CommScope Holding Company Inc (COMM) 2009 Q2 法說會逐字稿

Good afternoon, and welcome to the CommScope second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, Wednesday, July 29, 2009. Thank you. I would now like to turn the call over to Phil Armstrong. Sir, you may begin your conference.

Good afternoon. Thank you for joining us. Joining me today is Frank Drendel, CommScope's Chairman and Chief Executive Officer, Brian Garrett, CommScope's President and Chief Operating Officer, Jearld Leonhardt, CommScope's Executive Vice President and Chief Financial Officer, and Randy Crenshaw, Executive Vice President and General Manager Enterprise.

Please note that during this conference call we may make forward-looking statements regarding our 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 the factors that can cause such a difference, please see the Press Release we issued today and 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.

Also note that all dollar figures and percentages are approximations and that the detailed reconciliations of GAAP to adjusted results can be found in the Press Release we issued today that is posted on our Web site. After we review second quarter results and our outlook, we will open the lines up for questions. Also, during the Q&A period we ask you to limit your questions to one topic. If we have follow up questions, you can step back in the queue. With that, I will turn it over to Jearld.

Thank you, Phil. Before we get into the details, I plan to take a few minutes to talk about what we are seeing in the global marketplace. Despite the recession, the global fundamentals for wireless services remain solid. Global wireless subscriptions grew to more than four billion in the second quarter according to industry estimates, and traffic growth on mobile networks continues to accelerate. Consumer demand for new wireless services and broadband capabilities continue to drive the need for new infrastructure around the globe. In this environment we believe we have strengthened our global market position, particularly for the development of solutions for use in next generation networks.

However, there is still a great deal of economic uncertainty in the world which is affecting global telecommunications spending. While we have experienced pockets of strength, overall wireless customer spending levels were lower than we expected during the second quarter, particularly by OEMs and especially in international markets that were affected by the more difficult credit environment or unfavorable currency fluctuations.

However, we are pleased with our ability to deliver solid operating margins and generate strong cash flow in this difficult environment. We appreciate our employees' efforts and sacrifice, and we continue to balance short term priorities of driving down costs with our longer term priorities of enhancing our global market position and developing solutions for next generation networks.

As we discussed in our second quarter 2009 results, our primary focus will be on the sequential performance because we believe this will provide you a better sense of the current status of our business. For the second quarter of 2009, we reported sales of $784 million, and net income of $15 million or $0.18 per diluted share.

Reported net income includes after tax charges of $15 million for amortization of purchased intangibles, $15 million for charges related to debt conversions and prepayments, $10 million in litigation charges and $6 million in restructuring. Excluding these special items, adjusted second quarter 2009 earnings were $61 million or $0.67 per diluted share.

Now, sales declined 28% year-over-year, to $784 million, primarily due to the ongoing effect of the global recession, decreased spending by telecommunication providers and ongoing weakness in commercial and residential construction, and the impact of OEMs and distributors sharply reducing their inventory levels. The year-over-year sales were also negatively affected by changes in foreign currency exchange rates of $22 million.

Sales were down in all segments and all geographic regions. However, sales rose 6% or $41 million sequentially in the second quarter due to improved enterprise and wireless network solutions or WNS segment sales, and the positive sequential impact of foreign currency exchange rates of $8 million. The expected sequential sales growth was tempered by lower than expected wireless to global OEMs and delays in spending by certain North American wireless operators. IN Antenna, Cable and Cabinet Group, or ACCG segment, sales declined 1% sequentially to $322 million as much stronger North American wireless cabinet sales were largely offset by lower global wireless sales of cable and microwave products. Western Europe remained weak, and wireless sales declined moderately in the Asia-Pac region mainly due to irregular carrier spending and lower prices on some products.

While we expect lower second half sales from wireless infrastructure in China due to the timing of operator deployments, we remain bullish on longer term wireless opportunities there. We expect to benefit from 2G and 3G project that is will begin in the second half of the year.

India continues to adopt wireless at a stagger pace, however, there are some challenges that will constrain our growth. These include the effect of lower incumbent operator spending due mainly to seven new nation- wide operators and the timing of upcoming 3G license awards as well as increasing competition and the negative impact of the lower rupee. India will remain a key market and we intend to continue focusing on those opportunities where we can utilize our technology and competitive advantage to serve our customers and provide acceptable returns.

Shifting to our North American wire line business, we were pleased with a strong sequential improvement in sales of our environmentally secure cabinets. AT&T continues to experience success with its wire line Uverse strategy. We have also begun shipping environmentally secure cabinets for the wireless market and are in the process of completing somme key fuel cell trials in several global markets. We continue to be excited about the long term opportunities of our industry-leading cabinet portfolio. WNS segment sales rose 13% sequentially to $180 million. WNS sales rose sequentially in all major product areas and benefited from the network consolidated, consolidation initiatives of a large US based wireless operator as well as the timing of deployments of certain products in Asia. The WNS segment continues to benefit from increased deployment and use of mobile location base services.

We recently announced innovative new technology in GeoLENS, our next generation of solutions that enable location capable networks. GeoLENS helps communication carriers support and stay ahead of customer demand for location based application,s and enhances their ability to address regulatory requirements such as E91 emergency services and commercial opportunities such as 411 information services and other new Smartphone location based applications.

The proliferation of new frequencies and the increased efficiency of our power amplifier technology have accelerated interest in our industry-leading integrated amplifier products such as remote radio heads. These integrated power amplifiers provide high power high efficiency all in one solutions that enable flexible deployment options as well as make it easier for wireless carriers to change frequencies as they transition toward 4G technologies such as LTE. Demand is also improved for our high powered multicarrier power amplifiers or MCPA as network consolidations continue in North America which drives cell site sharing and as demand for wireless data increases.

Turning to our enterprise segment, sales rose 14% sequentially to $164 million in the seasonally stronger second quarter. Sales rose in essentially all regions except the EMEA region due primarily to ongoing weakness in western Europe. Sales rose despite lower sequential channel inventories that is we believe bottomed late in the second quarter. Distributer channel inventories are at historically low levels.

We continue to see increasing demand for our cutting edge SYSTIMAX gigaspeed extend solutions for data centers as well as SYSTIMAX Ipatch intelligence software and control systems. The Ipatch intelligent patch panels and shelves with software and control systems is increasingly demonstrating its value to IT professionals who want to improve control and enhance intelligence in their physical infrastructure. We have also seen some stabilization in corporate IT spending and in Government health care and education markets.

Despite the current economy, Enterprise has continued to consume increasing width and are upgrading their land infrastructure and data centers to handle expanding bandwidth requirements for data intensive applications such as collaborative software, tele-presence, requirements of IP based intelligence buildings as well as in-building wireless applications. As a result, we continue to experience a positive shift in mix toward the high end gigaspeed extend solutions and strong portfolio fiber solutions.

Broadband segment sales rose 4% sequentially to $118 million due primarily to normal, North American seasonal trends. We were pleased with the US Department of Agriculture's rural development telecommunications program that it has accepted CommScope's BrightPath fiber to the home solution, enabling service providers seeking funding from the rural utility service or RUS group to propose the use of BrightPath products in applications they submit for RUS grants and loans. The RUS accepted our flat drop fiber cable designs which support fiber to the home solutions, including the Company's BrightPath solution. BrightPath provides the benefits of a fiber to the home network without requiring changes to back office, head end, central office or customer premise equipment. We expect the broadband business to benefit from the US Government broadband stimulus beginning in 2010.

On a consolidated basis, US sales increased 17% sequentially to $419 million while non-US sales decreased 5% sequentially to $365 million. Total customer orders booked in the second quarter of 2009 were $742 million and our book to bill ratio was .95 times for the quarter. Gross margin for the second quarter 2009 rose more than 600 basis points sequentially to 29%. Adjusted gross margin for the quarter would have been 32% excluding a noncash $18 million litigation charge and $4 million for the amortization of purchased intangibles.

Gross margin rose sequentially primarily due to higher manufacturing volumes, lower material costs, and ongoing costs reduction. SG&A expense for the second quarter 2009 was $99 million, down $38 million or 28% year-over-year due primarily to ongoing cost reduction programs as well as the sufficient suspension of our incentive based cash bonus programs, lower sales commissions, and recoveries of bad debt expense.

SG&A expense in the first quarter of 2009 was $101 million. We were pleased to deliver a very solid operating margin in the second quarter of 2009 despite the tough business environment. Adjusted operating income excluding amortization of purchased intangibles and other special items nearly tripled sequentially to $125 million or 16% of sales. Also, adjusted operating margins returned to double digit levels in the quarter.

Now let me take a moment to highlight the progress in broadband and WNS adjusted results as they posted strong sequential and year-over-year performance. Broadband team executed the cost reduction and plant consolidation plans effectively in the past year. Broadband's record quarterly operating performance also reflects the unusual combination of higher year-over-year sales prices, lower raw material costs, the benefit of suspension of the incentive based cash bonus programs, and higher recoveries of bad debt expense. We do expect some sales price decline and higher margin costs in the second half of the year, and as a result, expect the operating margin to decline from the second quarter level.

The WNS team effectively restructured its product portfolio, divested unprofitable businesses and improved operations over the last year. We have also seen increasing adoptions of our technologies for power amplifiers and location based solutions. Interest expense was $43 million in the second quarter and includes noncash charges of $11 million related to the interest payment for the conversion of convertible debt, and $5 million related to the write off of the deferred financing piece in connection with accelerated debt payments made in the second quarter.

Excluding these items, interest expense in the quarter was $26.5 million. The Company's effective income tax rate was 51% and reflects nondeductible charges related to the conversion of convertible debentures and to a lesser extent, the effects of foreign income repatriation. Despite the global slowdown, we continue executing our plan to repatriate during 2009. The incremental calendar year impact on taxes is expected to be roughly $18 million which is having a significant impact on tax rates.

Now since our projected 2009 pretax income is lower than we anticipated earlier this year, the repatriation cost is having a larger effect on the overall tax rate than we previously expected. Now, assuming there are no major changes to US tax law and excluding the impact of special items, we do expect tax rates to decline in 2010 to the mid-30s likely, due primarily to repatriation costs having a lesser impact.

I will turn the cash flow, the balance sheet and liquidity measures. It has been a busy quarter for us with regards to our capital structure. I will review some of the key actions we took in the quarter to strengthen the balance sheet and enhance liquidity through capital markets transactions. Our primary goals were to lower debt and enhance financial flexibility and reduce uncertainty regarding the Company's ability to remain in compliance with the financial covenants and the credit facilities. So during the second quarter, we completed the public offering of $288 million of 3.25% senior subordinated convertible notes due 2015. Concurrent with the convertible note offerings, we issued 10.5 million shares of common stock and public offerings at a price of $22 per share.

We used $400 million of these proceeds to repay a portion of the senior secured term loans in conjunction with an amendment to the credit facilities. Credit facility amendment postpones by a year, the increase in the minimum interest coverage ratio and the decrease in the maximum leverage ratio, among other changes. These changes to the covenant levels will now take effect beginning with the quarter ending September 30, 2010 instead of the quarter ending September 30, 2009. The subsequent change to each ratio is also postponed by a year to September 30, 2011. We also announced the conversion of all $100 million of the outstanding 3.5% convertible senior subordinated debentures due 2024 in CommScope common stock.

In connection with the conversions, holders received an interest make-whole payment in shares of common stock and recorded a noncash charge of $11 million. As a result of the conversions, we issued 10.3 million share of CommScope common stock. We believe that we have established our key goals of adjusting our capital structure. We're also pleased that the rating agencies recognize our progress by affirming our corporate debt ratings while updating their outlook to stable from negative, and raising the rating on the senior secured term loans.

Now, turning to other second quarter results, we are pleased to report record cash flow from operations. Cash flow nearly tripled year-over-year and rose 62% sequentially to a quarterly record of $138 million. We achieved this record primarily due to increasing operating margins, cost management, and ongoing focus on reducing inventories and managing our working capital. Capital spending in the second quarter was $10 million. We are pleased with the pace of debt reduction and have reduced debt by nearly $500 million year-to-date. Now, at June 30, 2009 total debt outstanding was $1.5 billion or about 52% of book capital structure. Net debt, that is total debt outstanding less cash and cash equivalents was about $1.1 billion at the end of the quarter.

So looking ahead to the second half of the year, we are now planning on economic -- we are not planning on economic recovery or a significant benefit from the US Government stimulus plans. While we believe that the spending environment is stabilizing, we do not anticipate meaningful improvement until next year. So in this environment we believe it is best to remain cautious, a position we think many of our customers are taking.

Now for the third quarter of 2009, we expect revenues and adjusted operating income to be consistent with second quarter levels. Specifically, we expect revenue to remain generally stable sequentially around the $750 million to $800 million level. Adjusted operating income is expected in the range of $105 million to $125 million excluding amortization of purchased intangibles and special items. Interest expense of $26 million is expected including amortization of deferred financing fees.

The tax rate is expected at 38% to 40% on an adjusted pretax income and about 106 million fully diluted shares are expected to be outstanding in the third period. So overall, in this short term we remain cautious but optimistic. We are seeing some signs of stabilization in certain markets that could be a foundation for an eventual recovery. Global wireless subscriber and mobile data traffic growth do remain robust. The ongoing consumer demand for new wireless services and broadband capabilities continue to drive the need for new infrastructure around the globe. We believe that we have positioned CommScope well in all of our served markets, particularly for advanced next generation technologies. We expect ongoing waves of spending for 2G, 3G and 4G services global, for higher speeds and data center and the desktop, and for broadband services to the home to continue to expand.

Now, when the economy rebounds we intend to be even stronger, operationally, competitively, financially, so we can grow revenues at both market rates -- that's revenues at above market rates and continue to drive long term shareholder value. Now I will turn it over to Frank for his comments.

Thank you, Jearld. Thank you very much. First, I would like to thank all of CommScope employees for their excellent execution during a very difficult period. We improved sales margin and working capital. I would also like to congratulate the finance,accounting and legal teams for the capital market transactions and amendments. We are proud of our second quarter accomplishments. Capital market transactions have lowered the debt, enhanced liquidity and improved our ratios. We have reduced debt by more than a billion dollars since the acquisition of Andrew, and already this year added an additional $500 million reduction. We have improved operating margins to nearly 16%, and we generated record cash flow from operations of $138 million.

We continue to deal with the world economic issues. We still believe in the wireless and bandwidth growth. India is adding 13 million new subscribers a month. China is committed to deploying 3G networks, and SmartPhone usage is accelerating around the world. We see a number of long term growth opportunities in building wireless geolocation applications, wireless cabinets for power back-up and equipment protection, and ongoing data center expansion. The HDTV transition is taking place and we are beginning to see the first use of IPTV. We have the best team and the best execution in the marketplace, and we continue to believe in the power of the bandwidth expansion. With that, operator, we'll turn it over for questions.

(Operator Instructions). We will pause just a moment to compile the rooster. Your first question comes from Mike Walkley with Piper Jaffray. Please go ahead with your question.

Great. Thank you. I want to ask a question on the margins on the ACCG business. You talked about potential consolidation helping your business open the opportunity for new customers and maybe some scale there to improve margins. But on the flip side we have seen some pricing pressure hitting margins as the OEMs like Nokia, Siemens and Ericson, so can you talk to me about the pricing environment and then also some opportunities to gain share with new customers.

Brian Garrett here. I'd say year to date, I think we are pleased with the pricing environment. We have seen very ,very modest reductions in pricing, certainly in the quarter and on a year-to-date basis. And I would say very modest on a year-over-year basis. So we are pleased certainly in North America and the western world. Asia is always going to remain a very competitive space for us and, particularly, as it would relate to base station antennas, and more specifically within ACCG within the cable space, I think we have technologies that longer term are going to address that competitive environment in Asia. And specifically, without speaking to is our deployment of smooth wall aluminum solutions for the tower space in Asia.

Okay. Great. Thank you. Do you see any opportunities with the carrier consolidations, does that open opportunities for maybe new OEM relationships for you?

The OEMs already are very strong relationships for us, and some of the consolidating OEMs that you mentioned are OEMs that we have both large and close relationships with. The result, particularly if some of the activities in North America, I think we largely view that as a zero sum gain, where business that may have been on a direct basis longer term may be moving over to the OEMs we have well established relationships with.

Mike, thanks. Operator, we will take the next question.

Your next question is from George Notter with Jefferies. Please go ahead with your question.

I wanted to ask about gross margins. Obviously a big step up sequentially in gross margins , even though the top line I think was worse than folks were expecting. Can you help us kind of parse that improvement out? Was a lot of that driven by commodities? Was it driven by the cost reductions associated with manufacturing integration on the Andrew deal? Maybe there are other factors in there, but if you can just scale those things in terms of the impact that would be great . And as a follow on, I am wondering how much more benefit do you get from those things going on out in the model to the rest of

Brian Garrett again. Yes, I am not quite sure unless Jearld has specific quantification, I will respond to that qualitatively, because I don't have any specific detail for you. My assumption and insight would tell you the big contributors to margin was, one, clearly retaining pricing in the market. These give-backs can be substantial and I'll tell you that the sales and marketing teams globally continue to do an exceptional job, and I will say some times at the cost of volume. With that being said, the big contributors on a COGS basis in the quarter really has to be attributed to increased volume. That's going to affect our absorption. We reduced headcount substantially in the quarter.

Some 500 people are better. So, on higher volumes, lower headcount, productivity was improving. Historically, we have talked at length about the successes that we have had in delivering our synergy numbers in the quarter. We delivered approximately $32 million of synergy. So cost reduction in aggregate. Whether it's through productivity in traditional vehicles, or through our defined synergies with Andrew, are delivering big, big numbers and driving this gross margin.

Right. YOu mentioned a lot of these, but really just the whole supply chain area is where we have been getting probably the largest piece of cost reduction, which would include some benefit of commodities, in addition to the things that Brian talked about. But volume obviously is, has been key, it was much more productive factories this past quarter than the first quarter. That was very helpful and he mentioned headcounts and different factors there that helped the margins. I would lead with cost reduction in the supply chain is probably the biggest single item.

Then prospectively, for example on merger synergies, are you still at $115 million combined company target for year end? Is that on track ,what do do you think things about these looking forward.

Yes, our year-to-date run rate is ahead of the midpoint and our internal projections say that we will meet or exceed our public commitments to you.

Any benefit in commodities in the second half or no?

Modest.

Thanks very much.

In the second quarter or the second half?

The second half.

Commodities is always a tough call.

Thanks, George. Our next question, please.

Your next question is from Steve O'Brien with JPMorgan. Please go ahead with your question.

Hi. Thanks for taking my question. I would like to get a little bit better understanding of volume growth and price as it affected the revenue result this quarters versus your expectations into the quarter. And on the same topic, how did revenue or did revenue impact the ability or, I guess, just how did you manage to exceed your operating margin goal in a clearly tough revenue environment?

We were disappointed in the volume growth that we had in the period, but as Brian mentioned there were some price give backs, but they were as much as expectations. So we did okay on the pricing standpoint. And I think we got greater benefit out of cost reduction activity across the board in every area than we expected it was a strong period and therefore we were able to achieve higher number than we had expected. It was a strong focus for the period and therefore we were able to achieve higher numbers than we had expected in cost reduction. So it was a combination of factors lead to a higher operating margin margin than we expected.

It's Frank. The important thing for our investors to recognize we are generating these types of margins on these sales level. You get any strength coming through this market on improved performance and orders around the world, this thing will be in really great shape. The operational team have got it leaned out to where it can produce very substantial margins at very low volumes. No one in the world can do this kind of distribution and serve the customer base as we are serving it given this environment. You won't see any of our competitors producing this type of operational margins.

The other big variable, Frank is there was a large mix change in terms of the segments. On a pro forma basis, our WNS business delivered 16 points of operating margins. And this is a $700 plus million dollars part of our business that has struggled to reach profitability here heretofore. And Eddie and his team have continued to make increasing progress, both commerciality and operating performance, and a lot of things came together in the quarter for WNS. Parts of the, essentially every part of the business was profitable, and so you take a basically a break even business and put 16 points of operating margin on it, and it has the major impact on the corporate for both.

We could say much the same about broadband, for broadband has been for the last several quarters has been in single digits of operating margin, and for them to be in the mid-20s in the quarter was a big turn around for both of these businesses. So, these things as I say, have a major impact on the sum of the performance.

Great.

Steve, thanks. Operator, we will take our next question.

Your next question comes from Shawn Harrison of Longbow Research. Please go ahead with your question.

Good evening. Wanted to touch on the revenue shortfall ACCG this quarter, as well as kind of your look into the back half. I was hoping you could discuss the linearity of orders you witnessed during the quarter. You saw order rates decelerate as you went into the sumer and then as you look at the $750 million to $800 million guidance for the third quarter, I guess, what would be the puts and takes to the positive or negative to fall somewhere, either above or below the midpoint of that guidance?

Well, in the wireless space in particular, it is quite a mix and it's likely to continue to be puts and takes as we move forward. Some of Jearld's comments about there's going to continue to be variability across all of these businesses the next several quarters. But we continue to have a very strong business in Asia, and I will say that for all of our business segments. We had strength in our enterprise business in the quarter in Asia, and it remains a big part of CommScope, but in aggregate it was a softer period for us in wireless in Asia.

The flip is that in North America we saw an uptick in wireless business, and very large upticks by AT&T sequentially, and Verizon, but that was offset by substantial downturns in T-mobile. So you look across all of our businesses and, business segments and geographies, it is a really -- the strength of our position is that we've got a diversity in our leadership and in total provides us a lot of stability.

As we look out into the third quarter, is it safe to say maybe a continuation of the second quarter trends is the best way to expect.

I think that's what the forecast says, and there will be, on balance, a mix of up and down for all of the segments next quarter.

Operator, we will take our next question.

Your next question comes from Jeff Beach with Stifel Nicolaus. Please go ahead with your question.

Good afternoon, and great quarter.

Thank you.

Since I'm not going to get more than one question it sounds like, it better be a good one. I am looking at these outstanding margins, and I guess the question is was there any inventory gains off of the reductions here in some of the businesses in the quarter. And then looking at a couple of the segments, specifically like a broadband at 24% doesn't seem -- that's unusual pricing versus cost. But talk about some of the puts and takes on the margins,specifically at broadband and WNS going from here to the end of the year, where these are just outstanding margins, that have never been achieved before.

Okay, Jeff. I think we talked about in broadband area they certainly did have a remarkable and very strong second quarter and a lot of good execution there. But I think we said the expectations would -- that will not be our expectations in that area moving forward. I think the second quarter is one where we did catch a lot of wind at our back, if you would, in the broadband segment particularly, and our team executed well there.

In the WNS area, volume will be key to that business as it has the highest some of the strongest gross margins in the area, some of the product lines do. And so volume is always keen there. And as we said, there is a movement or more like waves of some of the programs that move in. They're very strong for a quarter or two and they back off and that could be, we would expect some in and out activity at WNS in the second half of the year. So third quarter probably not to the level that second quarter was.

Yes. I was going to say, Jeff, we got Randy here, in the enterprise space. They did nearly 19 points 18 or 19 points in the quarter. Randy, you want to give us some insight on what's happening there.

The biggest drivers, we have pushed all along the solutions element of our business, and too often people talk products, and we get confused a lot of other commodity players. And in reality we are doing solutions, both in the optical, intelligence and in the copper space. And we think utilizing that capability even though we are in a very, very difficult time for demand and volume standpoint, customers are demanding smarter solutions, and with that we can save our customers a lot of money and thus drive better margins as well.

Yes. One other thing I would mention is that we did while in total not a material number, we did benefit from some recoveries of bad debt. We wouldn't expect that to be a repeatable sort of situation in broadband, largely in broadband, and so we wouldn't expect to repeat that, obviously, in future quarters.

Just as a follow up to this, can you give us a flavor for the book to bill any segments above one, and any segments maybe below the .95 average?

The wireless groups were slightly below and the broadband and enterprise were a little above.

Okay. Thanks.

Thanks, Jeff.

Operator, we will go to the next question.

Your next question comes from Ken Muth with Robert Baird. Please go ahead with your question.

Thanks. On the Q2 operating margin, the 15.9% and the kind of guidance of 14 to 16 range, if you will on operating margin, is it fair to assume you feel comfortable you can maintain that level and that's kind of something we should think about for 2010 on kind of the worse case as Frank was talking about before, if volumes get better, that you would again see upside to the operating margin for a little bit further out?

Even when we were in the depths of the first quarter, we have been pretty vocal about our expectation that we saw little reason why we should not be in the mid teens and those numbers sustainable. So I wouldn't reject your proposition that for the second half we should remain in the mid teens.

Looking at the mix of businesses, the mix might shift a little between segments, but our largest segment, ACCG, was lighter in terms of operating margin and could have potential to improve that while we may give back some in some of the other segments.

It is Frank, and the other thing is we have not seen any solid dollars come in from any of those stimulus programs. So you could see a situation where the fourth quarter is stronger than it has been traditionally for this company. There's no question that there's all kinds of activities going on in Randy's space especially in government and health care, but as far as dollars getting out out of the government, out of Washington, DC and into the system, I can't imagine you will see that until the earliest of fourth quarter next year.

And then a quick follow-up on China. It seemed like that changed maybe a little more rapidly than you were thinking of as we talked back in May that you felt good about Q3 in China. Is that more a one quarter correction of inventory ,or do you think that some of the change may be from Huawei and ZTE gaining share over some of the other vendors over there has something to do with this fall-off as well?

Well, we are going to participate, at least on the OEM side with Huawei and ZTE in terms of some of our subsystems, and so our expectations are on the OEM we are going to do fine. Now second quarter China was down for us and not big numbers, and not substantial changes into the third quarter. There are RFPs that are out for the tail end of the year. There is some uncertainty about the fourth quarter, and our current outlook is that yes, it will be down from the third, but we don't see substantial downturns in our China business from these current levels.

Great. Thanks very much. Operator, we will take the next question.

Your next question comes from Steve Ferranti with Stephens Incorporated. Please go ahead with your question.

Thank you. Steve Ferranti with Stephens. Nice job on the operating front there, guys. Tough quarter on the top line, but good job on the OpEx line. Just wanted to ask you, just looking across your geographies, Latin America and EMEA obviously looking like the bigger territories in terms of decline. Can you give us some sense for, in term of your segments, maybe which segments are more exposed in those geographies. And then I guess as a follow up, in your discussions with customers in those particular territories, any sense for what sort of the key constraints in terms of their willingness to place orders, whether it is economic uncertainty, whether it is credit, ForEx challenges, any sort of color along those lines as well.

Okay. Steve I will let Randy kick off comments relating our enterprise business, and then I will follow up on wireless and broadband.

Speaking regionally, certainly some of the destocking levels that we saw in distribution were most severe in the EMEA region. And actually we are out looking for the rest of the year to see some improvement in that because the levels are not sustainable. Latin America certainly has struggled, but we are seeing renewed strength in that region as well, and we have strong expectations for the A-Pac region. We think North America is going to be pretty much business as usual.

And certainly North America was hit first and it matriculated around the world, and we are seeing pockets of strength in those areas. Certainly not out of the woods yet, but we think there's some masking because of the destocking. The days supply in channel had been cut dramatically which, even if the markets don't materially improve, we think there's some stabilization that's going to occur in those particular areas, at least in the enterprise space.

And let me go into wireless here. Within ACCG, we said North America was sequentially, was strong for us in the quarter. Expectations are in aggregate that activity will continue through the remainder of the year. Within EMEA, it was a soft period sequentially relative to the first quarter, and there's little visibility to improvements in EMEA for the remainder of the year as it relates to ACCG.

When we talk about WNS, the WNS business was strong in all segments sequentially in the quarter, having growth in the North America and EMEA which was a real stand out among our business segments as well as CALLA. I would say as it relates to WNS, we will have a mix of results throughout the remainder of the year. In some of our segments we will see softening in the -- with some of the European OEMs, and our China, our Asia- Pac segment will likely remain strong for the second half of the year.

Great. Thanks. Operator, we will take the next question.

Your next question comes from Blair King with Avondale Partners. Please go ahead.

Thanks for taking the question. Follow ups to previous questions that have been asked. But looking through the balance of the year and into 2010 on the operating margin side, obviously a lot of it, the top line is attributed to volume and there's a lot of upside when demand returns. Where is the break on the volume where potentially we would slide back down into numbers that might have been seen closer around the first quarter or sort of a down tick on operating margins. And then also just on the gross margin side, if you can just give a little more input on how the gross margin might be sustainable through the back half of this year, and then I will leave it at that. Any kind of input would be great. Thanks.

That's a long list. Jearld, if you want to chime in here. I don't know if Q1 is a good comparison. If your proposition is what does it take get back to what we had in Q1,because remember Q1 was more, it was much more than a loss of market demand. It was much about inventory destocking as it was about reductions in demand. And globally these channel inventories have compressed substantially and I don't think we will see that again from these levels. The other whipsaw that was in the first quarter, remember, was that we came into the period as a result of those volumes with overpriced commodities. So it was the worst storm.

Our margins, the confidence in margins going forward really has to do with what we have been able to achieve in productivity, and our outlook for continued improvements in cost reduction and productivity improvements. The other aspect as you think about the models of the business going forward is that the business largely across all elements of it continues to position itself on new technologies.

We look at what's happening in WNS in its post volume and margin growth. It wasn't about same old business. It was about attracting new accounts with their MLC technologies, the announcement they're making in the GeoLENS technologies, the things that Randy is dong with10G which our broadband group is doing in BrightPath is really about repositioning this company in the second half of this year and for 2010. I will just say there's a lot of focus right now on not just talking about the cost reduction performance, but repositioning this position, this business, for growth.

I think when you look at the construct that we have of our facilities around the world, the way we have consolidated the facilities and our ability to produce almost to order the short lead time cycle we have and taking care of this massive customer base we have, I don't see a competitor out there that's positioned to do that. So when it turns, we will have it, and we will be there.

I think we predicted a significant improvement to the margins for the second quarter when we did ,and because we knew the first quarter was unusually low as Brian pointed out. First quarter was really a major transitional period, seeing the factors going on in the world, the destocking activity, restructuring activity that we were doing. And our company first six months of this year, for instance, we've lowered our inventories more than $120 million, don't really expect to see those kind of reductions moving ahead. So what that means is that things are flowing through normally again, which means that we are getting the benefit of the lower cost on the raw material procurements and our component buys and those kind of things where we had to wait on those a quarter or so as we cleared out inventory.

So our restructuring activities are largely in place now, and we have that behind us as well. So we think the fundamentals of improved margin are in place. And top line side will be monitoring pricing, and as we said there will probably be some additional give backs in that area, but we have some potential offsets there as well. So we think we can sustain very healthy margins through the balance of the year.

We will take the next question, please.

Your next question comes from Amitabh Passi with UBS. Please go ahead.

Hey guys, I had two questions for you. The first one you talked about some benefit from network consolidation and WNS in the second quarter, is that something you think continues into the third quarter and could you just perhaps elaborate what exactly that activity was that benefited you in the second quarter?

It escapes me.

Among our products, our Geo area was healthy. All of our product segments in the WNS segment, if I understand your question, were healthy. Sales trends in the quarter, up nicely sequentially, and again in that environment because we do have better margins in some of those product areas, it responds to volume very nicely. And most of it driver by power amps and other technology driven by demand on traffic on the network.

I was slow on the uptake here. The specific there is a technology that you know well, and that's the value proposition for MCPAs, and it is a technology where Andrew has led for many years. But the value proposition has not been largely adopted by the carriers, but as a result of consolidation, the value gets much larger. So if you were to look at the performance of our power amplifier business, it was a substantial improvement in the quarter, an important piece of that was approval and acceptance and sales of our MCPA to North American carriers.

Got you. Frank, maybe for you, how are you thinking about the potential opportunity for CommScope from the broadband stimulus program. I think you said you don't have any major expectations for 2009, but possibly in 2010. Just curious to see how you're thinking about the potential side of the opportunity here.

We see multiple customers in the small rural communities that are applying for those stimulus monies, looking at some of our fiber to the home technologies. I would not expect any of the major MSOs to accept the terms and conditions. It will be the rural type of operators, but we have seen lofts of applications for it. So I would expect some sales in that area at the end of this year and certainly next year.

I would add to that, these are unquantified. For everyone it should be unquantified at this period, but even the tier 2 and tier 3 wire line carriers, and these are the guys, the traditional voice guys in rural markets, their ability to deploy broadband is going to be expanded by this stimulus. We will participate likely in our cabinet business if ADSL or VDSL is more broadly deployed in some of these rural markets by the tier 2 and tier 3 carriers

The other aspect that will probably take us some time to define,but federal interest in accelerating document management within the health care market is going to drive spending in data segments for health care, and so we only read that as a positive going forward. There not one operation in CommScope that isn't covered by some stimulus program. Wireless and public safety, all of the Government programs, medical care, health care, management, taxes all of these things will have some stimulus impact.

Thanks. Operator, we have about two more questions, please.

Your next question comes from Amir Rozwadowski with Barclays capital. Please go ahead with your question.

Thank you, gentlemen. If we look at sort of linear progression through the course of the year, I realize your guidance doesn't factor in any recovery at this point. But if we look at linear progression, obviously the step down in Q1 and we're seen some steady improvement here, and if we look at the higher end of your guidance, that would imply sort of some steady growth off of Q2 levels. How should we think about the progression through the course of the year.

I know you had mentioned that the fourth quarter could be, perhaps I misunderstood, stronger than it has been traditionally if we get some of that broadband stimulus into the back half of the year. I want to understand your thought process behind that.

I do believe that. I believe the fourth quarter will be one of the stronger fourth quarter sequential to what we have seen in history. And I look at what Randy is looking at, some of the programs you are talking about and some of the other programs. So Randy, why don't you mention what you are looking at in the future.

Just looking at days supply and channel in our indirect model. Distribution traditionally drives a weaker fourth quarter as they right-size their inventories. There could be a situation to be determined where they don't take quite as large a dip adjustment for year end inventories which can mute things, as well as a little more optimistic outlook since they are stocked so low that there may be less tendency to prepare for a soft first quarter, which is traditional. So some of that seasonality that we've experienced in the past may be muted depending upon the pace in which we go into the third quarter.

I would point out all of the major carriers, cable and Telco, are all saying they are going to spend more in the second half than they did in the first half. That is traditionally not the way it works. So you can imagine in the fourth quarter as these Telcos and cable operators get close to the end of the year they will spend everything they have on their capital budget. So I firmly believe it could be a stronger than normal fourth quarter.

Could we find ourselves in a position where revenue grows on a sequential basis in the fourth quarter?

I don't know, we have lived six to eight weeks backlog for five years, and I won't promise any investors that is going to happen. But I think the thing you can take comfort with is that we're performing at 75% of sales level of last year with better margins. Just show any recovery in 2010 the way this thing is trimmed up and we will hit full speed from the sail boat.

I would say it is fair to say probably the cyclical trends in the economy are probably overpowering the seasonal trends while they're still there. They're definitely muted, both on the way up and likely on the way down.

Thank you very much. We will take our last question, please.

Your last question comes from Simon Leopold with Morgan Keegan.

I wasn't sure if I was going to get in there. I wanted to get a quick clarification and then more of a big picture question. We want to see, you are anticipating roughly a 32% gross margin if revenues were to be flat. I want to make sure I am not missing some other variables on that.

In the second quarter, taking out the impact of the litigation charge and intangible amortization, it would have been 32% in the second quarter.

By inference, it would have to be close to that, but I think we said earlier the mix within businesses can shift around.

Sure. I want to make sure that I wasn't missing something beyond that. My other question, in terms of trying to understand a little better about this shortfall in the ACCG business, could you get into a little more explicit explanation of basically what you got wrong in your forecast, why you were surprised and how you're going to fill that gap going forward in the sense of is it a customer that's gone away, share loss or simply a timing issue.

The biggest way of putting it is, and I will just comment broadly about the entire forecast. You look at our WNS business which is a large component of it is direct. Certainly Randy has a direct correlation with his customers. These businesses -- and I will say the same thing with broadband, they largely met or exceeded their own internal expectations. Where we fell short anywhere with any scale is with our OEMs. We have, as you would expect, less visibility through an OEM to an end customer. So if you were to analyze where we fell short, it would be in the OEMs. And the ACCG business, even if a market like India where we have a very large presence, not a insignificant, insignificant part of that business goes through, goes through OEMs.

Now is it too big of a leap to ask if this OEM pause might have been related to bidding on the Nortel assets?

I wouldn't go there, but you have channel issue, inventory issues, you have some entire second order of considerations when moving through an indirect channel as an OEM.

That doesn't answer the question of telling us -- sort of granted you don't have great visibility, it doesn't answer the question of what do you do to fix it.

You can't fix the OEMs, they will either be there when they get reorganized and find the customer channel. It will take us with them. For us, the influence of Nortel or an Alcatel or someone else to spend is pushing a rope. The good news is we are not losing market share on these things. We understand what they're doing. We're having that participation and our technology mood is moving us deeper into that cycle.

I think you have to be visible to what they're doing and what's happening. But at the end of the day, nothing has changed this growth in demand of bandwidth. All of these carriers are struggling to keep up with the amount of traffic that's going through it. Just look at all of the AT&T and Verizon calls that took place this week. Thank you, ladies and gentlemen. I think it was an excellent quarter for our company given the environments we are operating in. We are proud of all the team and we will continue to hopefully produce great results for you.

With that, operator, I think we will close the call.

Thank you for participating in today's conference call. You may now disconnect.