sales for the year ago quarter.

Now I will turn to cash flow and balance sheet items. Net cash provided by operating activities in the third quarter was $35 million, up 22% year-over-year, and more than double the second quarter low. We achieved this performance with working capital metrics for accounts receivable and inventory turns, that were roughly equal with the second quarter levels. Typically, cash flow from operations is stronger in the second half of the year compared to the first half. We expect to generate good cash flow from operations again in the fourth quarter.

Total depreciation and amortization expense was $13 million, and included 3 million of intangibles amortization. Capital spending in the quarter was $8 million. June 30, 2006, long-term debt including the current maturities declined to $287 million, and was 29% of booked capital structure. CommScope ended the quarter with $334 million in cash, cash equivalents, and short-term investments.

In summary, we maintained price discipline, generated profitable growth, and delivered on our cost reduction commitments, which resulted in an outstanding quarter. Today we updated our fourth quarter 2006 financial guidance, and provided preliminary guidance for calendar year 2007.

As we look ahead to the seasonally slower fourth quarter of 2006, we expect revenue to be $370 million to $385 million, and operating margins to be 9 to 10% of sales excluding special items. We expect an effective tax rate of 30 to 34%, and we expect capital spending to be 5 to $8 million. Based on the fourth quarter 2006 guidance, sales for the calendar year 2006 for the full year, are expected to be approximately $1.6 to 1.62 billion, up 20% year-over-year. Operating margin for calendar year 2006 is estimated to be around 10.5% excluding special items.

For calendar year 2007, we believe revenue will be in the range of 1.7 to 1.75 billion, and operating margin will be 11.5% or better, excluding any special items. Our calendar year 2007 guidance assumes relatively constant raw material costs, modest volume growth, and a stable business environment. Other financial expectations for the calendar year '07 are expected effective tax rate of 30 to 34%. Depreciation amortization expense of 50 million, and capital spending in the 30 to $40 million range.

Overall it was a strong quarter, and we are bullish about our long-term prospects as a global leader in communications infrastructure solutions. We believe that the expanding demand for bandwidth is a positive long-term global trend. We see our customers actively investing in their communications networks, to support video data, voice and mobility, all of which we expect to drive our growth. We have industry leading cable and connectivity solutions. We have a strong track record of execution, and we believe that we have built a solid foundation for longer term earnings growth.

Now Frank has some additional comments.

Thank you, Jearld. Thank you all for joining us. I'd like to take a moment and thank all of our global employees for the outstanding job and workmanship they did in delivering these outstanding results. These are record sales and profits. I have never been more bullish on CommScope in the 30 years that we have been at this Company. We had an incredible effort put forth by all of our employees to ship that kind of volume out of these factories.

So I am very, very pleased and proud as our Board of Directors are of all the management and employees of the Company. I think we are so well positioned in the last mile, in all of the competitive efforts of it going forward to add bandwidth, we should look to a long-term future of providing that bandwidth.

And with that, Phil, we will open it up to questions.

Operator?

Thank you. Ladies and gentlemen, [OPERATOR INSTRUCTIONS] One moment, please, for the first question. Our first question comes from the line of Ittai Kidron from CIBC.

Hi, guys. Good quarter. Wanted to ask a little bit about your guidance for the next quarter. It seems a lower revenue number than what, at least I expected it looks like what Consensus Street has expected as well. You mentioned big orders that you had in the second quarter that have made for this big third quarter, but can you tell us, was there also did you see a pull from the fourth quarter into the third quarter that you think makes for a greater sequential decline?

I don't believe that's the case. I think we solved some extraordinary order entry in the second quarter. I think we talked about that in our last call that we felt the level was unusually high. We increased some capacity in the third quarter. We shipped to our channel partners, and order writes slowed down once the balance of supply/demand started to reach its equilibrium again. Order rates started to slow, and we are moving towards a slower time of the year, so I think we feel comfortable that our guidance is fairly consistent with what we've been saying about the fourth quarter for two quarters now, and so we believe that's certainly an achievable range of numbers, and looking forward to a strong performance year-over-year.

Can you talk a little bit about your gross margin? You did a very good job this quarter. The mix between the 3 units is roughly the same as it was in the June and March quarters. Can you tell us what within the groups, the mix of products within each of the groups that contributed to this high gross margin? Also from your guidance to the next quarter from your operating margin guidance for the next quarter implying, does that imply also a decline then back to the sort of second quarter gross margin level?

Ittai, Brian Garrett. A couple of things on the gross margin and operating income line. Obviously, we have got the volume and the subsequent absorption impact in the fourth quarter. But to your point, when you look at the three segments, what is really happening is the two most profitable segments are the segments that are having the greatest sequential decline.

And so when you think about enterprise, which is at the top of profitability, here is a business that had an extraordinary book to bill in the second quarter. As we have explained, as lead times moved out in the second quarter, distribution channels took positions and increased orders. And so we came into a third quarter with a very large backlog. We had just completed our global manufacturing for that segment.

Subsequently, we had sufficient capacity to support this large sales in the third quarter. So, you know, fourth quarter in enterprise, if you think about this from a POS perspective, in our POS second, third, and fourth quarter will be essentially the same. That's something in this 17 to 19% year-over-year growth in POS. So, you know, that's a lot of our enthusiasm and confidence, you know, these things that happen in channel inventories distort business perspectives, you know, on a quarter to quarter outlook.

The other thing that's happening, the other very profitable segment for us is our Carrier segment. And it, too, is going to have a larger decline sequentially Q3 to Q4. So you put those two together with the lower volumes. We get both volume and mix impact on gross margin and operating margin.

Very good. Thank you very much.

Our next question comes from the line of Celeste Laurenzano from Merrill Lynch.

Good afternoon. Could you guys talk about the price increases on the Broadband side, aside from the ones you put through, in I think it was mid-June? Have you done anything thus far and do you see any plans for additional increases?

Last price increases, you know, transitioned through the second quarter, and were largely all in effect by the end of the second quarter. You know, like many, you know, the response that we were able to obtain internationally were not on-par with what we have done domestically, were able to do domestically.

We continue to push in international markets and I think we have lost share clearly, lost some international accounts, I'll put it that specifically, as a result of our insistence on price. But we have made no public announcements over the course of the third quarter regarding new price increases in that business segment.

Okay. Then regarding the 2007 outlook, if you can just kind of walk us through business by business, you know what is behind the outlook, both from a top line and the operating profitability?

Well, you know, for all of our businesses, you know, as you know well, Celeste, we lead. We're leaders in our market and subsequently, our expectations are that we should meet or exceed segment growth from a global perspective. And so what we have in the current guidance, you know, is the current outlook of what we think markets are going to do, and not unlike last year, you know, as we moved through the year, and we have better vision, in terms of the dynamics in these markets, we'll update, you know, our outlook, but right now, based upon the business plan that we are putting together, that's what we have.

You know, our Broadband segment that we, you know, continue to expect a productive market, good fundamentals, no reason for that market to decline at all in North America. Enterprise was a very strong year in '06. Again, no expectation for that market to decline. Clearly, we should see modest growth. In the Carrier market, again, as last year, we have taken, I'll say a conservative position. These customers and segments are volatile.

That's probably the best way I can put it, and difficult to predict. Our representation again is a conservative representation of what we think's going to happen with our Carrier accounts.

The profitability, much like we should benefit from the global manufacturing. You saw a lot of that in the third quarter. You know, the volumes that we had in the third quarter are probably at or a little higher than the average for all of '07. And so it gives you a good indication of what we should be able to achieve in '07.

Great. Thank you.

Our next question comes from the line of Marcus Kupferschmidt from Lehman Brothers.

Hey, Marcus.

My first question, I guess was the fourth quarter guidance. What led you guys to lower the fourth quarter guidance to the lower end of the original range you set out at the beginning of October?

Well, I think each time we give guidance, Marcus, we look at our best estimate of information we have at that time, and what the dynamics are in the marketplace. So there may have been a little tweak from October 3rd. I think the Carrier volatility is probably an area of concern. It is slowing and expected to slow in the fourth quarter, from the very strong third quarter shipping performance that we had. And that's probably the biggest, one of the bigger areas to predict.

A lot depends on timing and forecast issues and that sort of thing. Trying to predict budgets, demands are what drives the budgets for our Carrier at the end of the year. These carriers have spent very heavily there year. We are not looking for an influx of spending if you will, to make budgets for the year, or to spend through the budget for the year, because of the heavy spending that has already occurred this year.

Marcus, it's Frank. I think there's another issue. The AT&T/BellSouth merger is not complete, it has been hung up at the FCC. That obviously we expected to have happen by now. I think it will happen, but I think that is a factor in looking at this again.

Okay. Separate note. Trying to understand thinking about the commentary about order activity. Since 2Q was such a great quarter on the enterprise orders, and we have a much lower order rate in 3Q to moderate, to me I would think even the 2 out, you blend the 2 together, you are at kind of the normal rate. I guess if 3Q is already a depressed quarter for order rates in enterprise, why wouldn't 4Q orders be flattish with 3Q? Why would 4Q come down from what is already a severely depressed order rate, because 2Q was so great?

Again, I would direct you kind of to the POS perspective, in terms of how the market's doing, and how we're doing in those markets.

Like I say, we confuse ourselves with inventories as they move through channel, but I can't disagree with you, Marcus, you know, by the time we finish the third quarter, we had largely satisfied the demand that it built in the second quarter, and channel inventories were at typical levels. I think in terms of 60 days.

The only other thing I would say is year end is not a typical period for channels to be building inventories. They are typically motivated to push inventories down to lower levels. And so that will affect sales in the fourth quarter of the year. That is all part, if you forget about what happened second to third quarter, that's all part of why fourth quarter is a traditional downturn for us.

And I will say fourth quarter is one of the more difficult quarters to forecast, Marcus because of the holiday season at the end of the year impacts not only our own production and shipments here, but people's ability to receive goods or their desire to receive goods, and I already mentioned, you know, impacts of reviewing their budgets, or spending more than their budgets for the year. And the slowdowns that might come from that. So we really believe it's seasonal in nature, not more than that.

Marcus, let me take --

Guys, I'm just referring to the order rate and nothing more than that. So --

I understand. Marcus, if you look at the end customers, every one of our end customer groupings has reported great results, and expecting a great year next year. If you look at what Anixter is saying about these markets, Comcast just blew the doors off this morning. In the competitive rating and what happened in adding telephone customers. You know as soon as the AT&T/BellSouth merger gets done, AT&T has confirmed in their analyst meetings that they are going with Fiber-to-the-Node.

So you know, we have always been a book to bill company of 1. I mean, my daddy told me if you got a backlog you are selling your product too cheap. I don't worry about this as long as we see the strength in the end markets that we see, and we see substantial strength in those markets.

And we pointed out here, that we actually didn't give guidance on orders. Our guidance is really based on shipments.

Okay. Understood. And I guess if I could just ask one final question to clarify. The thing about the '07 guidance. Unit growth in enterprise, what are we thinking about at this time?

Upper single digits.

Upper single digits, and then you get a full year of pricing increases, too. So carry that through. That adds to it, too. Should enterprise be growing in low double digits in 2007 with the pricing increases?

Should be moving. If you go to that guidance should be pushing 10% plus or minus number.

Okay. Super. Thanks.

Thank you, Marcus.

Our next question comes from the line of Daryl Armstrong from Citigroup.

Hi. This is Luke Lee in for Daryl Armstrong.

That's all right.

Just so I have a question related to the pricing and the fourth quarter guidance. Can you give us some color, a little color how much we should think is the price decline, the sales declines due to the volume, and how much if at all, due to the pricing?

I think I want to make sure I understand this. What you are asking is in the fourth quarter guidance, was there price reductions or price lost, or lost price discipline, is that the question you're asking?

Yes, the price decline.

There was none. There was none. The pricing is holding throughout the markets. All of our businesses, and in some cases, we are just finally getting the tail end of the price increases. So it is volume related.

I mean, commodity costs have been pretty stable for the last few months now, but they are not going down clearly, so pricing has stabilized more than what it was happening the first half of the year, and particularly the second half of last year.

Okay. The previous question, I think that Marcus mentioned that you guys will keep increasing the price through 2007, is that right or I heard wrong?

I think you heard wrong. The price increases happened largely in the first half of '06.

Okay.

Jearld's comments regarding the guidance for '07 really defined assumptions of flat commodity pricing throughout the year.

Right. [multiple speakers]

And the solution of our global manufacturing opportunities.

Okay. So right now we already saw the price of commodities, especially copper drop significantly, if you keep the pricing, you know, flat for your products, would we expect a huge expansion of the margin?

I take some exception to your comment, Luke, about the price drop in copper. Copper did peak back in May at somewhere around $4 but the averages through the months have been pretty constant now for several months in the $3.50 range, plus or minus $0.10. So it has leveled out. It is trading below its peak price, but that was not sustained for very long.

The peak lasted roughly a week by my records, and to Jearld's point, by June has been in the $3.50 plus or minus range pretty uniformly.

Aluminum which is our other, has been up slightly. But your question, I think, was if it dropped, would our margins expand, and the answer is yes for a while, but if it drops in a big, big amount, then we would have to obviously adjust the pricing. If it stays in this price range generally speaking, pricing should be level to our customers.

Okay. Thanks.

Yes, sir.

Our next question comes from the line of Brian Coyne from Freedman Billings Ramsey.

Brian?

Hey, everyone. Thanks for taking my call.

Absolutely. Good afternoon to you.

Hi. Couple bigger picture questions. Leading a little bit off of the last one, thinking about copper pricing, spot pricing, have you guys had any conversations, or could you characterize any discussions you may have had with your distributors, or broadband customers, or anything like that, with regard to raw material costs and where it's going in '07 and you know, do you think that if there is a substantial decline, you know that they would look to break some of the, or try to do something around to try to get around, maybe some of the constructs that are in the pricing equations.

Then secondly, just to be clear for the 2007 guidance, doesn't sound like it, but are you contemplating perhaps any area for pricing declines?

Regarding the last question, no, we have not. And the assumptions at this time are, as far as commodities are largely based upon the view we have of commodities through the first quarter. And so that's what the model's based upon.

Obviously if commodities go up, it's going to change our guidance. If commodities go down, it's likely going to change our guidance again. So we are not in the commodities business, and so we don't really pursue that in a lot of detail. The discussions as it results between ourselves and our channel partners are obviously ongoing.

We worked very hard to minimize channel inventories for that very reason. And if our costs and price change rapidly, we want that, we want those price revisions to move rapidly through the market. So we have been working hard with our channel partners to keep our inventories low in channels to give us best flexibility.

I think to Brian's point, one of the advantages CommScope has is that our inventory is basically in our trucks. We do turn inventory in a very formidable fashion, which helps us control that pricing point, if it should be volatile. Right now, it's a very stable environment. Our customers understand what is happening, and we have been successful in gaining some market share out of it.

All right. That's helpful. Then I guess second question really is back on costs. You mentioned your I guess roughly 75% or so through the global manufacturing initiatives, which impacted margins I guess primarily. And I realize that you are taking the stance that you are more or less in growth mode here specifically, and at the same time, I'm just kind of wondering how you look to balance the question of, you know, where you invest in the business as well as, you know, if again, may need be or you may want to consider sometime looking more at operating expenses, which has been relatively constant, I am just looking at SG&A and R&D over the last 3 years or so, and they haven't moved around too, too much. How do you sort of balance that question as you look into '07? Thanks.

Well, a number of things. Historically, I'll say as it related to cost reduction and margin enhancement, we chase the low hanging fruit. With the ACS acquisition, there was enormous opportunities that we outlined for you and executed on. Moving forward, our investment is obviously going to be directed at those business segments that create the highest return on investment.

And of late, we have gotten excellent returns on both our Carrier business, Carrier investments, our Enterprise, and really our Broadband as well. All segments we have had extraordinary returns, in terms of our new investment. If you look at our period expense, I would say to you that there's not a tremendous opportunity to lower those expenses, other than through dilution. You know, we are global leaders in each of these segments. We have got a lot of work to do in IT areas. We've got substantial R&D investments in the Enterprise space, that we're going to expand on in '07. So we would not expect a reduction of period spending moving forward.

Brian, I think, you know, one thing I'd like to get across to the investment community is, I think what some people fail to realize, is the fact that we shipped $466 million worth of product in one quarter. In the same time, our employees and our great global team was moving several plants.

So the fact that we can scale up and down with these types of capacities, gives us so much flexibility in the marketplace with this volatile customer bases that we have right now, but we still are the best prepared to serve this emerging market. We have twice the sales force of anybody. We are global in these products and markets, and it's getting harder and harder for anybody to approach this territory.

I mean, I have never felt more comfortable about our beachfront.

Operator?

Our next question comes from the line of [Jason Nolan] from Robert W. Baird.

Excellent quarter, gentlemen.

Thank you.

I just wanted to ask a question first on the 2007 guidance, if I assume approximately 10% year-over-year growth in Enterprise that was referenced earlier, a fair growth rate in Broadband, then I come up with a Carrier that's below double digit growth. Is that fair?

Well, we have not really given guidance. We are not going to give guidance by segment. Certainly not at this time. We are working some rough numbers there with Marcus or Luke, but Jason, we really don't want to go into the segment assumptions in revenue year-over-year at this time.

That's fair, Brian. It is fair to assume that you've been conservative with Carrier in '07 though?

That would be fair for the reasons that we described. We had great expectations for '06. They substantially materialized. But as you know, they had lots of ups and downs. We had great expectations for '07 in Carrier, we just need to keep our assumptions conservative at this time of the year.

Okay. Then a final question on price increases. We have had at least two competitors to you suggest that there was still some catch up to be done in commodity costs. One would have been a reference to copper, the second aluminum. Do you believe that is fair from CommScope point of view?

I think they are trying to catch up to us.

I think we have done a pretty good job, Jason. You know, particularly in the copper intensive areas, in Enterprise, we have done a good job of catching up.

In particularly in the wireless space, I think we have done fine. In terms of recovering costs, we have got the aluminum opportunities that will drive that business in '07, so as it relates to commodities, I think we are in a pretty good condition going into '07.

Okay, thanks, guys.

Yes, sir.

Our next question comes from the line of Alan Bezoza from Oppenheimer.

Good afternoon, guys. Frank, when you mentioned that comment with your father and backlog, I almost fell out of my chair. [laughter] A couple questions and not to keep going back with margins and inventory, but I just wanted to ask, when you look at kind of the manufacturing changes that you have done, as well as, you know, flattened cost commodities it's a pretty impressive quarter on the leverage and the business model. $466 million in sales is very impressive, but also seeing the margin and flow through the bottom line, which is equally impressive. Going forward, let's say you don't get back to that level all next year, could you at least obtain those same kind of margins, given some of the movement, assuming flat commodity pricing?

Yes Alan, this is Jearld. We always have goals obviously of improving our costs where we can. We still have some modest benefits coming out of initiatives. We are clearly looking at, for cost improvement programs for next year as well. I think your point is well made operating leverage certainly in the short term in the quarter, is a pretty significant piece of our bottom line performance is, you know, the strength of our top line, and the operating leverage impact of that. So we will adjust and look for opportunities to reduce costs, be they in materials or in other components of the P&L.

Going back to the question, do you think you can get back up to the 30% range, without having revenues that are in the $460 million range.

Well, we didn't give gross margin guidance, but it would not be implied in the guidance we gave, I would say the 11.5% for 2007 or better is the guidance next year, that's 150 basis points improvement over what we are doing this year. So, you know, it is showing improvement consistent with transit we have been seeing since late last year.

No doubt. And I would kick myself Frank if I didn't ask you about Andrews. When you look around, you are continuing to generate some nice cash this quarter, and sounds like it's going forward. Have you, you know, as you look around the marketplace and say okay, you have got great positioning and balance sheet that you can cash and look for something else? Have you gone back to the Andrews story? Have you looked elsewhere? What kind of things have you been thinking about?

Quite frankly, we haven't gone back to Andrew or anything this quarter, because we were working so hard to execute on those sales. The effort that was put forth by the entire management team, our customers, working with our customers, that demand was unbelievable, so it pretty much occupied us. I will never rule out, and we aren't going to look for growth opportunities in this Company. We have discussed those with you.

There aren't a lot of places to go where we aren't already the leader. In market share and position worldwide, so it's hard sometimes to find something that fits, that we think is affordable, given what the private equity people are doing these days that fits. So right now, our plan is to execute, add sales and marketing resources, and grow positions in these businesses where we're #1.

That's great. I have thought of you guys as your own private equity shop.

There you go! [laughter]

My last question is on the 10-gig product. As Cisco kind of comes out with new routers, and we start seeing, you know, more of a transition on the Enterprise space towards 10-gig, do you think you'll see a majority or, you know, a decent chunk, at least a material chunk of 10-gig product in 2007?

I think we are going to continue to see substantial growth coming out of small numbers there. You know '07 I hope is the transition year. You know, you follow the Silicon guys pretty well, the chip guys, and we've got, you know, at least five or six names come to the top of my head, who are just now getting chips to market. So my expectation is that those products would be coming, you know, the switches, the routers, the mix would be hitting the marketplace in the later half of next year, of '07 and I'll say that's later than I had originally anticipated.

But you know, even with that, you know, the IT execs understand what is happening, and so when they are doing wiring infrastructure, they are going to anticipate it, and they're going to respond accordingly. If I look at our POS it's out of small numbers. At least through the first half of this year, POS on 10-gig was up 50% year-over-year. So percentage growth ought to continue to be very large numbers into '07. But you know, they are not going to be north of 10% of our enterprise revenue. That is kind of the expectation right now.

Yes. And one last question on the Carrier business. The ICS is just a phenomenal turnaround story. And when you look at, you know, next year, is that going to continue? Are we at kind of a peak, or at a consistent level in that business, or are there other opportunities maybe international to grow that business even farther?

I think if you look at what the customers are saying, that they are committed to Fiber-to-the-Node and they are committed to be in front of 75, 80% of their served customers by '08, that if you just back into the math, it could have some very attractive growth.

Again, it's all speculated on the fact that they get the software out to make that system work.

Yes, I mean, there is substantial upside, I think, as it would relate to BellSouth. It's very difficult to Frank's point, about the impact of the merger acquisition, you know, it's very speculative to forecast when they are going to get in gear, in terms of deployment of Fiber-to-the-Node, and that would clearly be an upside for us in '07.

The other area that we are, in terms of growth opportunities, obviously in the wireless space, there are within North America, there are substantial opportunities for us to deploy our capabilities into that business segment, but the outlook for tooling that business into Asia or Europe, I would say, is minimal.

Great, guys, thanks.

[OPERATOR INSTRUCTIONS]

Operator, we will take one more question.

Next question, we have a question from Kevin Sarsany, Next Generation Equity.

Why do you guys do the question and answer so much different than everybody else? Just kidding.

Is it bad?

No, no, I was pressing star one, and then I thought it was star four.

Oh, I'm sorry. Technology thing.

It's a high-tech industry.

I talk more than I listen, I guess. Now in the fourth quarter, what would you say is typical seasonality on a percentage basis?

I would say historically and I would say sans our cabinet business, integrated cabinet business, if you took our traditional Enterprise business, and you took our traditional Broadband business, it's going to be somewhere in the 10% range plus or minus.

And you think the Carrier is going to be a lot more seasonal because of the book to bill that you --

Well, no. It's just an emerging application, and so it's driving it month to month, or quarter to quarter isn't so much seasonality of a construction season, as it is a lot of other variables.

Okay.

Such as technology and deployment schedules. So it's kind of been a little different model.

The reason why I asked, I went back to your previous guidance of 420 to 435 for the Q3 from the second quarter, and you know, where you are guiding now is about 11, 12%. So I mean, that's reasonable.

Yes. In fact, to Jearld's point, if you looked at the guidance that we gave in the second quarter call, our Q4 number is essentially the same number give or take, you know, 3 or $5 million.

Okay. I hate to do this but backing into the math, if I look at your guidance for the full year at 10.5% operating margin, and 1.61 midpoint revenue, and I just apply that to get an operating profit, and then I subtract the first three quarters, it looks like fourth quarter is going to be about 11%. You said you were excluding special items, so I just am trying to figure out what I'm missing.

I think your math may be off, Kevin.

Okay.

We can discuss that offline.

Yes, we can go through that. And I guess on the 2007 revenue estimates of about 7%, is that volume and price?

So there's no price assumptions that are in there so think of that in terms of volume.

Well, there is from this year's price, you're going to get some of that?

It's a baseline from this year point in space going forward without adjustments for materials or price.

There's a little bit of full-year price being there from, you know that we didn't achieve in the first half of the year, or some part of that.

Right.

Okay. And then just kind of a bookkeeping. 3 million in restructuring. Do I put that back into the cable segment to get that back over 10%?

I don't have the number in front of me, Kevin. But if you split it 50/50 with Enterprise, you wouldn't be far off.

All right. Okay.

All right.

And your Carrier business, I don't know maybe I missed it, but how was the wireless portion of that business?

Wireless for us, again it's a North American business.

Right.

Wireless will be flat to down in the third quarter.

In the third or fourth quarter?

In the fourth quarter will be down as well.

And what's going on there? Is that [Halton] buildout or --?

Well, our two largest North American customers are Sprint/Nextel and Cingular, and both of them are engaged in merger activities, and have slowed down their construction this year.

Okay. And my last question is you have talked about this year some of your global manufacturing initiatives being about 13 million in cost savings, and you said that's going to go up to about 40 million in 2007. Is that still what you are--?

Let me just restate it for you. Our global manufacturing initiative that we announced was roughly a $40 million annualized benefit.

So let's think of it in terms of $10 million a quarter. And so we just said in the third quarter, we derived about 75% of that 10 million per quarter benefit. And we'll be at the full rate of 10 million per quarter by the second quarter of '07.

Okay. That was it.

Thank you, sir.

Thank you.

Ladies and gentlemen, thank you for joining us and I hope that all of you can come to our Analyst Meeting in Texas. You'll get a chance to see some very, very serious technology. And with that, we will say good-bye.

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