CommScope Holding Company Inc (COMM) 2006 Q4 法說會逐字稿

Welcome to the CommScope fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS].

I would now like to turn the conference over to Phil Armstrong, Vice President of Investor Relations CommScope. Please go ahead, sir.

Good morning and 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 are joining me on the call.

During this conference call we may make forward-looking statements regarding our financial position, plans and outlooks 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 actual results to differ materially from those currently expected.

For more detailed description of factors that the could cause such difference, please see the press release we issued this morning and CommScope's filings with the Securities and Exchange Commission. And in providing forward being 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. Also please note that all dollar figures and percentages are approximations. After we review fourth quarter and year-end results and Frank makes some closing comments, we'll open the lines up for questions. Jearld?

Thank you, Phil. Today, CommScope announced fourth quarter results for the period ended December 31, 2006. The Company reported fourth quarter sales of $394 million and net income of $27 million or $0.38 per diluted share. Reported net income includes after-tax charges of $1 million related to restructuring costs. Excluding these special items, adjusted earnings were $28 million or $0.40 per diluted share.

Sales for the fourth quarter of 2006 increased 14% year-over-year, primarily driven by higher prices as a result of higher costs and increased customer demand in both the enterprise and broadband segments. Enterprise sales rose 15% year-over-year to $188 million, primarily due to the higher prices and increased sales volume. Enterprise sales rose across essentially all geographic regions with particular strength in the Europe, Middle East, and Africa and Latin American regions. Consistent with prior guidance, sales declined sequentially, primarily due to strong shipments in the third quarter and the typical seasonal slowdown. However, the enterprise segment continues to experience year-over-year growth as businesses invest in higher capacity infrastructure solutions to support greater demand for bandwidth.

For calendar year 2006, enterprise sales rose 21% year-over-year, with roughly 60% of the increase driven by volume and mix combined and 40% of the change driven by price. We expect long term demand in the enterprise segment to be propelled by continued investments in information technology , new bandwidth-intensive applications and data center consolidations. We are pleased with the ongoing shift towards higher end solutions including our SYSTIMAX GigaSPEED X10D 10-G solution over copper. CommScope, in collaboration with Solarflare communications recently demonstrated the first standards compliant 10-G base-T server adapter at Cisco's Networkers 2007 event in Cannes, France. We believe that our leadership in cutting edge copper and fiber solutions will continue to help us strengthen our position with large multi-national customers.

Broadband segment sales rose to $144 million, up 21% year-over-year, primarily due to price increases related to increased material costs and higher sales volumes. Broadband sales volume reflects continued competition between cable television companies and telephone companies that provide bundled services for residential and commercial customers. For calendar year 2006, Broadband sales rose 20% year-over-year with roughly two-thirds of the increase due to higher prices in response to higher commodity costs and the remaining one-third driven by volume and mix combined and the positive impact of a small product line acquisition in the year. We believe that the business environment remains positive for our broadband segment. While we expect modest growth in 2007, we have experienced a strong start to the year at some of our larger broadband customers have increased spending levels due to acquisitions and ongoing competition. Our Carrier sales decreased 2.5% year-over-year to $62 million in the fourth quarter. The year-over-year and sequential decrease is due primarily to the previously anticipated fourth quarter slowdown in spending by a major telecommunications Company. Despite this volatility, the Carrier segment was the fastest growing segment for CommScope during calendar year 2006, with sales growth of 26% year-over-year.

We believe that the outlook for ongoing Carrier growth is a positive as telephone companies continue investing in their infrastructure to support video and high speed data services. In the fourth quarter, overall international sales rose 11% year-over-year to $135 million or approximately 34% of total Company sales. The Europe, Middle East and Africa and Latin American regions showed particularly strong revenue growth in the fourth quarter, despite a slow start to the year, our calendar year 2006 international sales grew 14% year-over-year. We achieved double digit growth in all regions with particular strength in the Latin American region.

External orders booked in the fourth quarter of 2006 were $354 million, up 16% from the year ago quarter. The book-to-bill was slightly below one and is consistent with historical levels and reflects normal seasonal trends. As is typical, we expect first quarter book-to-bill to run above. Gross margin for the fourth quarter was 28%, up 240 basis points year-over-year. Gross margin improvements were primarily due to higher prices, higher sales volume, favorable mix, and the positive impact of the Company's global manufacturing initiatives. SG&A for the fourth quarter of 2006 was $65 million, compared to $41 million in the year ago quarter. The increase in SG&A results primarily from increased selling expenses related to higher sales and the impact of a special -- $13 million in pre-tax benefit recognized in 2005 related to the recovery of Accounts Receivable from Adelphia. We in intend to continue invest in Sales and Marketing as we work to expand our global presence particularly in emerging markets.

Our Research and Development was $8 million for the quarter or 2% of sales. CommScope's fourth quarter 2006 results reflect pre-tax restructuring charges of $2 million which were $1 million after-tax related to the global manufacturing initiatives. While we expect to incur about $1 million of expense in 2007 related to this program, the global manufacturing initiatives are substantially complete now. Operating income for the fourth quarter of 2006 were plus $36 million or 9.2% of sales, excluding costs related to the global manufacturing restructuring, operating margin and operating income was $38 million or 9.7% of sales, up more than $10 million and 190 basis points respectively year-over-year.

Excluding special items for calendar year 2006, operating margin rose to 10.5%, up more than 300 basis points year-over-year. While the Enterprise and Carrier segment operating margins improved significantly year-over-year, the Broadband segment operating margin did not. Assuming the business environment remains stable, we believe that the Broadband segment should improve margins in 2007 due mainly to the benefits from the recently completed manufacturing initiatives.

Now, I'd like to turn to cash flow and balance sheet items. Net cash provided by operating activities in the fourth quarter was a strong $87 million. Total depreciation amortization expense was $14 million for the fourth quarter. Capital spending for the quarter was $9 million. At December 31, 06, long term debt, including current maturities declined to $284 million and was 28% of booked capital structure. CommScope ended the year with $428 million in cash, cash equivalents and short-term investments.

Looking back over CommScope's 30th year of business, we are very pleased with our record 2006 performance. We grew 21%. We maintained price discipline and navigated challenging raw material volatility and created profitable growth. We successfully deployed major global manufacturing initiatives and delivered on cost reduction commitments. We are particularly proud of the Enterprise and Carrier teams who substantially improved operating dollars and operating margin.

Excluding special items, we increased operating income by 75% and earnings per diluted share growing by 64%. We generated $119 million in cash flow from operations and received a $30 million repayment of the OFS note receivable that had been written off and we disposed of excess assets worth $15 million. Most importantly, we believe that we have strategically positioned CommScope for further success in the years ahead. We are excited as we look ahead. We expect to have a strong start to 2007 and believe that we are positioned well to benefit from the global convergence of telecommunications.

For the first quarter of 2007, we expect the revenue to be around 390 to $410 million range and operating margin to be around 10.5% to 11.5%, excluding any special items. We expect an effective tax rate of the range of 30 to 34%. We have increased our calendar year 2007 revenue and operating margin guidance as well, assuming a stable business environment, we now expect revenue in the range of 1.72 billion to $1.76 billion and operating margin around the 12% level excluding special items. We expect an effective calendar year tax rate in the range of 30 to 34%. We expect depreciation amortization expense of $50 million and we expect capital spending to be between 30 and $40 million.

Now, overall, we had a strong fourth quarter and a great year. We have developed industry leading solutions for growing markets. We have a talented and dedicated workforce that created profitable growth while executing major global manufacturing initiatives. We intend to continue investing for growth and look forward to another good year. Now, I'll turn it over to Frank for his comments.

Thank you, Jerald and thank you, investor group and employees on the call for joining us. As we bring a close to our 30th year as partners, Jearld and I started this company 30 years ago and Brian came two years later, I want to thank all of our 4,500-plus employees for the outstanding 2006 performance, and this begins 2007, our tenth year as a public company, and we have achieved a great asset in bringing forth, in the last year almost $1 billion in increased shareholder value, so I have never in my 30 years seen the alignment of the stars better for CommScope and the continuing fight for growth in telecommunications in the last mile. So I'm very bullish on our future and want to thank everybody for the great great past. With that, Phil, we'll take some questions.

Julia?

[OPERATOR INSTRUCTIONS]. The first question comes from the line of Alan Bezoza with Oppenheimer. Please proceed.

Good morning, guys, great job in the quarter and also for the full year during a challenging environment.

Thank you.

A couple questions. First on the pricing side of the equation something that's been coming up over and over again with the decline in raw material prices. Could you comment on how you expect pricing to shape up through the year? Have you seen anything yet and maybe can you walk us through each segment separately and I have a follow-up after that.

Alan, Brian, good morning to you. A couple comments, specifically probably the best response is to respond from a segment perspective where commodities have the greatest impact. In our Broadband space, the leading commodity for us is aluminum and if you look at where aluminum is today relative to the fourth quarter or the average of last year, aluminum costs are actually up, and obviously, more stable than copper has been but still up, and so our expectations for pricing in the Broadband space is currently flat.

If we look at the enterprise space, whose costs would be largely influenced by copper, we have seen a softening over the last quarter but in the short-term here in the last few weeks, we've seen some strength in copper costs. From a market perspective, I would tell you that there is little pressure to change pricing, and so our outlook certainly through the remainder of the first quarter is to hold pricing. Yes, the other perspective, remember, when we think about the enterprise space, it's not about the cost of copper. We said that many times, and our proposition in terms of promoting the value of our entire solution continues to build strength as we move up into higher value products, so I think the outlook is pretty firm in terms of pricing through the remainder of the quarter.

That's helpful. A question also on the Carrier segment you said that one customer who which we won't name is on a pause. Has that changed yet or how do you expect that to shape up?

say it again, I missed it, Allen.

I believe if I'm correct you said one of our largest Carrier customers that was on pause in the fourth quarter, what's the outlook?

Yes.

That's very good.

So has it already reversed itself?

Yes.

Yes. We had, we got it at a substantial downturn in the fourth quarter in the Carrier segment. That did transpire and then the follow-up question to that is always, well when is it going to turn around and do we have confidence in it and to Frank's point, very early in the quarter, we saw very strong demand for near term shipment. We have good visibility into that segment for the remainder of the quarter and it is strong.

That's great and my last question is on M & A. Now that you have free positive cash balance and continue to generate a lot of cash, should we expect some kind of, I want to say life changing events but some kind of major M & A event this year or are you status quo for the year?

Yeah, Alan, this is Jearld. Yeah, we continue to evaluate our strategic options and of course, we wouldn't comment on any specific transaction but we are interested in growing by acquisition.

That's great. Thanks, guys. Keep up the good work.

Thank you. Thanks for the support.

Your next question is from the line of Simon Leopold with Morgan Keegan. Please proceed.

Thank you very much. First a quick housekeeping question and something a little bit more philosophical. On the housekeeping side, the interest income perked up this quarter. Maybe a little bit more color on the trends there. I think you're working off of a bigger cash balance, and then maybe a little bit more on the trending side, certainly coming off of earnings season and hearing from some of your large MSO customers, raising CapEx, and some of their other metric targets higher than many of us had anticipated, if you could talk about that market, the MSO, your Broadband segment and what kind of growth rates you anticipate to benefit from given the shifting spending we've seen there? Thank you.

Yeah. Well, I'll answer the interest first and then for the MSO question to Frank, but interest income was positive obviously in the quarter, and it is a reflection of our growing cash balance that we have and would expect with these type or level of cash balances to continue to generate interest income over the year assuming interest rates stay in the range they're in currently.

And to the MSO question, it's clearly the major MSOs have announced increases in capital expenditures somewhere in the order of 20 to 30%. As we evaluate that expenditure and talk to the MSOs, a great deal of that is is success-based expenditures, such as changing out old converters to newer generation converters and I'm not sure if you're aware of the situation on the July, I think it's July 7th issue that if you don't have converters with certain technology in place or at least in inventory that you don't get certain tax credits and tax deductions so there has been some advance purchase of that taking place. On the positive side, there's no question that we're seeing modest lift at this time from MSOs upgrading and expanding their plan to compete with head-to-head competition from Verizon and AT&T.

Well, let me be very blunt about the question. If we think MSO spending is growing let's just say 12%, you guys may not be exposed to set top box side of it, so perhaps you don't grow faster than 12% but how close do you get to that?

Well, usually the success based asset is one that hangs on an existing plant, so we're still guiding at this time in the single digit, high-medium single digit growth for our Broadband business because our discussions with MSOs don't lead us to believe that they need to do that much work in their plant. It's early in the process to determine how many of them will go to one gig plants. So a lot of it, the dollars are actual in the MSO capital but it's basically bringing in advanced converters HD converters.

So we then step back and look at your segment trends, I think you had given us an update at the analyst meeting last year, maybe refresh us because it sounds like you're a little bit more optimistic on the Broadband segment, maybe if you can just clarify what growth rate you expect from Enterprise and Carrier then, that would help.

I'm a little bit much more bullish on the fact that the Broadband people continue to expand and compete with telco and I'll let Brian work with you on expansion. Obviously our enterprise business is looking very very good and our Carrier business is clearly driven by the competition.

And the Broadband area, I think it's fair to say we ended the year stronger than we expected it to be and it's probably starting stronger than we expected it to be, so that's very early in the year.

Great. Well, thank you very much.

And do you want to comment on enterprise at all?

Well, it's the same situation. We are seeing a good start in the quarter, particularly in the last four weeks. I think coming into the year, we are guiding in the 10% range in terms of volume and mix growth in that segment. We feel very comfortable with that number, if we can sustain it, great, then obviously we'll be adjusting guidance but right now I think it's still a good assumption.

Could you clarify 10% was which number?

Was enterprise.

That was in the enterprise space.

Okay, great. Thank you.

Yes, sir.

Your next question is from the line of Jeff Beach with Stifel Nicolaus, please proceed.

Yes, good morning.

Good morning, Jeff.

The focus should be on 2007 but there's a lot of questions about the fourth quarter and I guess the thing I'd like to understand a little bit of is when I look at the volume decline in enterprise, you have a very significant decline in operating income. I'm working out a contribution margin there, a negative margin of about 45%, which is pretty high and then I look over at the Carrier division and see an even bigger percentage decline and only a modest impact in my viewpoint on the operating income. Can you describe a little bit more what's happening there? It sounds like you idled some plants and enterprise a little bit in the fourth quarter but I'd like to hear about how one got hit so much harder than the other.

Well, the big swing, Jeff, for the enterprise team, sequentially three to four, and then part of that and I think we were guiding to this level of result, part of it is a reflection of the seasonality of the fourth quarter, as you know, the other part of it was the very very strong third quarter that we had, so, I mean, if you look at what happened to revenues in the third quarter or fourth quarter, they were off 20 points or so sequentially. And I think if you looked, I don't have the data in front of me, but if you looked at production sequentially, you would see an even larger variation, Q3 to Q4, so the impact on profitability in terms of absorption will be substantial. I'd also add, spending for Sales and Marketing activity, particularly was stronger in our enterprise group in the fourth quarter than it was in the third which had some impact. We're investing in Sales and Marketing activity in emerging parts of the world and we're starting to see that spend, that investment if you will, show up in enterprise-related break outs of our segment reporting, and so the spending was higher in the fourth quarter than it was in the third. It's not all about gross margin or our contribution on sales, and I'll further add that mix and the enterprise, the mix between the products and margin mix between the products is pretty broad in some of the enterprise areas, so we can have bigger mix impacts there than any other segment.

Again, over on the Carrier side, you have an even bigger decline, almost 30%, and yet the margins hold up in the double digits. Can you explain how you did the great job there?

Well, good question. Part of that is outsource manufacturing versus insource. Realize too, Jeff, that we shut these facilities down in December for maintenance, and so you do have some of that effect in the fourth quarter, and we have contract manufacturers for some of the product.

All right thanks.

You bet, Jeff.

Your next question is from the line of Kevin Sarsany with Next Generation Equity Research. Please proceed.

Thank you. I guess just on that last point, were you saying that you make a higher margin from the contract manufacturers than you do --

No, no, wasn't even implying that at all.

Okay.

But it's logical that, Kevin, that if our sales slow down and it's being reduced from third parties that you're not having sort of overhead under that analysis so you're going to see less of an impact.

So you're pulling its from the contract manufacturers that keep filling up your plant; right?

Well, I wouldn't say pulling in, but we manage the mix of business between our factories and third parties.

Got you. And then on the MSO CapEx stuff, isn't a part of your, like the way they account for it, isn't it part of their operating expenditures?

Yes, part is maintenance.

And that's typically 2 to 4% or something kind of growth?

Yes. I mean, the year in and year out you can count on about $6 per subscriber, $4 to $6 per subscriber in collect sales. It's a very small amount when you times 65 million subs.

And then on the cable margin, you talked about you expect them to increase throughout the year and you mainly pointed to the initiatives. I think you mentioned that you weren't expecting to increase price even though aluminum is up sequentially. Is that correct?

There was a discussion about prices increasing, Kevin. One of the comments that we're not seeing downward movement in the cost of aluminum.

But you're seeing an increase; correct?

Absolutely.

So you would expect to increase pricing there to offset that?

Well, it depends on the amount and our outlook for the remainder of the year. I mean, right now, as we said many times, we hope don't change pricing weekly or monthly with spot pricing. A little different proposition for us, and so I think the outlook for pricing in the first quarter is stable.

Okay.

The aluminum, Kevin, went up in the fourth quarter of last year, so, or in the second half of the year and that's what we're saying is not trending down to this point. So there were price actions obviously last year.

Okay. Now, is price covering the increase in raw material costs or are you still facing a headwind there?

Oh, we're covered. We put enough price increase in last year to catch to all of these material increases. What we're enjoying now is a more stable environment that we can manage to for ourselves and our customers.

Okay. And on the initiatives side, you talked about getting $20 million cost savings in 2006 and $40 million in total in 2007. Is that still on plan?

Still on track.

Still on track, okay. And then I guess just my last two and you guys can take it more -- we haven't heard about wireless in awhile. Could you talk about that a little bit?

Well, wireless, our wireless product line is largely North American. The results, two things, like everyone else in the North American geography, we are suffering from consolidation between Cingular and AT&T and the Sprint-Nextel deal, so it's not a growth environment. It's not been such for the last 12 months, but year-over-year we're stable. The one thing that is happening in that segment for us is that we continue to sell more and more aluminum products and that transition is moving nicely and being broadly accepted by our customer base.

Okay, and then just my last question is it seems like ten year anniversary, there's been a lot of stock sale activity. Can you just comment on that? Is it because your ten year anniversary or --

No. Obviously ten year, the options were ten year options and so for a substantial amount of those options they were coming up on their ten year anniversary and they do exercise. The other reason of course is we've taken the stock from $15 which is the average price of the options to in the 30s and this employer group has lifted the shareholder value, yours and other shareholders almost a billion dollars and they are just enjoying some of that earned gain.

Okay. Fair enough.

The next question is from the line of Marcus Kupferschmidt with Lehman Brothers. Please proceed.

Hi, guys.

Hi.

Good morning, Marcus.

Could you just clarify what the operating income was by division on a pro forma basis when you exclude any of the one-time charges and I have a conceptual question after that.

I've got it, Marcus. In the fourth quarter, enterprise was 11%, roughly Broadband 6.8 and Carrier 12.2, should get you to over all roughly 9.7% and that would be excluding the restructuring associated with the global manufacturing.

All right, great. And then kind of bigger picture, can you help us understand first quarter what you're implying for the trends by the business units? It sounds like the sales are going to grow because you're seeing strength in the Carrier side, largely the cabinets. I mean, is there anything else that's going to improve in 1Q and help us think about, well let me start with that. That would be great.

Well, you picked the biggest one. I think because of the big slowdown in the Carrier space in the fourth quarter, the sequential performance will look very attractive when we get here at the same time at the end of this quarter. Enterprise, like scenarios just because of the large downturn in the fourth quarter, our sequentials will look very positive in the first quarter, but when we get to the end of the quarter, I think we'll see growth in all segments.

All right, and then I guess if you think about the growth of the business over the year, if you're doing what you want , is this going to be largely back end loaded 2007?

Marcus, this is probably the strongest beginning of the year I've seen in five or six years. And we just don't want to get too far ahead of ourselves. I mean, the budgets have been released faster than normal for our customers. We're hitting really good visibility into the first quarter in almost all of these divisions, so we're off to a good start.

All right, great. Thanks.

Yes, sir.

The next question is from the line of Glen Anderson with CIBC World Markets. Please proceed.

Hi, guys. Thanks for taking my question.

Yes, sir.

Just thinking, most of my questions have been answered so just more of a bigger picture question. When you guys are looking ahead to 2007, maybe even a little further, where is the focus area in terms of your attention in terms of where you see additional operating leverage being built into the business, A or B, particular areas where you see the potential for out performance from a growth perspective, just thinking about it in terms of if we're sitting on this call six months from now looking back, this particular product line, perhaps, has a potential to have out performed over that period.

Well let me take kind of a corporate general philosophy that Jerald, Brian and I are trying to bring to CommScope. We don't want to be a cable company anymore. We want to be a solutions provider for the last mile, and if you look at the expenditures we're making in Sales and Marketing worldwide, and positioning these products to be complete solution providers for enterprise, data centers, last mile connectivity for the cable industry, that's the scope and strength we're trying to build. We're number one in these markets and fortunately for us, there's a lot of competition happening out there between our customer bases and we're able to supply both sides.

But that's kind of the top down philosophy and then Brian is executing a plan, I'll let him speak to it to add to our worldwide salesforce. In some of these divisions we have three times the salesforce that anybody else has. We have the ability to deliver product on our own trucks and vehicles within 24 hours to any major city and 48 hours anywhere in the United States, so we have this whole inventory management plan that we're putting forth to do contract work for our customers to take the inventory out of their hands and Management, so we have this kind of year to five year view of moving this Company from being this commodity based product to being the solution provider and so far, it has been very successful. Brian?

Yeah, I think you hit the nail on the head, Frank. All of these segments, I think the outlook is clearly strong for '07, particularly for longer term perspectives, digital broadband, I think will remain strong for the next clearly the next three years, and so long as economy, global economy stays strong, the enterprise space will continue to be a very attractive area for us. The organically and much a big part of the acquisition strategy that we are pursuing direct to the price point and that is it's not about being more cable. It's more about being more of a solution provider to our Markets and the result of that hopefully will expand margins for the Corporation. So a favorable outlook top line as well as margins moving forward.

So do you have a sense for what that would mean in terms of sort of your thought in terms of what the long term operating margin target for a business like that would be moving from the type of business you have today to more of a solutions driven business?

All of these big yeses. I tell the story we came into '06 and if we ever get to double digits and we told everyone that we aspired to get there and it did happen over the course of 06. Yeah, I think the expectation now is that we should get into the longer term into the middle team.

Okay. Well, congratulations on a great quarter, guys.

Thank you, sir.

Your next question is from the line of Celeste Laurenzano with Merrill Lynch. Please proceed.

Good morning, Celeste.

Could you talk about what type of seasonality you're expecting in operating margins this year?

Well, it might be influenced, you know, we have a lot of seasonality last year, right? The third quarter was just phenomenal, and wish it was just sustainable but with high levels of seasonality last year, to the extent that we have a very good start in the first quarter of '07, it may detract a little bit from those high levels of seasonality, so quite frankly, I'm hoping this year's not quite so erratic as it was last year.

Okay, and then if you could just update us, looking at Enterprise and the mix of sales coming from CAT-6 and above, what did it look like in 06 and where do you think it's going in '07 and if you could just talk about 10 gig as a percentage of sales, how much that was in '07?

I can, in part. I think somewhere, I think in the fourth quarter our CAT-6 were somewhere in the 60-plus percent range. Expectations, clearly for '07 to expand those numbers. I think if we could get into the 65, 70 might be an upper limit in terms of mix. Under the 10-G side, I don't have that number for you for the quarter. I can tell you that in December and January, in terms of North American sales of 10-G, it was the 10% plus number, so we are seeing substantial traction currently in the 10-G space, and our hopes and desires are that we can expand that, but we don't have good visibility, Celeste, in terms of where we think that number is going to go through the course of the year.

Great. Thank you.

The next question is from the line of Daryl Armstrong with Citigroup. Please proceed.

Thank you very much. First, a clarification and then some questions. I know that you guys talked more about price stability now, but I just wanted to insure that all of the price increases that you guys took last year have fully rolled through your base of business, so as I think about pricing on the blended basis going forward, on the sequential basis, if you're right about price stability, your results will be driven almost entirely by volume. Am I thinking about that correctly?

That's exactly right. Pricing in the second half of the year was largely stable and, yes, our growth expectations or our guidance for top line growth in '07 is fully mix and volume.

Daryl, this is Jearld. I think there's still some year-over-year sort of benefits coming from price increases which we'll probably see through the first half of the year, but again, prices are stable and not changing currently.

Daryl, that was a good observation. Analytically you're absolutely correct. What you have at the beginning of this year is price in raw material, stability, and the growth is in dollar and volume and mix, so that if you look on the sequential basis, you'll be comparing it to periods that didn't have price increases.

Great. And then in terms of the Broadband segment, I know that you guys had just a little bit early to assess whether Carriers were going to upgrade one gigabit but as you think about your own business, if I recall, you guys still have a good bit of unused manufacturing capacity, to the extent that we did see some incremental investment on that front, which would push up your expectations in terms of volume. How should I think about the incremental margins within that Broadband business and that type of scenario?

I think we're operating at kind of capacity that there wouldn't be a substantial lift in individual margin contribution, Daryl. We're at the 85-plus capacity range now. It would clearly help the overall margin and dollar margin contribution, but it wouldn't do a lot in the absorption, if that's where you were headed.

Exactly. And the other thing too is think about our global manufacturing initiatives. A big part of that was to become more efficient in terms of fixed overhead and so the impact is relatively small volume changes won't create a lot of dilution dollars.

Right, and then one last question. You guys talked about increase of spending in the Carrier segment from the large Carrier. To the extent that that spending would start to show some volatility again as we move through the year, do you have enough other leverage to be able to offset that relative to the forecast that you guys put out for the full year?

Daryl, quick qualification. Let me see if I can help us understand your question. What I believe if I can help us understand your question. What I believe Daryl is saying that this large customer should be as volatile as he was last year, do we have enough visibility to maintain our projections for the year.

Right.

We're counting on this customer to do what he said he would do for the year.

Okay.

But what he has done is he started off faster.

Oh, good.

And if that helps clarify?

No, that's perfect.

The other part too, Daryl, is we said it last year and we're saying it again this year. In our guidance is some pretty conservative numbers because of the uncertainty or volatility in that segment. So, I mean, to the extent that, I mean if they shut her off for the rest of the year obviously it has an impact. They remain equally volatile and should have minimal impact in our guidance. If it stays at the Q1 levels, it will build strength in our guidance for the whole year.

Very helpful, and again, congratulations on the results.

Thank you.

Thank you for the support.

Your next question is from the line of Brian Coyne with Friedman Billings Ramsey. Please proceed.

Hi, good morning, guys, and congratulations again.

Thank you, Brian.

Three questions. First of all, I think Alan asked the M&A question to be begin with but obviously you had fantastic cash generation this quarter so I was wondering if you could possibly focus perhaps a little bit on an opportunity to maybe gain some share in a very fragmented enterprise market possibly by rolling up smaller competitors. It seems like the growth outlook and the margin outlook obviously seems to be pretty good for the segment. Is there an opportunity there?

Brian, we're probably looking at 25 to 30 opportunities, ranging from very very small companies that have very unique additive products that could go into either Enterprise, Broadband, or Carrier, to very large opportunities. We clearly understand that if we don't find an appropriate and correct use but not a stupid use of our cash, then we will look at other opportunities to put the cash to use for our shareholders. We have a very stable team that's capable of integrating these acquisitions and our acquisition team has all kinds of experience that, Brian's operating team has great experience. We're very fortunate in integrating as fast as we did the Avaya acquisition, so we have lots of things working. We just want to make sure that we do the right opportunities at the right time. Brian?

I would say, I would acknowledge, Brian, the enterprise space is very fragmented. I don't think it's a good strategy to be acquiring these smaller players in the segment. Certainly in the world of cable, they bring little or nothing to us. They don't have our technology, our cost bases, or our market access, and they're playing in lower margin segments of the business of the market. There's just too many of them to have any impact, so I don't think that's a good strategy for cabling or a discrete connector manufacturer, either one. They would bring very little, if anything, to our value proposition. If you look at Enterprise, not unlike Broadband and Carrier space, the strategy is really about broadening our capabilities to fill in what we need to provide as part of a larger solution, so that gives you a little bit of insight in terms of what our thinking is.

No, that's helpful. Almost like a build it and they will come. Focus on a higher capacity gear, I guess, right?

Absolutely.

Great. Second one really is last year, when you proposed the Andrew acquisition, a big part of the rational was cost and sort of substituting aluminum for copper and with copper well off its highs, what's your view on that cost to arbitrage opportunity?

Well, as the spread between copper and aluminum narrows, obviously, the value of that proposition becomes less, but it still remains a very large number and it still is a very attractive synergy.

Okay, sounds great and then I'll make it quick. The third one, I haven't heard too much recently about the facility in China. I was wondering if you could give an update perhaps on where your capacity utilization is. Just in general is it meeting your expectations? Thanks.

We've been very very happy with it, Brian. The project is substantially complete. There will be low levels of activity continuing through this quarter, and utilization of that facility remain very high, optimal I would characterize it as.

Great, guys. Thanks again.

Thank you, Brian.

Your next question is from the line of Ken Muth with Robert W. Baird. Please proceed.

Thanks, good morning this is Jason on for Ken.

Hi, Jason.

Good morning.

Just a question on Carrier and then one on enterprise. In Carrier, that strength, as you said, it started early and I know we had talked about potentially seeing a competitor there with that particular project. Are you seeing competition yet there?

Not substantially, Jason. Expectation is that it will happen, but right now, particularly for the traditional AT&T properties, we're seeing low levels of competition in the first quarter. Okay, great. And then on enterprise, back at the analyst day, you had talked about adding 50 people to the sales and support group going from 350-400. Is that still the case throughout the year and then if you could talk a little bit about your relationship with Cisco and the emerging Markets? Well, the expectations in terms of our investment in Sales and Marketing and enterprise is under way. Some of that, you're seeing in SG&A spending in the fourth quarter trying to get a jump on the year, and we like everything that we see in the emerging Markets and there is no change in our strategy.

We're in the extensive hiring mode right now and trying to execute that strategy. The second part of your question was Cisco. The relationship continues to expand. We found a lot of synergy working with Cisco from a Marketing perspective as well as a technology perspective where we have been able to integrate particular elements of our technology, particularly as it relates to our intelligent patching systems. The show that we participated in, the Cisco show in Cannes, France was, I think, representative of that growing global relationship. It was a excellent show for both parties and largely because we share so many joint customers. So, I hope and our expectations are that globally that relationship will only continue to expand.

All right, thanks, Brian. Thanks, guys.

Yes, sir.

Operator, we'll take one more question.

Certainly. The final question is from the line of Alan Mitrani with Sylvan Lake Asset Management. Please proceed.

Hi, thank you. Just to be clear, can you just run through capacity utilization for each of the three businesses? I thought your answer to Daryl was the 85% capacity utilization. I thought that was was the 85% capacity utilization. I thought that was just for Broadband. Maybe if you could run through those three.

I don't remember that number. But yeah, largely, we don't talk about utilization. Capacity, I'll just say is not that expensive for our Company. We like short supply chains and we like short business cycles, so we try and stay away from high levels of utilization. I'll just say that for the current outlook of '07, I think we've got the right capacity to service our customers.

Okay, and then since CapEx looks like it's going to be below D&A for I don't know how many years straight already, can you give us a sense as should we just assume that net income is going to approximate free cash flow?

I'm thinking of your question here, just some background, depreciation and amortization has been falling as you've noted over the last two years, and our capital spending has been rising the last couple years, so that they are coming closer together. We do expect to have continue to generate significant free cash flow and operating and generate mainly from the operating cash flow the business. We have seasonal trends in that. Our first quarter is usually not as strong in the cash area as the fourth quarter, for instance, where we saw the $87 million of operating cash flow, so but it is, CommScope has always been a strong cash flow Company and that's part of our future as well, I think.

Okay. Thanks a lot and great job, guys.

Thank you. Thank you for joining us, Ladies and Gentlemen, and we look forward to visiting with you next quarter.

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.