CommScope Holding Company Inc (COMM) 2009 Q4 法說會逐字稿

Good afternoon, my name is Christian and I will be your conference operator today. At this time, I would like to welcome everyone to the CommScope fourth 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) Thank you.

I will now turn the call over to our host, Mr. Phil Armstrong, Senior Vice President of Corporate Finances. Sir, you may begin your conference.

Thank you. Good afternoon, and thank you for joining us on this call. Joining me today is Frank Drendel, CommScope's Chairman and Chief Executive Officer; Eddie Edwards, CommScope's President, Chief Operating Officer; and Jearld Leonhardt, CommScope's Executive Vice President and Chief Financial Officer. We have added a slide presentation to provide you with additional background and color on the quarterly performance and business environment. Slides can be found on the CommScope website under the Events/Presentations tab of the Investor Relations portion of our website at www.CommScope.com. We hope you find these useful and would appreciate your feedback.

On slide two of the presentation, the forward-looking statement, you will find our cautionary language, related to forward-looking statements. During this conference call we may make forward-looking statements regarding our financial position, plans and outlook, that are based on information currently available to management, management's beliefs, and a number of assumptions concerning future events. Forward-looking statements are not a guarantee of performance, and are subject to a number of uncertainties and other factors which could cause the actual results to differ materially from those currently expected. For a more detailed description of factors that could cause such a difference, please see our press release and CommScope's 10-K that we filed today with the Securities and Exchange Commission. In providing forward-looking statements, the Company has not undertaken 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. In addition to GAAP information, we will provide certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors. Detailed reconciliations of GAAP to adjusted results can be found in the press release we issued today, and in the appendix to our slide presentation.

Now I will turn it over to Jearld Leonhardt.

Thank you, Phil. I will review our fourth quarter results and our outlook and then I will turn it over to Frank Drendel, and Eddie Edwards for comments, about our new organization structure, as well as some discussion of opportunities, and a brief summary. After their comments, we will open it up for questions.

Slide three provides a snapshot of our fourth quarter 2009 performance. Fourth quarter 2009 sales declined 13% year-over-year, to $748 million. While the fourth quarter is historically one of the weaker quarters of the year, total sales were stable sequentially. The key reason was recovery in our WNS or Wireless Network Solutions segment. A strong recovery in sales of the project-oriented WNS segment substantially offset the seasonal decline in the broadband segment. From a geographic standpoint, sales increased 27% sequentially in the Asia Pacific or APAC region, which was offset by a sales decline of 6% in other regions.

Foreign exchange rates positively affected sales by $16 million year-over-year, and $6 million sequentially, primarily in the antenna, cable and cabinet or ACCG group. Orders were $735 million and our book to bill ratio was slightly below 1, which is not unusual for the typically weaker fourth quarter. Operating income was $73 million for the quarter. Despite lower year-over-year sales, adjusted operating income, which excludes amortization of purchased intangibles, and restructuring, rose 6% to $100 million, or 13.4% of sales. Net income was $37 million, or $0.37 per diluted share. This included after-tax charges of $17 million for the amortization of purchased intangibles and a small amount of restructuring costs. Excluding these items, adjusted fourth quarter 2009 net income was $54 million, or $0.53 per diluted share.

With that summary, I will provide some specific commentary about each of our segments. Slide four highlights our ACCG segment financial performance. Fourth quarter ACCG sales were $312 million, and were stable sequentially in what is normally a seasonally weaker quarter. When sales to the Europe and Middle East and Africa region, or EMEA region were weak, they were substantially offset by stronger sales in the APAC region. As you can see, ACCG sales and adjusted operating margins have been relatively stable over the last few quarters. However, performance in this segment has been mixed. Cable sales have slowed and we are working opportunities for a recovery, particularly in the more price-sensitive markets of Asia. We are beginning to see results in executing our aluminum strategy with recent customer wins in India, for example.

Additionally, the superior performance of our HELIAX FXL smooth wall aluminum cable was recently authenticated by China's leading test lab which defines performance standards for coaxial cable used in China's wireless communications industry. Our HELIAX FXL cable was the first aluminum cable to pass ten rounds of environmental testing. It also generally outperforms leading copper cables and provides operators with a low cost transmission line solution. While we expect a slow start to the year, we expect improving cable sales trends once carrier budgets are released, and weather improves and we move into the typically stronger construction period of the year.

While we also expect a slow start to the year in our microwave and base station antenna solutions business, we're excited about our growth prospects this year as well as in the longer term. We believe there are meaningful global microwave backhaul opportunities, particularly outside of North America. We have expanded our support of wireless backhaul through the recently introduced microwave ValuLine Vision one-meter antenna, and the launch of our Comsearch iQ link services suite. The ValuLine Vision microwave antenna solution offers high performance in a smaller-sized antenna, which helps operators reduce costs through lower tower loading, and easier installation. These microwave antennas are supported by the industry-leading spectrum management solutions in our WNS segment. For example the Comsearch i Link Services Suite provides network engineering analysis and software tools that enable microwave planners to roll out high capacity, backhaul networks quickly and efficiently.

We also expect our base station antenna business to benefit from the continued investment in 3G infrastructure, and the initial deployment of 4G networks in North America. We have a broad selection of single band, dual band, and wide band antennas, specifically for LTE applications. In addition, our SmartBeam base station antennas increase capacity efficiency of existing sites and equipment, by redirecting the beam based on predictable customer traffic flow. With this dynamic load balancing, traffic peaks are covered, and the purchase of expensive new equipment can be delayed.

Turning to slide five, our Enterprise segment performance continues to be solid. As we expected, the typical seasonal decline was muted. Sales declined 2% sequentially to $175 million, substantially less than the prior fourth quarter sequential decline. We are seeing signs of a recovery in the corporate information technology spending and believe that channel inventories were more stable. We have seen solid trends in government, education, and energy sectors, as well as the data center market.

We believe that our end to end solutions, robust fiber portfolio, global sales force, and the commitment to R&D separate us from the competition. We are confident that we have a leading technology portfolio to support increasing bandwidth needs of the data center and intelligent buildings. We also remain excited about the longer term in-building wireless opportunity. We are focused on in-building wireless as a key growth area where we expect our One CommScope approach to yield benefits. We believe we have a unique market position and intend to build upon our wireless and enterprise expertise to provide customers with fully integrated intelligent building solutions.

Turning to slide six, our WNS segment sales increased 32% sequentially, to $159 million due primarily to strong project activity in the APAC region. Because WNS sales are primarily project-oriented, it is our most volatile segment. Our Wireless Innovations Group, or our WIG group, also continues to perform well. Wireless consumers desire coverage in complex and dynamic environments such as tunnels and stadiums. For example, CommScope was chosen to provide wireless and enterprise connectivity in two of the highest profile sports stadium projects of 2009. The Dallas Cowboys stadium, and ten stadiums hosting the FIFA World Cup soccer matches in South Africa. These landmark projects showcase our ability to support customers successfully across our business units. We think this one CommScope approach, our technology, global support, and ability to deploy end to end solutions, provide us with a competitive edge.

We are equally excited about near term opportunities for GeoLENs, our next generation solution which enable location capable networks. GeoLENs helps communication carriers support customer demand for location-based applications. The solution enhances operator's ability to address regulatory requirements such as e911 emergency services, and commercial opportunities such as 411 information services, and other new smartphone location-based applications. We also have begun to see positive trends in the sale of integrated power amplifier products such as remote radioheads as wireless operators transition to 4G wireless technologies. These integrated power amplifiers provide high-power, high-efficiency solutions that enable flexible deployment options as well as making it easier for wireless carriers to change frequencies as they transition to 4G technology, such as LTE.

Turning to slide seven, our Broadband segment sales declined 24% sequentially, to $104 million, as a result of the normal seasonal fourth quarter decline, and lower prices on select products. Broadband segment delivered a record annual operating income in 2009, despite a challenging economy. While we were pleased with the unusually strong margins in the second and third quarters of the year, we believe the fourth quarter 2009 margins are more typical of this business segment. While Broadband is a relatively mature business, we expect some modest benefit in 2010 from potential federal broadband stimulus, with our BrightPath fiber-to-the-home solution for DOCSIS-based HSC networks.

Slide eight shows our consolidated performance and highlights the relative stability and sales over the past few quarters. I will highlight some details. Gross margin for the fourth quarter of 2009 was 29.8%, and includes $4 million of amortization of purchased intangibles, included in cost of sales. Excluding the intangible amortization, adjusted gross margin was 30.2%. Despite lower sales volume, gross margin rose 200 basis points year-over-year primarily due to manufacturing profit improvement programs and the suspension of certain cash bonus programs for employees. SG&A expense for the quarter was $101 million, down 16% or 14% year-over -- down $16 million, rather, or 14%, year-over-year due primarily to lower sales volume, and the suspension of bonus programs. Adjusted operating income, excluding intangible amortization, and special items rose 6% from the year ago quarter, to $100 million, or 13.4% of sales. We believe that from a sales standpoint, we have been bouncing along the bottom and are pleased to have been able to improve adjusted operating margins despite lower sales.

Slide nine highlights other key items. Interest expense declined $11 million year-over-year, to $26 million, primarily due to lower outstanding debt balances. The Company's effective income tax rate for the fourth quarter was 26%. This tax rate was lower than we expected and reflects the benefits of operations outside the United States that are generally taxed at rates lower than the US statutory rate, as well as benefits arriving from the completion of prior year US and foreign income tax returns, and the filing of various amended tax returns. For the quarter, net income was $37 million, or $0.37 per diluted share. Adjusted net income was $54 million, and excludes after-tax charges of $17 million for the amortization of purchased intangibles and a small amount of restructuring costs. Adjusted earnings were $54 million or $0.53 per diluted share.

Now, I will turn to cash flow, the balance sheet and liquidity measures. Slide ten highlights our record-setting cash flow and significant debt reduction over the past two years. We delivered another year of strong cash flow from operations, by generating a fourth quarter record $122 million, and a calendar year record of $484 million. With modest annual capital spending of $41 million, we also generated record annual free cash flow of $443 million for the year. Since completing the Andrew acquisition in December, 2007, we have reduced debt by more than $1 billion.

Slide 11 provides more detail regarding our capital structure, which we have strengthened over the last two years. During 2009, we amended our senior secured credit facilities, and completed several important capital market transactions. Through these actions, we have strengthened our balance sheet, reduced debt by nearly $500 million, and enhanced our flexibility financially. At December 31, 2009, total debt outstanding was $1.5 billion, or about 50% of booked capital structure. We ended the year with $703 million of cash, cash equivalents, and short-term investments. Net debt, which is total debt outstanding less cash, and equivalents, and short-term investments, was $842 million. We have more than $1 billion of liquidity available to us, based upon a little more than $700 million in cash and equivalents and short-term investments, and about $360 million in availability of our revolving credit facility. We also remain well within compliance of the financial covenants in our credit facility.

Turning to slide 12, we have outlined some of the key factors affecting the current business environment. We are optimistic about our future. However, our ability to forecast with the normal levels of confidence continues to be negatively affected by a number of factors. These include the economic uncertainty, and our expectation of a slow economic recovery. Also, volatile quarterly carrier spending. For example, we posted strong wireless sales to India in the fourth quarter. However we expect a slowdown in early 2010, primarily as a result of the delay surrounding the auction of 3G licenses. We continue to experience significant price competition, particularly in the APAC region. Finally, we've also seen volatility in commodities and currencies. For example, during the last 30 days, copper prices have ranged from $2.85 a pound to nearly $3.40 a pound.

Despite these uncertainties, we remain optimistic about 2010. We believe that we have a strong competitive position, and that we will benefit from the economic recovery, even though the recovery may be slow, and may vary considerably among geographic regions. In addition, we believe we are well positioned to benefit from the positive trends driving the markets we serve. Rapid growth in wireless data and the transition to 4G in North America are expected to provide significant opportunities over the next few years. We are also optimistic due to the promising trends in our Enterprise segment which posted stronger fourth quarter sales than historical seasonal trending would suggest. We expect to continue to reduce debt in 2010, and plan to make our required excess cash flow payment within the next week.

I will now cover our outlook, found on slide 13. Despite limited visibility, we have tried to balance the positives and the negatives of the current business environment. The first quarter is typically one of the seasonally weaker quarters of the year, and we expect the first quarter of 2010 to be no exception. Specifically, for the first quarter, we expect to see revenue of $700 million, to $730 million. For reference, the midpoint of our revenue guidance, above, is down 4% year-over-year. We expect adjusted operating income of $50 million to $65 million, which excludes amortization of purchased intangibles, restructuring related to the current manufacturing review, and other special items. For reference, the midpoint of our adjusted operating guidance is 28% above the year-ago level. Now, we expect a tax rate of 32% to 36% on adjusted pre-tax income, and we anticipate a 2009 excess cash flow debt repayment of about $130 million, which we expect to pay within this quarter.

Now, our first quarter guidance reflects our expectation of a slow start to the year. Some factors that have influenced our first quarter outlook include volatile carrier spending patterns, and the timing of the release of carrier budgets, the delay of 3G licenses, as mentioned in India, the difficult weather conditions in certain geographic regions, particularly the US, supply chain constraints of certain key components, and higher operating expenses from a return to more normal business practices around our salaries and incentive programs. Although we expect a slow start to the year, we expect growth in both sales and adjusted operating income in 2010. Excluding any special items, that is. We expect business to improve as we move through the year and expect sales in the second half of 2010 to be stronger than sales in the first half of the year. We continue to believe that we are well positioned to benefit from the ongoing deployment and upgrades of wireless and wire line networks.

Now, that concludes my presentation. I will turn it over to Frank Drendel.

Thank you, Jearld And thank you for joining us everyone. Despite the challenges and uncertainties of 2009, I believe our Company operated with extreme expertise in delivering the results that we delivered. Our employees sacrificed a great deal to provide this opportunity for you. We are clearly in the sweet spot of telecommunications. Nothing that is happening every day takes away from the ultimate demand for our products. Data center growth, in-building wireless, 2G, 3G, 4G, the enhanced spending of wireless coverage for virtually every venue, and especially the advent of high definition TV and video over the Internet. It has been an incredible 2009. We suffered from the beginning of the recession, we've worked our way through that, we managed our way through all of the debts or Jearld's teams financings, we've come out with the strongest balance sheet we have had in years. We have the cash and cash equivalents to do anything we need to do and we're in the best position we've been in. Both from a balance sheet and a management leadership.

As you know, Brian Garrett left us after 30 years and he continues to work with us, during his planned sequencing to retirement during 2010. Eddie Edwards joined us as President and Chief Operating Officer. I've known Eddie for years. We've done business deals together. He is an outstanding leader and clearly the correct person for this time. He is accomplished in all the segments in wireless and understands as having been the President and Chief Operating Officer of RFS, one of our biggest competitors.

And finally, again, I would like to thank all the employees worldwide for the effort they put forward in this most challenging year. I am personally convinced that 2010 will be a defining moment for CommScope as we are clearly positioned as the best of the best in the world.

With that, Eddie, I will turn it over to you.

Thanks, Frank. On slide 15, we highlight the recent organizational changes we made to take advantage of the numerous opportunities we see. We created three Company-wide organizations across existing segments that have global responsibilities for commercial, supply, and technology areas of CommScope. We made these changes to accelerate growth, especially in Enterprise and Wireless innovations, as those two units work together more closely. And also in GeoLENs, as that business is seeing a lot of growth during the last part of '09, and we see great opportunities coming forward in 2010.

Also, to improve teamwork. This is something, we were organized under silos, this is something that we did to stimulate cross-functional selling, and calling, and something that we've seen recent successes. Also, to drive innovation, within the CTO group. CommScope heretofore has not had a group like this. We dealt with near-term technologies and needs. This is a group of people who will have the opportunity to spend time to think about where we need to be in innovation and technology in the next three to five years. Also, it becomes faster to respond to our customers' needs through more open communications. With the silo, the walls torn down, we believe that that can happen. And also, to improve organizational excellence. Better quality at lower costs, better plant utilization. As we see plants that we had that were single dimensional, are now being looked at to be multi-dimensional, as our operations teams look across the borders, as opposed to just within their segment.

Randy Crenshaw's supply team is in the midst of a complete manufacturing review, and Ted Hally's group is focused on determining the profitable sales growth that we can see and the solutions that we need to offer our customers in the near term. As Jearld said, we have limited visibility for the first quarter. However, we believe that we can deliver both sales growth, and higher adjusted operating income during the course of 2010, excluding special items.

On slide 16, we highlight why we're optimistic about long-term growth prospects. We are the global market leader in communications infrastructure. There are significant long-term growth opportunities as individuals and enterprises consume more data and across all bandwidth at home, and the office and on the go. At the same time, we are well diversified across markets, technologies and geographies. And in 2009, in the midst of what had been one of the most difficult economies, we successfully strengthened our balance sheet by reducing debt and generating record levels of cash flow.

Thank you, and I will now turn it over to Phil prior to starting the Q&A.

Thanks, Eddie. Please note during the Q&A we ask that you limit your questions to one topic, and if you have follow-up questions get back in the queue. Now, Operator, if you'll set up the Q&A please.

(Operator Instructions). Our first question comes from the line of Steve O'Brien with JPMorgan.

Hi, thanks for taking my question. I understand the guidance, looking out for 2010, on revenue is for growth, so it sounds like there has to be some acceleration in the back half of the year. Just want to see if that acceleration comes as soon as Q2 or will it follow more the seasonal pattern still of Q2, up a little bit Q3, and then, as far as you know, Q4 being down sequentially? And then on that topic, will there be cash flow growth in 2010? Is there still working capital benefits in the model that you're clear on the revenue growth and operating income growth? Thanks.

Okay, Steve, this is Jearld Yes, on the guidance question, on revenue, yes, we do expect an accelerating trend throughout the year, which should start in the second quarter, and move into the second half of the year. However, we would just caution that the fourth quarter typically would be less than a third quarter, based on seasonal trends, and wouldn't expect different than that at this time. So, much stronger second quarter and perhaps stronger third quarter after that, on the trends that we do see.

On the cash flow question, since we are expecting revenues to grow this year, we don't expect to have the same working capital benefit that we had last year. We expect to generate good cash flow in the year, but I would not expect that we could generate a record cash flow, as we did in 2009. Our 2009 performance, I think, was extraordinarily good. And it was fueled by $170 million reduction in working capital over the year.

So would the working capital, in 2010, be a bit of a head wind? Or neutral, but obviously still on a comparable basis less favorable than 2009?

Yes, I'm sure we will be working hard to maintain good working capital metrics throughout the year. We're committed to that. But with accelerating revenue trends, I suspect working capital would consume cash in 2010. If I were modeling today, that would be my assumption.

Appreciate it.

We will take our next question, Operator.

Our next question comes from Amitabh Passi with UBS.

Hi, thank you for taking my question. My question is around operating margins. If I look at your segments, Enterprise revenues are flattish, margins were down almost 600 basis points sequentially. I think Broadband you did a pretty good job explaining what is going on there. But I had a similar question for ACCG where similar revenues, yet margins were down 200, 300 basis points. So really the crux of the question is how do we think about normalized margins across your segments? If you are going to give us any guidance, that would be great. And then related to that just around your first quarter guidance, I wanted to confirm the $50 million to $65 million OI guidance as a clean number. And if I have to, could you maybe just give us some color in terms of the puts and takes as to how we get to that $50 million to $65 million which is quite a bit down from the 14 number. Thanks.

You're saying, just to clarify, the $50 million to $65 million of adjusted operating income.

Right.

And that transition. Okay. We obviously don't break down gross margins by segment. Looking at operating margins, our Enterprise business continues to perform very well on the operating income level. And our ACCG segment is struggling mainly with volume issues. That has been the most negative impact on operating income. So we would expect their operating income to improve on better volumes later in the year. The WNS business is also a very volume sensitive business. We see a lot of exciting things going on potentially in that area this year. So no reason to think that our margins should not achieve corporate averages or near that, in that business, this year. And that leaves us Broadband, which in 2009 was an extraordinarily positive operating income, and one that we do not believe that we could duplicate, or would plan to duplicate this year, based on reasonable events. And so I would say that would move more towards the corporate average as well, from above that.

I would say the two factors in our operating income performance, comparing Q4 to Q1 2010, I think was your question, the normalization of our practices around compensation for incentives will add some costs. Raw materials certainly we expect to be a little higher in the quarter, in the first quarter. And volume a little weaker. So those three things together account for the decline in operating income, Q4 versus expected Q1.

Any color on what we should think about in terms of SG&A for the next quarter?

Again, I would say spending levels of certainly $10 million or more on a quarterly rate, could be higher.

Okay, I appreciate it. Thank you. I will get back in the queue.

Our next question comes from George Notter with Jefferies.

Hi, thanks very much, guys. I wanted to ask about, it feels like you're redoubling your efforts here on the cost side. We saw in the press release about the Omaha manufacturing facility. It sounds like you're going back and looking at manufacturing again across the Company more closely. Is that perception right? And what is driving that and how much cost do you think you can then take out of the business going forward? Thanks.

George, this is Eddie. This is something that we never stop doing. And it is just part of our culture. We looked for utilization, I think with the focus that we have now, with a consolidated operations group, looking at all aspects of that, that would be even more enhanced.

In the case of Omaha, it is not a reflection upon that location at all, or the job that people have done there, because it has been great, but the fact of it is, is our competition is not domestic any longer. It is all import. And so we have to have a cost structure that meets that target. We made an announcement in January that we were going to reduce by 110 or so. We also said that we were going to look at the survivability or the maintenance of profit of that location, and that work is yet to be completed. And that is a collaborative work with the union and management in the Omaha location to come up with that solution. And at that time, we will make a determination as to what the ultimate decision is, in regards to Omaha. But it is not the only one. We are looking at other locations to make sure they're properly utilized. We need to maximize the utility of these factories to get the best cost that we can. So that is something that will never stop.

Got it. And just in terms of the cost reduction activity, is there a metric you're shooting for, or a number in terms of the cost you can take out of the business this year or next?

As I said before, the work is yet to be done to determine if that is going to actually happen. We are going to spend some money in the 110-plus people that are going to be removed during the first quarter. And so we have that built into our plan.

Into a restructuring (multiple speaker).

Into restructuring cost.

George, it is Frank. Since the inception of CommScope 30 years ago, we have had profit improvement plans that have averaged 5% to 15% a year. It goes on constantly. And constantly we have taken costs out of this Company to become the worldwide leader that we are in these operations. The concept of putting Randy and his team and is to looking at what all of these facilities could do for each other, and to reload some of the facilities so they have more efficiency at the manufacturing locations. And I think that will really begin to show itself in the third and fourth quarter.

Got it. Thanks very much.

Our next question comes from Steve Ferranti with Stephens, Inc.

I wanted to re-ask a question that had been previously asked and maybe come at it a little different angle. It is related to op margins. So we certainly understand the volume sensitivity involved on the op margin side, but just looking if I were to single out, let's say, the ACCG group, for example, revenues are flat quarter over quarter, September to December, but yet a 200 to 300 basis point decline in op margin. So is that more material cost related, given the commodity price increase quarter to quarter? Or how do we think about that decline given that the top line was flat in that segment?

Costs, certainly raw material costs was a factor in the quarter, Steve, and I would say the mix in that business was not as profitable as it was in the prior quarter. I would say those were the two principal factors.

Steve, this is Frank. The other thing is, we are continuing to put substantial support and cost in our aluminum introduction and product, and we're getting very good results both in a testing and customer acceptance. So for that business to have long-term margin improvement, margin enhancement, we have to take the technical discipline away from our competitors, which this product does. It is substantially better than anything that is out there in the world. So if you see this changing in the mix, if we can get that over the next year to two years mix change to the aluminum, a process that we have patents on and resources, it will make a substantial difference in those margins.

Steve, this is Eddie. Also, the thing that Jearld mentioned in his narrative about the testing lab in China, what we've said about aluminum cable has been CommScope perspective, until this test was done by an independent lab. And what it showed, while it is not just durable, the performance characteristics of this cable are better than what copper equivalents are. So it is something that we will sell, not only from its possible lower cost advantage, but also from its performance characteristics.

And that's helpful. And then could you give us some sense for how much of your cable product mix is aluminum today?

Very small portion. But it is gaining customer acceptance. So it has, all of the upside is still in the business. These are very slow processes, Steve. They go through trial, the testing helped, they're getting the acceptance in China, they're getting the acceptance in the United States, and again, it will make a substantial difference. Fortunately, the factories do not require substantial modification to do this, because they're covered by our processes.

Okay. Very helpful. Thanks guys, and good luck going forward.

Our next question comes from Amir Rozwadowski with Barclay's Capital.

Thank you very much. And good afternoon, gentlemen. I was wondering if we could shift focus just in terms of expectations for growth in 2010 overall. Certainly, it seems as though starting from a sequential down tick in the first quarter, what gives you the visibility, or at least the thought process that really we can get some of that top line growth starting to accelerate in the second quarter? Is that the pipeline of business that you folks are seeing at the moment? Or can you give us a sense in terms of that trajectory?

I think, Frank and Jerald both said -- Amir, this is Eddie -- I think they both said that we're enthusiastic as to what we see in Enterprise, and how we saw them finish the fourth quarter and start this year. And we see continued movement there. We also are seeing opportunities in the Enterprise and the WIG combination, not combination of segments, but the cooperation, I guess, in in-building program, which I think you know we've tried to start for a couple of years. We believe [it] got us on the right footing.

The other thing I think qualitatively, we have a great mix of products. And we're seeing a lot of new LTE introductions that are coming on, where we're well-positioned, certainly from the amplifier standpoint. And these are not just products that we've developed, but these are active trials and revenue that are being generated today. So we think we're ahead of the group, as a third party manufacturer, as to where the scope is going to go.

And I think lastly, in GeoLENs, we see a lot of movement there. In the MLC part of the business, especially, where the location-based service is, the commercial side, is growing, we've had some big successes that we've announced over the course of last year. And we expect that to grow.

Maybe I can take a little cut at it from the broadband and demand piece. If you look at it, every one of the supply channels, every one of our customers has stated that they will be at the same level they were last year or ahead. So we know that the capital planning, at least on the surface, from what customers and are telling both the public, they're public companies, are at laterals at or better than. We have a short cycle company. This Company was built on the ability to ship product within a four to six-week turn-around. We have a four to six-week backlog. So promises -- [running] idle on all of you as investors but we will see it and see it first, and we'll tell you about it.

Our confidence is that there is a lot of inquiry. There is a lot of looks, there is a lot of stuff that hasn't converted to orders but a lot of inquiry. And we're just now beginning to see the very, very first part of stimulus dollars hit our markets. When we reviewed our businesses at year end, Enterprise has moved to the number one business channel it has, is government. That's gone from financial being number one in 2008 to number six or seven. Education is number two. And health is number three. All of those will have stimulus dollars hit in the future. So there is confidence in the pipelines. Now, they haven't converted to where we can say that we can guarantee that the second quarter is going to blow the doors off. But there is clear indication that our position has not deteriorated. We have actually gained market share. And we're in a position to work with these customers and channels to grow it.

Back to the seasonal comment, in the US, anyway, the weather has been about as bad this first quarter as I can imagine it has been, for a while, and so I think that has muted things, it is muting things here in the first quarter, as well.

That's helpful. Thank you very much, gentlemen. And then if I may, just there has been some discussion in terms of the trajectory of your operating expenses in the past, specifically around a return to normal expenditure, and perhaps around variable compensation expenses. But also you had mentioned that there are areas where you're continuing to look for cost savings, and manufacturing synergies and so forth, as evidenced by some of your recent announcements. How should we think about the puts and takes there? Should we expect a material pickup in operating expenses in 2010 or should we expect some of that variable compensation increase to be offset by some of the cost synergies that you expect?

I expect some of that, but I would say at this point, I wouldn't be surprised if our operating expense were a higher percentage in 2010, over 2009. And incentive plans are based on performance, our plans are performance-based, so implicit in that is improving performance, which we think we can achieve. So the two are somewhat connected.

We do expect continuing to look at operating income enhancement and growth. If you look at the fourth quarter, this is the first time in memory that I can see that all of the operating divisions operated at double digit operating margins, on 25% lower sales than we had in 2008. So mathematically, if you study this Company, we're the best in the world, we have the capacity, if we can get a turn-around, we will be able to perform. We will be able to ship, we will be able to manage that and we will be continuing the consolidation. And the board, myself, Eddie and Jearld, we're committed to performance bonuses. If we're not performing, they won't be in there. So for shareholders like myself and you, we want to pay these bonuses because these people will be performing.

Great. Thank you very much for the incremental color, gentlemen.

Our next question comes from Jeff Beach with Stifel Nicolaus.

Good afternoon. Boy, limited to one subject. I would like to ask about the rising cost that squeezed your business somewhat in the fourth quarter. Looking ahead at the market conditions you see right now, if raw materials would continue to push ahead somewhat, do you think you can pass those on, and maintain profitability outside of volume, and then hope you grow volume to get better margins?

Jeff, this is Eddie. That's not instantaneous gratification when these things happen. So I think you know from the past that there is a lag between when material prices move and when we can get price increases. But I think you also know that we're very deliberate about doing that, and those kind of conversations in certain of our businesses is already underway. It is more challenging than others that may use different materials. So I think it is a balance.

Jeff, it is Frank. It may seem like heresy but higher copper prices long term fit CommScope's model because we have the most differentiated product line that substitutes aluminum, fiber optics, for copper. So it is a multi-year process, but we have constantly been able, as you have followed us a for a long time, within a certain period, quarter to two quarters, to pass along most of our cost increases to our customers.

All right. Thanks.

Our next question comes from Blair King with Avondale Partners.

Yes, hi. I will ask a question, just heading back on to this, maybe I will just keep it on a regional basis. So Jearld, I think you had mentioned during your opening remarks you had seen some sort of pricing or at least that the China market has been price sensitive. And you didn't mention much with regard to India in that respect. But obviously, there has been a lot of carrier competition for subscribers in India, as well. So could you talk a little bit about what the pricing situation might be in those two regions?

Sure. I will make a few comments. Eddie may want to add to them. But I would say Asia, as a general statement, in all of our markets, is probably the most price-sensitive market that we operate in, in all of our businesses. For many of our cable products particularly, we do face domestic competition in those pars of the world. So it remains a very price competitive environment. We are located in places like India, where we have a manufacturing facility. We have manufacturing facilities in China. That gives us a good cost base to compete effectively in those markets but they are very price competitive markets. And so it is a constant challenge in that part of the world.

I think in the case of things that could be positive, if you saw growth in certain of the WNS businesses that operate in those two regions, the products that they make are more value-added products, and we see less competition than we would against others, like we do in cable, or base station antennas. So I think really dependent upon the mix and what customer base we're serving at the time.

Okay. So is it fair to say that pricing in the ACC segment on a hold, or has held in the first quarter?

I'm sorry, what was the question again?

Just on pricing in the ACCG segment, is it fair to say that that has held in the first quarter and you expect it to hold going forward?

We certainly expect to -- it remain a competitive situation all year, Blair. And whether we have the ability to raise prices, if costs go up, I don't know. We do have a strategy as in the cable area, where we can transition to aluminum with what we think could be an excellent product, or is an excellent product. So we think we have a number of cards to play in the competitive pricing game, depending on the market, and what the customer is looking for. But it will remain competitive. No one doubts that, and we will be looking for opportunities to raise prices, if we see costs increase dramatically.

Thanks.

Our next question comes from Shawn Harrison with Longbow.

Hi. Digging into the sequential margin decline for the first quarter, the question is, with incremental margins under the EBIT side looking down, say, 100% sequentially, as you see revenue growth, should we see that type of incremental margin to any growth in revenues as well? Is there something special here in the March quarter, say beyond the uptick in SG&A/variable compensation?

I wouldn't say special, but our mix of business, particularly on lower volumes can be more impactful. In our enterprise business, for instance, if it is carrying a bigger percentage of ours, it has been generating the highest adjusted operating margins of any of our segments in recent times, so we think it could be a little higher percentage overall as opposed to historical mix, given where we think that ACCG may be the weaker in the first quarter.

The basic question I'm lost with right now is, quarter to quarter, stripping out the decline in incremental variable compensation, EBIT will decline about $30 million on not a lot of change in volume. So it sounds like in addition to copper and volume, mix is involved, but if you see a better mix in the second quarter and beyond, you should see maybe similar incremental margins to the upside. That's what I'm trying to get a distinct clarification on.

We have a certain level of fixed costs and every dollar we sell above that cost is, a large part of that is profit. So a lot of leverage. Certainly in WNS, a lot of leverage in that P&L, and as you see revenues increase, a lot of that falls to the bottom.

I think the point you have to look at is we're operating at very good margins, at 25% below 2008 sales levels. So we have been able to manage the value, the sales price, and the operations and still have capacity to serve the growth. So it is highly leveraged to, what you pointed out, that if we get the incremental sales and we don't have to give it away, and there is more momentum, you will see it quickly in the leverage. But that's your question.

Yes. And then as a follow-up, just a few quick things. Capital spending for 2010.

Very modest, not much [up]. $50 million plus or minus.

$50 million. And then also the tax rate, you provided it for the first quarter. Is that safe to assume that range will apply for the full year as well?

That is our expectation right now. Yes, it is, Shawn.

Okay. Thank you very much.

Our next question comes from the line of Simon Leopold with Morgan Keegan.

Thank you. I wanted to get two clarifications in and then the question. One of the very early questions, I think Jearld talked about the sequential increase in SG&A expenditures as being $10 million higher than Q4. I just want to clarify that's what you said.

That is what I said. In that range.

Okay. And then also, what do you expect in Q1 in terms of the one-time charges and the amortization of intangibles?

No big change with intangibles. We did have a few million dollars of extra intangible amortization in the fourth quarter. But the number --

It is about $24 million is what we would expect for the first quarter, and then I think Jearld mentioned earlier that there may be some charges related to Omaha, of the 100 people that have been let go.

$4 million to $6 million, something in that range. Those would be restructuring expenses.

Okay. That is all I'm looking for on that. Now, in terms of the question, I want to see if you can talk about the mix trending. I imagine you've got a little more sense of what you expect in Q1, but I would like you to take the question out Q1 to year, in terms of how mix may be changing both on a geographic and product level.

I think on the geographic level, we're assuming not much change. We're about 52% North America right now, and not much change to that. I think you have seen some slides in the past about that. The mix between the businesses, I think WNS may grow a little bit faster than some of the other businesses, and Enterprise as well, for the full year.

Part of the reason I'm asking the geographic mix question is, with the delays in India and some suggestion that China is maybe flat, and probably weak in the first quarter due to the Chinese New Year, and we've got in North America AT&T forecasting much higher capital spending, favoring wireless, I would have thought you would see a shift more towards North America, and I'm wondering why that is not the case.

Again, all of this varies by business segment somewhat. Just to amplify what [Eddie was saying]. We've seen more volatility out of Asia in recent quarters than we have in other markets. So we've seen $20 million to $30 million quarter to quarter swings in those marks, going back from the third quarter of last year, so those have been large impacts on our business. And they do swing both ways.

This is Frank. I think the question though bears in mind that clearly indications are that the North American market in wireless is at least announced by the carriers that they expect their spending to be up more than it was last year. So from a plan view, it is our expectation we will begin to see that as the carriers release their budgets, usually in the March quarter. And as soon as we see it, it moves through that. So historically, all the carriers finalize their budget process and begin to place orders in the tail end of March, and then all the way through the year, and you always have that last-minute push in November, December, to get everything out in the budget they haven't spent.

Thank you.

Operator, we've got time for about two more questions, please.

I understand. Our next question comes from Anthony Kure with KeyBanc.

Good afternoon, gentlemen. I apologize for the airport noise. A quick question and a clarification if possible. Can you hear me okay?

We'll manage.

again, I apologize. First, in regards to the government stimulus opportunity, could you just talk about the addressable market opportunity, or the opportunity for those particular related spending. And I assume that's in the US, if not if there is some in Asia that you might be able to pars out that would be helpful. And the second question or clarification is just on revenue growth. I heard that there is expectations for revenue growth, expectations for operating income growth, but is there an expectation for operating margin expansion as well from the 2009 level? Thanks a lot.

The question on stimulus, we've seen a minimal so far, and I think the only segment to really see it so far is Broadband and it's very, very small. The possibility for the current year, I don't know what that number would be.

It could be substantial.

If we don't run out of money first, as a country. And your second question was?

Margins. Operating margins.

Because we're not going to talk about the different segments. The ones that grow that have higher leverage, will have higher margins at the end of the year, and I think I've answered what that might be. So I think we're going to see corporate averages being realized by the units, all of them. I think we've said that Broadband would be depressed over the year. And we announced, I think we talked about that late in '09.

A little clarity on what I expect, and I think the team expects is for the first time we're seeing projects that are getting stimulus dollars that were on the drawing boards for the whole year of 2009. And you're beginning to see these projects be brought into the channel, especially the alphabet soup people, the government, all of the programs, all of the government programs that you would expect, the FBI. All of the ones that are trying to protect the country, are all looking at substantial increases in their data processing and people hires. As you know, if you follow it, about the only person that is adding people to payrolls is the government in those areas. So I would expect you will see clear indication of that type of that type of spending in the second and third quarters.

Anthony, this is Jearld Leonhardt. We would expect that operating income and dollars certainly could grow on revenue growth and not expect to see a significant operating income expansion in 2010, based on our views of increased additional costs that we've covered, talked about, and where we will start the year in that regard. But we are optimistic that we can grow revenues on a year-over-year basis, as we stated, and at least hold operating margins at levels that we were, and provide the growth in operating income, adjusted operating income that we expect.

Okay, guys. Thank you. I apologize again for the noise.

Operator, we will take one more question.

The final question comes from Nat Kellogg with Next Generation Equity.

Thanks for taking my question, guys. Just a quick one. You elaborated on it a little bit but could you guys talk a little bit more about what your plans are for use of capital? Obviously the balance sheet is in much much better shape than it was 12 months ago. And just curious if there are opportunities out there that you guys are looking at from a consolidation standpoint that seem interesting to you, or whether it is paying down debt? Just a little insight on what you might do with your substantial cash balance now would be helpful.

We still have debt. And I think that our intent is to pay debt back at some point in time, so that is one use. We get lots of calls on a daily basis of people interested in talking to us about buying things, or opportunities to join together in some form or fashion. We have interest in looking at opportunities that are complementary technologies to what we currently have today. So we now have, I think, the currency to do that, and I think if the right opportunity of a medium size came along, we would certainly entertain a view.

And then could you just give us a sense of how much of that cash is overseas versus domestic?

Yes, Nate, this is Jearld Leonhardt. A substantial portion of it is overseas because we are substantially an international and global company. And our US cash tends to get consumed first, so it is usually proportionally higher internationally than it is in the US, percentage to the total. Back to the question of what our use of cash would be, we're certainly interested in strategic opportunities, as Eddie talked about. We paid $1 billion of debt down in two years, that's $500 million each year. At this time, I wouldn't expect that sort of progression and there is no need for that sort of progression in our view, towards 2010. So we're going to start paying down $130 million next week, and then we will just consider our other options from there, in terms of debt repayment, and other opportunities.

Okay. Great. Tanks for taking my question. That's very helpful. Thanks, guys.

Thank you, ladies and gentlemen, for joining us on this call. And we're available, as you know, all the time if you have any additional questions. So with that, we will say good night.

Ladies and gentlemen, this does conclude today's CommScope fourth quarter 2009 earnings release. You may now disconnect.