CommScope Holding Company Inc (COMM) 2010 Q1 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the CommScope first quarter 2010 earnings conversation call. (Operator Instructions) I would now like to turn the call over to Phil Armstrong, Senior Vice President of Corporate Finance. Mr. Armstrong, you may begin your conference.

Thank you. Good afternoon and thank you for joining us on this call. Joining me on today's call is Frank Drendel, CommScope's Chairman and Chief Executive Officer, Eddy Edwards, CommScope's President and Chief Operating Officer, and Jearld Leonhardt, CommScope's Executive Vice President, Chief Financial Officer. We've added a slide presentation to provide you with additional background and color on the quarterly performance and business environment. Please note that slides can be found on the CommScope website at www.commscope.com under the Investor Relations tab.

On slide two in the presentation, you will find our cautionary language relating to the 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 more detailed description of factors that can cause such a difference, please see our press release and our 10Q that we filed today with the Securities and Exchange Commission. In providing forward-looking statements the Company is not undertaking any duty or obligation to update these statements as a result of new information, future events or otherwise.

Also, please note that all dollar figures and percentages are approximations. In addition to GAAP information, we will provide certain nonGAAP measures. We believe that presenting these nonGAAP or adjusted measures provides additional meaningful information to investors. The 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'll turn it over to Jearld Leonhardt. Jearld.

Thank you, Phil, and good afternoon. I will review first quarter 2010 results and our outlook and turn it over to Frank Drendel closing remarks before opening it up to questions.

Beginning with slide three which provides a snapshot of CommScope's first quarter 2010 performance. First quarter 2010 sales declined 3% year-over-year and 4% sequentially to $722 million. As anticipated, our first quarter sales reflected a slowdown in wireless carrier spending but robust enterprise segment sales also were experienced.

Foreign exchange rates positively affected sales by $16 million on a year-over-year basis and negatively affected sales $5 million on a sequential basis, primarily in the antenna, cable, cabinet group, or ACCG is what we refer to.

From a geographical standpoint, sales increased in the United States and Central and Latin America. These increases were offset by lower sales in the Asia Pacific region and in EMEA or Europe, Middle East and Africa region.

Both sales and orders strengthened considerably as we moved through the first quarter. We are pleased to report total orders of $792 million. This results in a book to bill ratio of 1.1 times which is the strongest book to bill ratio we've seen in several years. We had positive book to bill ratios in all segments with particular strengths in ACCG and broadband.

As a result of restructuring charges recognized during the quarter we reported an operating loss of $6 million. Adjusted operating income which excludes special items such as restructuring and the amortization of purchased intangible assets, rose 46% year over year to $66 million. Strengthening enterprise segment profitability, benefits from cost reduction initiatives implemented in 2009, and improved factory utilization where the primarily responsible items for year over year improvement in adjusted operating income.

CommScope reported a first quarter net loss of $22 million or a loss of $0.23 per share. The reported net loss includes after tax charges of $30 million in restructuring costs, $15 million for the amortization of purchased intangibles as well as a $2 million tax charge related to corporate income tax deductibility of prescription drug benefits to certain retirees made as a result of the recent US health care legislation. Now, excluding these special items, adjusted first quarter 2010 earnings were $25 million or $0.26 per diluted share.

With that summary, I will provide some specific commentary about each of our segments.

Slide four highlights our ACC segment financial performance, which includes product offerings of primarily passive transmission devices for wireless infrastructure market applications including base-station and microwave antennas, coaxial cable and connectors as well as secure environmental enclosures for wire line and wireless applications. First quarter ACCG sales were $259 million down 21% on a year-over-year basis and down 17% sequentially. Sales declined primarily due to lower capital spending by customers in the Asia Pacific and EMEA regions.

Lower Asia Pacific sales were driven by regulatory issues in India including new local security review practices and the delay in auctioning 3G licenses as well, as reduced capital spending levels by wireless service providers in China. Sales of the Company's antenna and cable products were also negatively affected by conservative capital deployment trends by European wireless operators. Seasonal factors such as the timing of the release of operator budgets and unusually severe winter weather also negatively affected the year-over-year comparison.

Now, while adjusted ACCG operating margins rose year-over-year, they were down sequentially due to lower sales volume, mix and higher costs. Despite a slow start to the year in ACCG segment, sales and orders grew substantially as we moved through the quarter. We had a very robust ACCG book to bill ratio for the quarter and expect a significant recovery in sales and operating margin as we move into the traditionally stronger summer months, particularly in North America. We expect North American wireless capital spending to increase as wireless operators continue to build out 3G networks and prepare for the initial deployment for commercial 4G networks.

Turning to slide five our enterprise segment which provides structured cabling and connectivity systems for business enterprise applications delivered a very strong result in the quarter. Sales rose 37% from the year ago period and increased 13% sequentially. Sales increased year-over-year in all major regions and product groups. Importantly, global sales into the distribution channels during the quarter were roughly equal to sales out of distribution. In other words, end user demand was a primary driver of the enterprise segment's first quarter sales performance.

Enterprise segment sales rose as corporations and other large entities resumed investing in strategic information technology including data centers and other infrastructure. We believe that our end to end intelligent solutions, robust fiber portfolio, global sales force and a commitment to R&D continue to separate us from the competition. We see many exciting opportunities as we look ahead, particularly in the technology, US Federal government, health care and education sectors.

We are pleased to introduce an important new addition to our industry leading enterprise portfolio with the introduction of our wired for wireless solution. The cost effective innovation builds upon CommScope's enterprise structured cabling expertise and our Andrew brand of wireless products. It provides building owners and developers the necessary foundation in advance, to ensure exceptional wireless coverage throughout a building's life cycle. We believe that wired for wireless is a much needed evolution to the way wireless infrastructure is implemented in enterprise buildings, and we're very excited about its long-term prospects. It is part of the Company's overall in-building wireless portfolio which includes fiber distributed antenna systems, repeater platforms, radiating cables and other coverage solutions.

Turning to slide six, wireless network solutions, or WNS, segment sales consist mainly of base station sub systems, services, location-based network optimization systems as well as products and solutions that extend and enhance wireless coverage. WNS sales declined slightly year-over-year and sequentially to $156 million. WNS sales are mainly project oriented and were negatively affected by the timing of various projects in the EMEA region and the North American market.

WNS' adjusted operating income was down $8 million on a year-over-year basis and $16 million sequentially primarily as a result of sales mix and cost increases.

Looking ahead, we continue to see meaningful opportunities for capacity and coverage solutions for buildings, stadiums, trains and other challenging applications as well as solutions for location-capable networks.

Moving on and turning to slide seven, our broadband segment sales consist of mainly of coaxial and fiber optic cable for cable television operators. Broadband sales declined 3% year-over-year mainly due to pricing declines on cable products in the North American market. However, broadband sales increased 7% sequentially primarily due to strong sales to Central and South America. We expect demand for broadband products to continue to be influenced by ongoing maintenance requirements for cable networks, the competition between MSOs and telcos, and the activity in the residential construction market.

Looking ahead, we believe that we will begin to see modest spending from of the US Federal broadband stimulus initiatives as we move into the traditionally stronger summer construction months. We've also expanded our portfolio of advanced broadband solutions with the introductions of two new BrightPath fiber to the home solutions. We've added solutions that are compatible with passive optical network, or PON applications, as well as a new solution that supports European DOCSIS standards.

Slide 8 details our consolidated financial performance over the last five quarters. Despite lower year-over-year wireless sales, we were able to achieve higher adjusted operating margins. I'll highlight a few key items.

Gross margin for the first quarter of 2010 rose to 28.4% up from 22.7% in the year ago period. This gross margin improvement was the key driver in our higher operating income. SG&A expense in the quarter rose $11 million from the year ago period to $113 million primarily due to the return to our normal business practices around our salary and incentive programs.

Despite lower sales and higher SG&A, adjusted operating margin rose more than 300 basis points from the year ago quarter due primarily to the strength in the enterprise business, cost reduction initiatives that were implemented in 2009 and improved factory utilization. Ongoing cost reduction is key part of our efforts in enhancing results. During the first quarter of 2010 we recognized $48 million of pre-tax restructuring charges.

Let's take a look at the details on slide nine which highlights recent manufacturing initiatives we have undertaken in the quarter. We are in the midst of a comprehensive review of our global manufacturing footprint as we work to rationalize production capacity, lower costs, and improve utilization. The bulk of the restructuring costs and the savings we expect from these initiatives relate to the announced closing of the Connectivity Solutions Manufacturing, Inc., subsidiary in Omaha, Nebraska. We expect to close this facility at the end of 2011. We also plan to close two smaller locations by the end of 2010.

Total expected costs for these actions are $56 million to $61 million. We recognized $48 million in the first quarter, including a $9 million charge for asset impairment and a $6 million net curtailment loss related to pension and other post retirement benefits. We expect to recognize additional charges of $8 million to $13 million by the end of 2011.

Now, once we complete these actions in late 2011, we expect total annualized savings of $25 million to $30 million per year. And about half of these annualized savings are expected to be realized in 2011 primarily in the second half of the year next year.

Now I will turn to cash flow, the balance sheet and liquidity measures. Slide ten highlights our overall debt reduction over the past few years as a result of capital market transactions and strong historical cash flow from operations.

We generated $63 million of cash flow from operations during the first quarter of 2010 and with modest capital spending of $9 million in the quarter, we generated $55 million of free cash flow. We also continued to strengthen our balance sheet. In the quarter, total debt outstanding declined by $137 million, primarily through the annual excess cash flow payment. Since the closing of the Andrew transaction in December 2007, our outstanding debt has declined by more than $1.1 billion. At March 31, 2010, total debt outstanding was $1.4 billion or about 48% of our booked capital structure.

We ended the quarter with $622 million of cash, cash equivalents and short-term investments. Net debt, which is total debt less cash, cash equivalent and short-term investments, was $786 million. We also remain well within compliance of the financial covenants and our credit facility.

Turning to slide 11 we have outlined some of the key factors affecting the current business environment. We are optimistic about our future, however, and our ability to forecast with 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. It also includes volatile quarterly spending patterns by carriers, regulatory issues in India including new security review practices and the timing of 3G license auctions are concerned, lower expected wireless capital spending in China as well. Rising costs also remain a concern. Our ability to recover margin of increased prices typically lags and depends in part upon market conditions.

Another growing concern relates to supply chain constraints. As the economy improves and carriers increase spending we've seen the lead times for many components increase, substantially in some cases. Despite these uncertainties, we remain optimistic about 2010. We believe that we have a strong competitive position and will benefit from the economic recovery, even though recovery may be slow and may vary considerably among geographical regions.

In addition, we believe we are well positioned to benefit from the positive trends driving the markets we serve. We expect stronger North American wireless capital spending in the second quarter which is supported by the strengthening of orders and sales in the first quarter.

The explosive growth in wireless data, global subscriber growth and the transition to 4G in North America are expected to provide opportunities over the next few years. Highly promising, we believe, is the ongoing transition to higher-performance networks in the enterprise market. As the economy recovers, many corporations and other large entities have resumed investing in data centers and other strategic information technology. We see many exciting opportunities as we look ahead, particularly in the technology, US Federal government, health care and education sectors. We also believe that our expanding in-building wireless portfolio will begin to create additional opportunities as we move through the year.

I will now cover the outlook on slide twelve. Looking ahead, we are encouraged by prospects by continued economic growth and strengthening of the North American capital spending. We expect strong sequential improvements in second quarter sales and adjusted operating income, excluding restructuring and any other special items.

Now, for the second quarter we expect revenue of between $800 million to $850 million, adjusted operating income expectations of $90 million to $110 million, excluding amortization of purchased intangibles, restructuring and other special items, and a tax rate of between 32% to 36% on adjusted pre-tax income.

Now, our second quarter 2010 guidance is based upon our current expectations of an improving global economy and increasing North American carrier spending. However, we also expect higher material costs and some supply chain constraints. We are currently facing long lead times for certain components, which could restrain our second quarter growth. Now, while cost trends could make margin expansion more challenging in the calendar year 2010 we continue to expect growth in sales and adjusted operating income, excluding special items.

We believe sales will be stronger in the second half of the year as the economy improves as we improve operational efficiency and as we enhance our competitive position in new and existing markets. Now I'll turn it over to Frank Drendel for closing remarks before we open it up for questions.

Thank you, Jearld, and thank you for joining us on the call.

Why do we believe and why are we so optimistic about CommScope's future? First of all, we are the best of the best, we have global market leadership. We have a worldwide competitive advantage. As we move to our higher bandwidth solutions, all of these businesses move towards CommScope products. So, again, the global growth opportunities, the strong revenue diversity that we have, we have the worldwide management team and the worldwide manufacturing capacity to deliver. We have a very strong cash flow generation and we have the best improving balance sheet.

At the end of the day, CommScope is bandwidth and CommScope is a bandwidth company. With that, I'll turn it back to the team.

Thanks, Frank. Please note during the question and answer we would ask you to limit your questions to one topic and if you have follow-up, step back in the queue. We'd now be glad to address your questions. Katina.

(Operator Instructions) We'll pause for just a moment to compile the question and answer roster. Your first question comes from George Notter with Jefferies.

Hi. Thanks very much, guys. Can you hear me?

Yes we can, George.

Hey, I wanted to ask about North American wireless spending trends as we look over the balance of the year. I mean certainly the order book and the backlog looks like it really picked up here exiting Q1. Do you get the sense then that North American wireless spending ought to be up again in Q3 relative to Q2, and how about Q4? Do you have a sense for how seasonality might apply this year? Thanks.

George, this is Eddy. I think what we saw in the first quarter, we saw less spending than you would see on a linear basis to get to some of the levels that our customers are talking about. So I think by arithmetic you would have to see growth certainly during the summer months, the second half I guess by definition. What we see in the press or listen to or the conversations that we have with our major customers here say the same thing. So we do see a strong middle of the year, which is I think what we've said we believed would happen. So I think your answer is yes.

Got it. And then I want to ask also about the WNS piece. You printed a pretty good revenue number in WNS. Looks like margins, profitability were down in WNS. I guess I was trying to get a better sense for what was driving that and could that improve going forward?

Well, I think as we have talked on many occasions, the mix of products in this segment is very instrumental as to how the money is earned. And I think in the quarter we had a high mix of base-station sub systems which is not our largest earner. And we had some -- really some project holdbacks that flow into following quarters, which hurts us as well. So we're optimistic as we've said about what we see in this business both from our coverage solutions, our position in LTE trials going forward which are now shipping at volume and also our geolocation business. So we're optimistic for the future here.

Thanks very much.

Your next question comes from Steve O'Brien with JPMorgan.

Hi. Thanks for taking my question. I just got a quick question, maybe a point of clarification.

On the question side, Jearld mentioned India I guess inspection or qualification but the -- maybe delaying some sales right now. Just wanted to clarify, once the regulator there or the government approves the product, is it correct to assume there will be more normal flow? On that same token it sounds like from the schedule the auctions are certainly under way and that there could be spectrum allocation in September. When would you think CommScope might see a revenue pull-through if that schedule kind of holds? And then I'll hold off on the follow-up for now.

Steve, this is Eddy. So you had two questions. One as to the flow of product. And what we said there is the security issues between India and China is causing some slowdown in the market. I think we saw in the press today that the Indian telecom department has prohibited ZTE and Huawei and [Comba] among other Chinese suppliers to ship active product into India. So that is creating a lot of confusion.

Our product is really a more passive as to what we sell into that market and not as affected, but it does impact what the carriers are doing overall. So it is -- we're impacted even though we're not on the banned - the restrictive list, I guess.

So we have a location in India. As the carriers determine what they're going to do with this restriction that is in place, we will benefit from that. Plus, we also sell to not just the carriers but the other OEMs that are not on the restricted list.

In regards to 3G, those auctions I guess last week were at 11 billion or so and progressing. And assuming that they do get finalized and distributed and all of that by some time in the third quarter we would anticipate some time in the balance of the year that we would see revenue. At what pace and precise date of start, we don't know.

Okay. If I could just a clarification. The guidance is sort of up $100 million at the mid-point in revenue, up $34 million in operating income, so that is sort of a 34%-35% incremental operating margin. Is that kind of leverage sustainable as revenue potentially ramps into Q3?

Yes -- yes, I think it is, Steve. We have -- we're pretty excited about the revenue ramping up in the quarter. We do have some challenges, as I pointed out, around some of the supply chain constraints and some higher raw material costs, and those kind of things that will keep us occupied in terms of trying to execute well in the second quarter. But I think we believe we have the capability to do that and to substantially see an improvement in the second quarter over the first.

Thanks, Steve, and Operator, we'll take the next question.

Your next question comes from Jeff Beach with Stifel Nicolaus.

Good morning or good afternoon.

Hi, Jeff.

My question revolves around your comments about costs and potentially stretching lead times for products as headwinds. Can you talk about some of the products that could be challenging and if you're the leader it sounds like you might be impacted less than others. And then the costs, I'm hearing broadly costs -- prices are starting to increase. Is it going to actually cause headwinds or do you not know yet?

Jeff this is Eddy, I'll answer part of that question as to the component market for active products, semiconductor market. We see a lot of delays, lead times are pushed out. We and our customers are working on a daily basis with our partners to overcome that.

It is a daily challenge. It is not any different for us than it is the other people in this market place. You know, we had a volcano in the middle of March. A lot of those types of products are flown in. So there is some delay that has to be overcome there but we're gaining ground on some of these things. I think as the suppliers to us and the electronic field see continued demand they will add capacity and this situation will be more balanced, but for right now it is a daily task that we and our customers jointly are working to overcome.

And on the cost side, Jeff, things have been somewhat volatile in copper and aluminum, in places. Typically, we have minimally some lag impact of being able to adjust our revenues for those kind of increases and I would expect a lag. It remains obviously a very competitive market. All of our markets are and there is nothing automatic about any price increases.

All right thank you.

Thanks Jeff.

Thank you Jeff.

Your next question comes from Mike Walkley with Piper Jaffray.

This is (inaudible) filling in for Mike Walkley. Good afternoon, guys, and congratulations on a strong quarter.

Jearld, the guidance - obviously a nice top line growth that you are guiding to in Q2, but the operating income just mostly in line with our estimates. Maybe you could just walk us through the allocation. How much of it is towards the higher raw material costs and how we should think of the higher OpEx maybe for the June quarter and the back half of the year?

And then, Eddy, maybe just in the commentary in terms of the conservative capital deployment by western European operators. Could you give us some more color there? It is more eastern European carriers given the economic situation there, or is it across the board? Thanks.

Charles, I'm sorry I didn't catch the first part of your question.

Yes, it is just -- the strong topline growth that you're guiding to and then the operating margin expansion doesn't seem to be as much as we would have expected. So just trying to figure out how much of that is just higher raw material costs and how much of it is going back to the normal paying your employees for their bonuses and sales force, etc.

Sorry to make you repeat. Yes, obviously it is some of both.

Clearly we have seen material costs, raw material inputs rising in the current environment. And as we say, we will typically get some lag impact of trying to pass those on. It creates some headwind for us from a margin standpoint.

And, yes, we are continuing our spending and incentive compensation plans, I should say. And those will have continuing impact through the rest of the year, obviously as we have talked about earlier in the year the reinstatement of those programs.

The mix is also a part of what you're seeing there, as Phil reminds me here. ACCG is the business unit or segment that is going to likely see the largest revenue growth in the period and it is the lower margin of the unit. So that mix is also showing up there.

And, Jearld, maybe a quick clarification. Have you already started negotiations in terms of price increases because of the higher raw material costs, or is that something you will -- it is too early to talk about right now?

Well it is a multi-faceted answer to that, Charles. We're always conscious of opportunities to raise prices, but as I say, it is a very competitive market. The answer is a little different for each business segment. It -- there is not a single answer. So the answer is yes. We've started some, and others would not be started yet.

Charles, this is Frank. We have an ability to look at almost every order, in every type capability through our funnel to price to that order, to price to the competition. We have very sophisticated systems that look at that, and we obviously take every advantage we can to match pricing to cost to competition. So that is why CommScope has always been able over the years to modulate those costs, given enough time.

Okay, Charles. This is Eddy. You asked about Europe. I think what we saw in Europe in the first quarter is that some segments did better than others. I think in the passive equipment we had severe weather issues that hurt them. You can't work on cell towers in that environment. I think enterprise and WNS probably were not hurt as much.

Much of the WNS business in Europe is project-related. We've won several in-train jobs in the last weeks. So I think we see a lot of promise there. So it is really mixed. It's I think throughout most of Europe. They have some interesting economic issues there right now. So it is a slower time versus what we see in the future for places like North America.

Thanks, Operator, we'll take the next question.

Your next question comes from Will Power with Robert W. Baird.

Great, thanks for taking the question. So I know you noted you're expecting stronger Q2 results in the ACCG segment. Is that primarily the US or do you think you will start to see better strength elsewhere as well?

Well the largest growth would be in North America. It is our largest geographic area. I think the customer base on the wireless side it more bullish here than in other parts of the word, but we do expect growth in the other markets also.

Okay. And can you update us what your expectations are from China? I know that has been a little weaker. Are there any signs of that starting to pick up as we kind of move through the balance of the year, for you?

Well, China was weaker, the whole of the Asian area was weaker in the quarter than it has been.

We -- what we're seeing -- there is bidding going on right now with China Unicom for cable products and base-station antenna products. We're involved in that.

For the first time in the Chinese market we're going to be able to bid our aluminum cable product which we think will be very well received from a pricing standpoint to the customer. And it will enable us to generate margin and be competitive with the copper prices that we've seen from the domestic suppliers. So we talked a bit about this I think in the last call where we've won approval from the testing labs there. Showed that our cable is -- performs at or better than the copper equivalent and certainly from a price to performance ratio is much superior to what is out there. So we do have acceptance now. We believe in Unicom that we'll see some benefit.

Eddy, remind them of the awards we won as outstanding supplier.

Yes, the other thing I think, as Frank was saying, we have won now multi years in a row with both Huawei and ZTE for strategic partners and quality of supply. So those -- the guys in that market respect what Andrew has historically and what we've done in the last few years to improve our position.

Will, thanks very much. Operator, we'll take the next question.

Your next question comes from Simon Leopold with Morgan Keegan.

Thank you very much.

You have touched a little bit on some of the growth in mix trends. I wonder if I could maybe step back and look at the overall business in terms of the other units - the enterprise unit, broadband unit, WNS and not just ACCG because at mid-point your sequential growth is roughly 15%. You suggested ACCG grows faster than the other segments. If you could talk about what you see in terms of the product mix and then maybe follow that up with trends in the geographic mix and where I'm going with that part of the question is we're wondering if you're expecting India to start contributing in the second quarter, or if that is a later event?

Okay, if Phil can keep me on track.

We do see both China and India I think growing during the quarter and throughout the year, subject to normal cyclicality I would say. So from that market place, based upon bids that are happening, based upon expected recovery from this security issue in India and the 3G when it is approved and then when it is deployed is two different things. And -- but we're preparing for that.

I think in the case of WNS what we would see is probably mix changes over the course of the year where it is less dominant to the mix that we had in the first quarter. That is not a negative thing from our perspective. We would see I think growth in the geo business which I think we have talked about repeatedly.

In enterprise, we said in February that we ended the year well. We said that we believed that we would enter the first quarter well and that did happen. And we believe that we'll see a continuation of that through the course of the year. So we're very positive about that business. We're well positioned.

Our data center business, very fiber oriented, has grown a lot. And so we see that that is a great improvement for us with not just in selling a cable product or connectorized cable product but the whole data center capability that CommScope appreciates.

In broadband, it is a more stable business. Founding of the company I think we talked last year about the middle two quarters and the lack of sustainability of the margins that we usually saw. It has now got back to what is more normal. And although lots of price competition and lot of people beating on our door, we expect to maintain that business in a similar fashion to where we've been.

You noted strength from Latin America for the broadband business. What was the mix shift in the quarter in that business compared to normal trends?

It was much stronger. There is some build outs going on in Brazil, I think, that we participate in, and Chile. So we did see some opportunistic business there.

Thanks, Simon. We need to move on here. Operator, we'll take the next question.

Your next question comes from Amir Rozwadowski with Barclays Capital.

Thank you very much and good afternoon, gentlemen.

I wanted to switch back in terms of looking at overall growth for this year, because if we take a look at - obviously with respect to your guidance, it seems as though the healthy order trends are certainly coming in to play within the second quarter, but it does seem as though a number of factors - be they India component constraints, some of the LTE builds perhaps in the back half of the year - do suggest sort of steadily improving demand through the course of the year.

And the question I have -- I'm looking at is if we look at sort of seasonal trends on the second half of the year versus the first half, do you expect sort of better seasonal trends in terms of the second half of the year as it relates to first, half based on these number of factors? I mean, could we find ourselves in that situation?

Amir, this is Jearld. The answer is possibly, which is maybe not a strong answer for you but we're very early. We're not a business with a big backlog, as you know. And -- but I think we have been saying all along that we like the trends and the way things are lining up this year. There are a number of potential constraints and volatility and that sort of thing that we've talked about. But we think there certainly is the opportunity for improving second half performance over the first half of the year which would imply the likelihood of probably a better third quarter than a second quarter.

And I think to add to what Jearld said, Amir, we said that we were going to grow the top line and we were going to grow the operating profit. If you do the math, that leads you to a conclusion. And I think that is consistent with what Jearld just said.

Great. And I know we've talked about some of the issues around input costs and the component costs. But the one thing -- just trying to understand, I mean obviously in the second quarter you have a pretty marked improvement in terms of your top line. And it seems as though from your guidance that there is a tempered expectation when it comes to gross margin expansion here.

How much of an impact is the better utilization factoring here? I mean should we see -- if we look for a sales improvement in the back half of the year, overall better utilization that could lead to gross margin expansion from current levels despite the higher input costs?

Well, from a utilization standpoint, yes. There -- I would agree with that. The -- we have a couple of thousand fewer employees, if you will, than we had the first quarter of last year. So there has been a fair amount of restructuring and adjusting of capacity. And so we think utilization trends are -- should be good for the second half of the year. But that is only one factor and we talked some about the mix in which this might be growing quicker. We talked about some of the raw material concerns that we have which could tamper or temper the gross margin expansion with this lag effect we've talked about.

And, Amir, we do need to move on. Operator, I will take the next question.

Your next question comes from Amitabh Passi with UBS.

Okay, I just had a question on margins again. I'm looking at slides four and six here. And we know we had a lot of volatility last year with commodity prices. I'm just seeing if you can give us some parameters. For your ACCG segment, around the $300 million to $350 million run rate for the quarter, is this kind of a mid single-digit type segment?

And then for WNS, we've had three quarters with sales roughly in this $155 million to $160 million and margins have been between 5 and 15. And again I'm just trying to get a sense. I appreciate that mix is a key element. But at that level around $155 million to $160 million, is that roughly a 10% type margin segment? Just anything you can give me in terms of trying to bound the margin ranges here, because they're just all over the place.

I think we've called that volatile from time to time and it will continue. We have differing levels of visibility to our different sub segments, let's say, and they all have a different profit profile and markedly different from one to the other. So it really depends on what comes and at what speed. We've talked -- when we saw you in San Francisco we talked about the fixed cost levels of some of these businesses and what is required as a minimum to overcome that, and it depends on where that is and at what pace. But I think as we said in February we see no reason that this business on a normalized basis can't perform as well as I guess the "corporate average" but from quarter to quarter that is a challenge to forecast.

I think also you've got to recognize that there are major product modifications and new products being brought to market through this division and this group, that long-term have substantial margin improvements. So you've got a lot of product mix happening there.

Yes, and the base station sub system area, about 70% of what we're selling today didn't exist a year ago. And many of those or several of those, let's say, are in their ramp or just passing the post-ramp where they go from a milled version of a cavity to a die-cast version, and you get significant up-lift when that happens. But you know, it does not happen overnight and we have to go through the pain of working through that. And that is sort of what we've gone through this quarter.

And the ACC segment -- in the first quarter particularly capacity utilization was not that good with weakness that we saw in Asia and the slow seasonal trends that we start the year off, but in the US we think that trend has changed with the better weather and in Asia we still have a way to go there. But it should be improving utilization the ACCG segment as we move through the year.

And, Jearld, can I just ask a quick follow-up on cash-flow? Just any guidance on use or source of cash with respect to working capital in June and then any CapEx outlook for June and maybe the rest of the year?

For the second quarter? Well, we haven't provided any guidance for the second quarter specific on cash flow items, but for the year we think that capital spending will be a $50 million to $55 million sort of number, a $50 million to $60 million in that range I think is what we have disclosed in our Q this quarter. And we did see some increase in working capital in the first quarter as we -- anticipated in some respects improving business conditions. So we didn't slow our factories quite as much relative to revenue and preparing ourselves for the stronger seasonal trends that lay ahead.

In past years we have done some working capital harvesting if you will out of our businesses and I think we had indicated we really didn't expect that to be the situation for 2010. Wouldn't be surprised that for the full year our receivables and inventory would see some increase over -- versus the decline we saw in 2009.

Thank you. Appreciate it.

Operator, next question.

Your next question comes from Kim Watkins with Morgan Stanley.

Kim, are you there?

Can you hear me now? Sorry about that. I just had a question on the enterprise segment. You have already touched on it a little bit. But wanted to see if you could give us anymore color as to what is causing the growth there either on an industry vertical basis, domestic versus international split and then was pricing a factor at all? And then, Eddy, to your comments a few minutes ago about that continuing to improve throughout the year, were you implying that we could see sequential growth perhaps for the rest of the year?

I don't think I said that, but what I said was that we -- we've said that we will be larger in revenue than we were a year ago. We started slow. You have our guidance for Q2 and that says something about the balance of the year.

Yes, I just -- to clarify and that is specifically for the enterprise business.

Right, in enterprise we're seeing strength in all their business. The two businesses, whether it be the intelligent building which is more the structured cable in an office, we're seeing strength there. Not just -- not in the building of inventory by our fulfillment partners but direct through them to the customer without stopping almost. So that is a very positive thing from our standpoint -- is that we're not concerned about double ordering or anything of that sort. We sell our product at a premium. We think that our solution and warranty product is well appreciated in the marketplace by our customers that we have throughout the world. And I think that is recognized.

The standpoint of the data center where we are seeing it out-pace the growth of what the balance of the business is, we're seeing really good demand there universally. This is products that we sell to the major international companies to make sure that their data centers are the same, whether it be in the United States or other parts of the world. So that business is a real -- has really taken off and excelling. So we have great expectations not just for the year but for the future of this business.

And we might point out as we reviewed all of our businesses at the end of the quarter -- the interesting thing still in all of our businesses, we have seen virtually no stimulus dollars reaching sales dollars in this company, so that's still coming through the pipeline. Now, there are a lot of projects out there that are getting closer. But we asked that question from all of our managers and it was marginally incremental if zero (sic). Lots of projects that we looked like we should be successful on as they worked their way through the pipeline, especially in the government section.

I think one thing that we have seen a change - we talked about a lot of last year, about the financial sector not dying but not certainly not to the left of our chart. It is now I think back to number two. So it is has started to revive and we're seeing some life there. So it is very positive.

Right, and in the channel obviously we said that we thought that sales out were about equal to sales in, in the quarter. And that follows several quarters last year, all year really, of destocking that was going on in the channel. So the strength we saw in the first quarter was not restocking, if you will, which we think is a bullish sign.

Operator, we probably need to go to the next question. I think we'll have time for about two more questions.

Your next question comes from Anthony Kure with KeyBanc.

Hi gentlemen. Thanks for taking my question. Just in regards to the supply chain or the component shortages, just wondering the impact in the first quarter, is it implied in your guidance and the second quarter as this worsens or the same or gets a little bit better - you get a little more relief?

Well, the mix is a bit different. I think we take into account what we know at the time we do our guidance. If circumstances change either way, that could impact us. But you know as I tried to say, not just us but our partners, our customers, are all working on a 24-hour -- 24/7 basis to try to improve this. We or they have good relationships with the key suppliers in this market and we're both actively dealing with it. It is -- but these things happen from time to time, but I think we've got it in hand.

I will tell you that this is the one time being number one in the market really helps.

Okay. And then with the excess cash flow payment towards the end of the first quarter does that imply that we can maybe expect a little bit lower interest expense going through the second, third and fourth quarter?

Yes, modestly, yes.

Your next question comes from Shawn Harrison with Longbow Research.

Just a few brief questions. Clarification, what was the nonGAAP share count for this quarter?

About 106 million. -- not the -- you said the nonGAAP? Yes, I'm sorry that is correct.

Okay, and there was also a noncash interest expense maybe around $1.8 million?

There was some other income -- Yes, there was some other income, and FX, and several things.

Okay. My real question just centers around SG&A. It was a little bit lower than I would have expected this quarter. How should we expect it to trend for the rest of the year on a dollar basis? And then on the enterprise side, nice recovery in March with the sales growth. Maybe if you could provide a band of an operating margin through the rest of the year.

Yes, we were certainly not prepared to provide a band today. But the -- on rising volumes there is no reason to expect that we should see declining margins from this point. They should be rising with stronger volumes, particularly in ACCG, which was our weakest segment.

We'll certainly start to see absorption across the board.

I'm sorry, I was just trying to focus on the enterprise business. There has been some volatility the past few quarters so maybe --.

Sure. We don't give guidance by segment on operating margins, Shawn, but enterprise remains strong over the last few quarters and we've talked about it with additional volume getting better.

Okay.

Thanks very much. Operator, we'll take one more question on the call.

Your next question comes from Michael Genovese with Soleil Securities.

Thank you for fitting me in. From your earlier comments about enterprise it sounds like inventory levels in the channel were consistent quarter over quarter. Would you describe those inventory levels as normal, as lean? How would you characterize them is the first question. And the second question is as we go back to GAAP profitability next quarter, should we model the share count going back to that 106 million-plus level? Thanks.

Let me answer the first one and then Jearld can do that. We've talked about they destocked much of last year, the distribution channel destocked most of last year. I think what we said earlier today is that, from our viewpoint the product we sold through distribution went straight through to the customer base. So if they destock during most of last year and didn't build inventory in the first quarter, I think what we would say is it is a low point. And so I think we have a lot of exciting things that could happen there.

Yes. Michael, we certainly have -- we didn't give guidance today on a GAAP basis but assuming that we are profitable on the GAAP basis, which based on our guidance should be the likely scenario, I would expect a share count to be 106 million or thereabouts in the second quarter.

Thanks, Mike. Operator, that does it. Frank, do you have any --.

Yes, I'll just get a few closing comments to the audience. In the 35 years plus that Jearld and I and Eddy have all been partners in running this business, this is the best product mix I have ever seen in this Company. We have a blend of new products, traditional products, best blend of customer base I've ever seen and certainly one of the best looking funnels I've seen in a long, long time.

Most importantly though, we have a management team and an employee team that continue to show that they can deliver the products and bring these capacities on line when it is needed. So I am very, very proud of this first quarter's performance and look to a very strong year this year. With that, we'll say good night.

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