CommScope Holding Company Inc (COMM) 2014 Q2 法說會逐字稿

Good morning, and welcome to CommScope's 2014 earnings call. My name is Tanisha, and I will facilitating the audio portion of today's interactive background. All lines have been placed on mute to prevent any background noise. (Operator Instructions). At this time, I will turn the show over to Mr. Phil Armstrong, Senior Vice President of Corporate Finance.

Good morning, and thank you for joining us today to discuss CommScope's second quarter 2014 results. With me on the call today are Eddie Edwards, CommScope's President and Chief Executive Officer, Mark Olson, CommScope's Executive Vice President and Chief Financial Officer, and Mark Huegerich, Director of Investor Relations. You can find the slides that accompany this review on our Investor Relations website.

Before we begin the presentation I'll cover a few housekeeping items. Please note on slide two you'll find our cautionary language related to forward-looking statements. During this conference call, we will 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 second quarter 2014 10-Q and other SEC filings, and 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 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 insight to investors. Detailed reconciliations of GAAP to adjusted measures can be found in the Appendix to our slide presentation.

With that, I'd like to turn the call over to Mark Olson.

Thanks Bill, and good morning. Now let's turn to slide four for a summary of our second quarter. We are very pleased to deliver the strongest second quarter sales since 2008, with record gross margin, adjusted operating margin, and adjusted net income. Here are the highlights. Sales increased 13% year-over-year to nearly $1.1 billion. Our strong wireless performance drove the growth. We're also pleased to see continued enterprise growth in North America. Orders booked in the second quarter increased 2% year-over-year to $961 million, providing a book to bill ratio of 0.9 times. Second quarter gross margin increased over 300 basis points from the year ago quarter to a record 39%. GAAP operating income in the quarter rose 116% year-over-year to $204 million. Adjusted operating income which excludes the amortization of purchased intangible assets and other special items rose 40% year-over-year to $259 million. We achieved a report adjusted operating income margin of 24%, due mainly to record wireless performance.

For the quarter the Company reported GAAP net income of $28 million, or $0.15 per diluted share. Excluding special items, non-GAAP adjusted net income, increased 51% year-over-year to $139 million, or $0.73 per diluted share. Adjusted EPS increased 26%, despite an increase of 33 million shares in our diluted share account, primarily as a result of our October 2013 IPO. Adjusted net income and adjusted EPS rose substantially year-over-year due mainly to strong wireless performance driven by higher sales volumes, a favorable shift in mix, and the benefit from ongoing cost savings initiatives.

For example, in addition to operational savings we continue to manage SG&A very carefully. And as a percentage of sales, SG&A declined 100 basis points year-over-year. I'll now discuss each of our three segment's second quarter performance, starting with the wireless segment on slide six. In wireless, we're the global leader in merchant RF wireless network connectivity solutions and small cell data solutions. Our solutions which are marketed primarily under the Andrew brand enable wireless operators to deploy macro cell sites and small cell data solutions to meet 2G, 3G, and 4G cellular coverage and capacity requirements. Wireless segment sales increased 23% year-over-year to $725 million.

The sales increase was driven by growth in most regions, with particular strength in North America, Europe, and Asia. Outside of the US, we're beginning to see initial LTE roll outs. Although the majority of network investment is still focused on 3G network modernization. Wireless investment in Europe and the Asia Pacific region continue to show strong year-over-year growth. We're very pleased to see increasing activity in Europe, as customer demand for LTE services appears to be growing. We're also pleased to see improving demand in India. Sales of our industry-leading ion branded small cell data solutions were particularly robust in the quarter. We believe that metro cell and small cell solutions will be a critical component of the next wave of infrastructure expansion. As operators work to densify their networks and differentiate their service offerings. Operators are focused on network quality and performance, particularly in urban areas. By densifying the network using small cell data solutions, operators can offer more capacity and create a more seamless user experience.

In the quarter, wireless adjusted operating income rose 64% year-over-year to $207 million, or 29% of sales. We continue to benefit from higher sales volumes, ongoing cost savings initiatives, and a favorable regional sales mix, as well as mix of solutions sold. Slide seven highlights the Alifabs acquisition we announced on July 1. In the transaction, we acquired the cabinets and ancilliaries unit, and the design and construction business from the Alifabs group for approximately $45 million. Alifabs had sales of more than $20 million during 2013, and profitability consistent with CommScope. We expect it to be immediately accretive.

Alifabs' designs and supplies enclosures for the telecommunications, utility, and energy markets, as well as a full range of monopole, smaller street work towers, and tower solutions to wireless operators in the United Kingdom. Our strategy is to expand Alifabs unique capabilities across Europe, by supporting wireless operators with metro cell and small cell site acquisition, as well as address operator power and energy requirements. Cell sites throughout Europe vary with each operator's needs in each local jurisdiction's limitations and requirements. Alifabs has an outstanding track record in providing quick dependable and customized solutions. We believe these solutions will complement our efforts to help operators roll out LTE while continuing to manage and optimize their 2G and 3G networks. Through this acquisition, our goal is to help operators deal more effectively with the complexities and challenges of deploying advanced networks quickly and cost efficiently.

Moving to slide eight, I will discuss our enterprise segment, we are the global leader in enterprise connectivity solutions for data centers and commercial buildings. Our comprehensive solutions sold primarily under the SYSTIMAX and Uniprise brands, include optical fiber and twisted pair structured cabling solutions, intelligent infrastructure software, network rack and cabinet enclosures, intelligent building sensors, advanced LED lighting control systems, and network design services. Enterprise sales of $218 million were essentially unchanged year-over-year, as growth in the US was offset by declines in the international markets, and from the slightly negative impact of foreign exchange rate changes.

In the quarter, enterprise adjusted operating income declined 6% year-over-year to $43 million, or 20% of sales. Adjusted operating income was impacted by continued investments in long-term growth initiatives, like Redwood Systems, iTRACS, and our data center on demand solutions. While sales were essentially unchanged year-over-year we did see normal seasonal patterns and good sequential growth. Our sales pipeline remains solid, and we continue to see signs of modest improvement in the enterprise market. We continue to believe we have maintained our global market position, and remain optimistic regarding our long-term growth opportunities.

I'll now turn to slide nine to discuss our broadband segment. We are a global leader in providing cable and communications products that support the multi-channel video, voice and high speed data services provided by multiple system operators, or MSOs. We believe we are the leading global manufacturer of coaxial cable, or hybrid fiber coax networks globally, and a leading supplier of fiber optic cable for North American MSOs.

The broadband segment is our smallest and most mature business. Sales declined 6% year-over-year, to $123 million. The decline was primarily driven by lower sales in Central and Latin America, due to the completion of certain major network upgrades. In the quarter broadband adjusted operating income declined 30% year-over-year to $8 million, or 6% of sales. Broadband performance however improved meaningfully sequentially. Due to the benefits of cost reduction activities initiated in 2013. We continue to expect adjusted operating income improvement in 2014, as in-process cost reduction activities are realized. We also continue to evaluate additional alternatives to improve the performance of the broadband segment.

Next I'll discuss cash flow and liquidity on slide 11. CommScope used $13 million in cash from operations in the second quarter, which reflects both the $94 million redemption premium, and acceleration of $38 million of cash interest on our 8.25% notes. In the quarter we invested $10 million in capital expenditures. Adjusted free cash flow for the 12 months ended June 30th of this year was $275 million. We ended the quarter with $481 million in cash and cash equivalents, and had availability under our credit facility of $353 million, which combined with our curb balance provided total liquidity of $834 million.

On Slide 12, I'll discuss what we view as our foundational capital structure. In May of this year we issued $650 million of 5% senior notes due June of 2021, $650 million of 5.5% senior notes due June of 2024. Proceeds from the new notes were used to redeem the entire amount of the $1.1 billion 8.25% notes outstanding, plus pay redemption premiums of $94 million, which is included in other expense in our second quarter results. As a result of these transactions, we expect to reduce annualized interest expense by approximately $23 million, providing $0.07 per share of EPS accretion.

I'll now discuss our capital structure on slide 13. Since the take private in January of 2011, we have reduced our net leverage ratio 2.2 turns. We accomplished this reduction by growing earnings substantially. We're very pleased to have a net debt ratio of 2.8 times as of June 30th, 2014. We continue to expect to generate strong free cash flow this year, and our priorities for cash have not changed. As a reminder those priorities are first to grow the business both organically and through acquisition, as can be seen from our recent acquisition of Alifabs. Second, to reduce debt over the longer term, and then third, to consider other shareholder friendly actions.

Finally, I'll cover our third quarter and full year 2014 outlook on slide 15. While there is always uncertainty, our business trends remain positive. For the third quarter we expect revenue to be in the range of $970 million to $1.020 billion, up 12% year-over-year at the mid-point of the range. We expect adjusted operating income of $190 million to $210 million, up 23% year-over-year at the mid-point, and adjusted earnings of $0.53 to $0.58 per diluted share, up 46% year-over-year at the mid-point, based on a diluted share account of 192 million shares.

Our calendar year 2014 outlook has also strengthened. Excluding special items and assuming business conditions remain relatively stable, we expect revenue of approximately $3.9 billion, up approximately 12% year-over-year, an adjusted effective tax rate of 35% to 37%, and adjusted earnings per diluted share of $2.20 to $2.30, or up 41% at the mid-point of the range, based on a diluted share count of 192 million shares. We also expect to generate strong free cash flow, which reflects growing net income, disciplined working capital management, cash taxes that are below the effective tax rate, and modest capital spending. With that, I'll turn the call over to Eddie before the operator opens the call for Q&A. Eddie.

Thank you, Mark. I want to start by thanking the global CommScope team for their outstanding performance in the second quarter of this year. Our position in the market and our strong performance is a testament to our leading solutions, our commitment to innovation, and our industry leading sales force and global scale and service model. Global wireless operators continue to turn to wire cell site solutions to address their most challenging capacity and coverage requirements. We also continue to see strong performance and a robust pipeline of opportunities for our small cell data solutions. Our small cell data solutions are currently found in some of the largest and most important venues, and we remain excited about our longer term in-building opportunities, and our ION-E solution, which we launched this year at Mobile World Congress.

Trials are underway and are progressing well. We continue to expect to see initial sales towards the end of this year, with more meaningful commercial traction in 2015. While enterprise sales were flat year-over-year, we're pleased to see continued signs of recovery. Our sales funnel is solid and as Mark just highlighted, we're confident that our position remains strong. We continue to invest in iTRACS, Redwood Systems, and our data center on demand solutions, and customer feedback all across these initiatives is positive. We're also pleased to see sequential operating improvement from our broadband team, as we have previously discussed, our expectation is that our broadband business returns to a high-single digit adjusted operating margin by the end of the year, and we're on track to meet that goal.

In the first half of 2014, we have been strong. We remain excited about our opportunities and our position in the market. While we continue to expect North American wireless investment to moderate in the second half as we said multiple times, we believe that global LTE opportunities and operator investment in capacity and network densification for increased capacity and coverage, provide meaningful long-term growth opportunities. Now we will be happy to answer your questions, and I will turn the call back over to Phil.

Thanks. Before we get started, please just to make sure everyone has the opportunity to ask a question on today's call, we ask that you limit yourselves to one question, and then return to the queue for any additional questions. Tanisha, we're ready to take questions.

(Operator Instructions). Your first question comes from the line of Brian Modoff of Deutsche Bank.

Can you talk a little bit about the strength you are seeing on the wireless side, you mentioned you do expect players like perhaps AT&T to be, as a [mop] rate in the back half of the year. Strength in the rest of the markets, can you give us an idea on DAS as a percent of your revenue, and then just briefly talk about what you're doing on cable side? You noted you're continuing to improve it, can you give us a run down of kind of the things you've done to improve the sustainability, and why you think that's going to carry forward? Thank you.

Brian, I think as you know we sell to over 200 operators around the globe, and so what happens with one while it impacts us is not as devastating as it could be to others that don't have that diversity. So we remain confident that the wireless market is going to continue to be a growth market. It's going to change from continent to continent, and I think what we saw this year we saw increased growth in Europe and India, and other places like that, not just in North America. So we're seeing a broad-based growth across the wireless segment.

And in the case of DAS as it relates to the macro percentages, we couch that in big numbers, approximately 20%. I think we're still seeing that number, although the DAS business is growing at a much faster rate than the macro environment. Our position there is equally diversified, not just here in North America, but globally. And I think we enjoy a great position. The new products that were coming out, not just ION-E that we talk about a lot, our ION-U just launched here in North America. And for larger venues and is being received very well. So that coverage is not a one product business, it's across a lot of different verticals that we support. So we need a multitude of different capabilities. And the cable side of wireless, we continue to focus on the fiber part of that, which is growing fast. We have a good and growing position in that market, and look to expand it.

Thank you.

Your next question comes from the line of George Notter of Jefferies.

Hi, guys. Thanks very much. I wanted to ask about lead times in the wireless business. I know there were some points around the turn of the year when they were extended, particularly for things like wireless antennas. I'm just trying to understand maybe what's happened to the lead times, through to now, and then also how is that impacted the order book and the tenor of spending and business trends that you're seeing?

Okay. So I guess being the leader you get a lot of attention by customers. The first of the year we had to adapt our capacity to what the demand was in the market. And that's not done on an instantaneous basis, and so our lead times did extend. We have that back in check now. I think depending on what, within wireless, what you may order we have anything from instantaneous to a few weeks. So I think we're in good shape. I think our customers are pleased at how that's going. We don't believe that we have lost any position. We may have lost some particular bids or quotes here and there, but I think we have recouped that, and are ready to go on a more logical basis. The ability to ramp like we did, and the last part of 2013 and early in 2014 is unique I think to CommScope, and I think that our larger customers rely upon that capability. It doesn't always go up, so we have to be able to react on the alternative side. And we're modulating our workforce as we do react to that.

Got it. Same question on the DAS business. I know lead times for a period of time were extended there also. Was that also an area where you were improving things? I know that ION-E was part of the equation there. I guess a product you were looking to help you deliver more quickly to customers. Where are we in terms of the traction and the ramp on ION-E? Thanks.

Okay. Two different questions there. The ION-E is an introductory product. We're doing trials I think as we said in Europe right now, four different trials, they are all going well. We want to make sure as this is commercially introduced towards the end of the year, and then in 2015 in other parts of the world, that it comes out in the expected fashion. This is a software based product that is easily adaptable by the whole frequency of the cellular spectrum today. And we want to make sure as it's introduced commercially that it goes flawless.

We are doing other introductions, though, I mentioned the ION-U is introduced here in North America, as well as other parts of the world, and that's an equally important maybe for larger or higher power needs, but that's equally important to us. So in the case of DAS, no different than antennas. We had very high demand, much higher than expectations of ourself or our customer base. And I think we have recovered to meet those demands, and our customer base in general is very pleased at their ability to get product on a timely basis.

Thanks guys. Appreciate it.

Sure.

Your next question comes from the line of Rod Hall of JPMorgan.

Hi, guys, good morning. Thanks for the question. I just want to ask Eddie, if you could update us on European distribution, the number of sales people you have got in Europe, and remind us what else you're doing on distribution there, how you feel that's progressing? And any indication on wireless market share in Europe at the present time would also be of interest? Thanks.

Okay. So we've recently added another distribution partner in Europe, but Europe is a bit different than here in the US where we have some larger distributors, both through enterprise as well as wireless, and then some strong wireless distributors here as well. Europe has regional distribution, as well as a couple of major multi-national distributors, so we use it that way. Europe the same as the US in enterprise, is primarily a distribution model, where as most of our sales for our other products are generally direct. I guess we're adapting our broadband business in some of these markets to be more of a distribution model.

We have looked at the size of orders that we'll take directly, and so we're changing that sales model a little bit. Our share in Europe, by different, we have a small broadband business there, our enterprise business we are in a one, two position, and in our wireless business we're depending by products it's different, but we're a leader in that market. In antennas, we have a strong competitor in Germany, but otherwise we are a leader in the market, we feel.

Eddie just to follow-up on that, could you give us any update on the timing of the ramp of some of the build out, the LTE build outs in Europe, do you think it's early 2015, 2015? Can you give us an idea of when that revenue ramps?

Well, we're starting to see a ramp now. I think if you look at not in absolute dollars, but if you look at percentages, we had customers in Europe that grew faster than any other part of the world. So I think we're starting to see that in LTE. As we talked earlier, LTE is not all of what we do, and we're still larger in 3G than LTE, certainly outside of North America. LTE is catching up, but still has a ways to go before it becomes the leading products or solutions that we sell.

Rod just to put European growth in perspective, Europe grew about the same as the US, and the last quarter we talked about European wireless revenue being up about 25%, and that growth in the second quarter actually strengthened.

Great. Okay. Thanks, Mark. Thanks, Eddie.

Sure. Thank you.

Your next question comes from the line of Jess Lubert of Wells Fargo.

Hi guys, congratulations on a nice quarter. Couple of questions. First, I was hoping you could talk about linearity in the period, is it typical to see book-to-bill below 1 in Q2, and perhaps could you update us how visibility has progressed over the last 90 days?

Sure, Jess. 0.9 in the quarter is a little bit lower than you would see in historical second quarter periods, not unlike a 1.2 times book-to-bill was unusually heavy in the first quarter. If you put the two quarters together through the first half, we have a book-to-bill of 1.04 times. And that compares to 1.03 times last year. So as Eddie described, we did have based on the huge spike in demand in wireless coming into the year, we did have some extended lead times. And we believe that in part as a result of that some customers that placed orders maybe a little bit in advance of when they otherwise would have. As we have brought our capacity up a ramp here in the first quarter that has mitigated the need for them to do that. We carry about six to eight weeks of demand in our backlog, so visibility is never perfect for us, but we are very optimistic here as we move into the second half.

That's helpful. And then can you help us better understand some of the drivers of the improved wireless profitability, how much the improvement was due to a structural shift towards technology such as DAS, versus a cyclical improvement by better North American macro cell side volumes, and perhaps you can help us understand how you expect DAS to progress into the second half versus the first half of the year, and how much of an offset that can be for profitability as international increases the percentage of mix?

Okay. DAS is the solution. I think we said a lot of times that the solution selling has better margins than selling products, and so what we're seeing in wireless overall is we're selling more solutions as time goes by. A key contributor also has been the elimination or restructuring of some loss making sub-segments, mostly within wireless. And mostly within the active products. We have turned that totally around, and are seeing meaningful recovery there. I think the last thing and Mark has talked about, the biggest friend we have is volume. And during the course of the first two quarters we have seen a lot of that. And that has, since we make about 85% of what we sell, that has a material impact upon that incremental margin.

And do you expect DAS to be up in the second half versus the first half?

What we I think would say Jess, is we expect DAS to continue to grow at a rate faster than our overall wireless segment.

Alright. Thanks, guys.

Thank you.

Your next question comes from the line of Tal Liani of Bank of America.

Hi. I'm trying to reconcile a few things that you said. If book-to-bill was 0.9, and it's a decline from last quarter, and we expect some slow down, and I see how you're evading the answer about DAS second half, why wouldn't wireless have a reversion to the mean in the near-term after such a giant performance in the last two quarters? I mean I'm worried about double ordering, did we see components all of the time, and always, always after double ordering because of difficulties to deliver of Company's lack of capacity there is slow down in orders. So can you discuss your visibility into the second half, and your confidence level with continued growth? Because I put this on one side. On the other side you guided above expectations for next quarter, so you're clearly confident with the next quarter. So what do you see that is beyond just a book-to-bill, and the double ordering, et cetera?

Okay. So this is Eddie. I want to answer part of that, and then I'll let Mark respond to the balance. You're talking solely about the wireless business here?

Wireless segment, yes.

So we have 200 sales men around the globe that talk to every single customer that we have. We know by project these guys talk to the regional guys, who know about projects, where things are going in, we know who the installers are, certainly here in North America which is the biggest part of the market. And so we test what they're ordering to make sure that you don't get into that situation. And it hasn't been so prevalent in the wireless business, I think as you would historically see in more commodity driven products. So I'm not concerned that we have that.

What Mark has said earlier in the call is that we had orders in advance, that people get in the queue, but I don't think that's the same as double ordering. So as the customers modulate their demand during the course of the balance of the year, we will adapt to that. But it's not a case of us being concerned about people who have placed orders with us, and others, because in many of the cases certainly here, we have significant positions that the other people don't appreciate. And so we know what the customer needs. They rely upon us, and they are in constant contact with us about where their needs may be, and what those shifts are.

Maybe just to address the balance of your point there, Tal, I think you hit the nail on the head with our guidance for the third quarter being above expectations, and I think that pretty much speaks to the book-to-bill and our backlog coming into the quarter.

Got it. I have another question, if you don't mind. How does your participation in wireless change when companies hit capacity versus companies where carriers versus when they put initial footprint? Do you have the same dollar participation in capacity enhancements versus initial, or is the initial roll out greater in dollars versus the capacity expansion?

I think what we would say, Eddie can you add to my comments. The answer is, it depends. If you have a developing country that is putting in an initial network then there will be a large coverage build, and we see that in some of the developing countries, in southeast Asia right now, for example. Over the longer term the densification of that network, we believe, will significantly consume more CapEx than the initial installation.

Thank you.

Thank you.

Your next question comes from the line of Shawn Harrison of Longbow Research.

I'll try to make this brief, but a two-part on separate topics. Enterprise, maybe if you could just elaborate more what happened internationally during the June quarter, and how is that I guess progressing in the back half of the year? Second I understand you have kind of three paths for cash usage, but I'm looking at least in my model right now maybe $650 million to $700 million of kind of potential cash balance exiting the year, which seems to be well more than what you need, so maybe if you could, any more detail there, that would be great?

Sure. I'll take the second part, Shawn, and then Eddie will comment on enterprise. But as we have talked for some time now, our priorities in terms of use of cash is first to reinvest in the business. We are investing organically very heavily in our wireless business, in particular in small cell DAS, as well as in our enterprise business, two areas that we see as large long-term growth potential.

And then inorganically we continue to do well with small tuck-in acquisitions. Alifabs being a great example of that. So today we believe that with the opportunities we have for both organic and inorganic investment, that the priorities as I gave them are right for us at this point in time. As we continue to evaluate opportunities should we get to a point in the future where for some reason we feel that we have exhausted them, or there aren't further accretive M&A opportunities, we may then look to alter the line up of those priorities, but as of today we're very confident with our chances or opportunities to reinvest.

In the case of enterprise, as Mark said, the US we had growth, and Europe it was flat to slightly down, and it's still the leading indicator of the world economic situation, and it's not yet fixed. We have seen of late that we're starting to see some orders of scale, back to what more normal levels would be, so we're optimistic about that, and what this means for the future. In conversations with our partners in this market, our distribution partners, I think they see a second half generally and what we do with them, that will be stronger than what we saw in the first half. And we feel confident that our position has maintained to strengthen in the markets that we serve. So the performance of enterprise as Mark said, and I did as well, the performance somewhat muted by the investment, the continued investment in our three small acquisitions that we did there. They are not yet of scale, and so we're supporting them as they get to that level.

So we're very optimistic. We think that will enhance the growth during the back end of this year. And into the future. And certainly in the data center on demand, we're seeing a lot of optimism there in the marketplace of the solution that we have. And we're getting a lot of traction with Redwood, as well as iTRACS, so we are optimistic about those acquisitions that we made, and we think they'll enhance our enterprise story going forward. As we go into 2015, we think the advent of an enterprise based wireless product is going to enhance that position, with our 400 place sales men and several thousand business partners around the world. We're very optimistic about enterprise in the long-term with all that we're doing in enhancing the technology.

Thanks for the color, Eddie and congratulations everyone on the quarter.

Thanks, Shawn.

Your next question comes from the line of Matthew Hoffman from Mizuho.

The Company is clearly executing well overall, but working capital is one of the areas where your numbers are trailing what you were doing a year ago. So given the outlook for better free cash flow growth, should we model these items to dip in the second half, and we have a focus on monetizing those items? Thanks.

Yes, sure, Matthew. While our working capital has grown commensurate with our growth in the top line, from a metric standpoint, we are either consistent with or outperforming prior periods. Part of that of course being attributable to a little bit heavier growth in North America, where our DSOs are somewhat favorably impacted. The rate at which we turn our inventories and collect our receivables today is very consistent with prior periods, and typically to your second point, we generate most of our free cash flow in the second half of the year, and we expect that to be the case again this year.

And a quick follow-up, if I can, on the R&D side. You built out a little bit in the second quarter. Should we assume that's the stickier part of the OpEx moving forward, and the SG&A is what will move down? Thanks.

I think R&D will be a place that we want to spend what is necessary, and it's something that we will continue to focus on. We spent, what we talk about is $120 million to $130 million a year. We'll continue at that pace. If we need more we'll do that because technology is going to be our growth driver, and so that's something that we don't try to curtail. So that's not where the savings came. It was in the other overhead parts of the business. And that's where we'll continue that focus.

Thanks, and nice job.

Thank you.

Your next question comes from the line of Simon Leopold of Raymond James.

Thank you very much. I wanted to get two quick clarifications, and then more of a trending question. In terms of the clarifications, just want to see if thinking about the DAS contribution, if we think about it, I think you've been asked a couple times around this, roughly it's 14% of overall revenue. I want to see if that's a reasonable assumption. Also, within enterprise, we have talked about data center as part of that business, as well as campus. Wondering if you could give us an approximation of data centers as a percent of business? I'm thinking it's about a third.

In terms of my question, I'm trying to think about wireless relative to CapEx trends, and the idea that you saw everything but the base station and we see pretty high price compression for base stations, 4G base stations are so much cheaper than 3G. So I want to get a better understanding because we assume there's relative price stability of the products you sell, cabling, antennas, and DAS. And so I'd like to see if you could elaborate on how to think about the correlation to wireless carrier CapEx around this context of price for the products? Thank you.

Okay. That's a lot of number questions. So we said that DAS is approximately 20% of wireless, which is approximately 65% of our overall revenue. You can do the math, and 14% is probably not unreasonable.

Enterprise. The enterprise data center business is about a third of our enterprise business, so I think that's what we said consistently. It is growing at a faster pace than what the non-res construction, the typical land business is. So I think you're correct there.

Simon, if you could, what was the last part of your question?

The last part is a lot of us build our models based on carrier CapEx trends which are somewhat challenging, but we assume that your pricing for the cable, the antennas, small cells, your wireless products, would be more stable than the prices of the other companies that sell base stations where 4G base stations are much cheaper than 3G base stations. What I'm looking for a correlation between your business and the carrier CapEx models?

The antenna that we sold a year ago is not the antenna we sell today, maybe it's a little bit more than a year. But we're making enhancements in the capability of what you can put in a Ray dome all the time, and the multi frequencies to make sure that the points on the tower are different and more efficient for the operators. The transition from coaxial cable to fiber is changing, too. We have a good position there. And it's really customized by carrier almost, customized design. So it's not as trending towards what you might believe commiditization would do. So I think those have more stability.

We are tending more toward power top solutions, the coupling devices that we have, that we talked about a lot, enable efficiency with our carriers, as well as the installers that work for them. And so we have some unique opportunities there. So we're trying to put this more as a solution sale, more than just ordering items in a bomb, and having to compete with everybody in the world for that. So our EBTR, everything, but the radio is a unique position that we have. We think stronger than anyone else. Or maybe multiple anyone else's in the world. And so we think that gives us an advantage.

Thank you.

Sure. Thank you.

Your next question comes from the line of Amir Rozwadowski of Barclay's.

Thank you very much. I was wondering if we could talk a bit about the trajectory of the enterprise business, particularly the margin trajectory. Clearly you folks mentioned in the past that you made a number of investments in order to expand the addressable market of the opportunity set in the enterprise. One, are you starting to see some of those investments bear fruit? And when should we start to see some of those business transition from investment mode towards a bit of a harvesting mode with some of these newer opportunities?

Thanks for the question, Amir. We're proud of the fact that from an operating margin standpoint we've been able to maintain 20 points of adjusted operating income margin within the enterprise business, despite the fact it's been relatively flat over the last two to three years. With the introduction of more intelligent products, like our iTRACS solutions and other DCIM offerings, we do expect that going forward the mix of higher value added into our overall data center solutions will grow. From a contribution standpoint we would expect at some point next year that we would turn the corner from an investment mode to a harvesting mode, but long-term potential in that products that we think is very good.

Great. Thank you very much for the incremental color.

The next question comes from the line of Steven Fox Cross Research.

Thanks, good morning. Just one question on the enterprise. Yesterday one of your competitors probably the lower end products than you guys, talked about sort of walking away from some of the lower end markets and cabling products. You guys are also moving upstream it seems with some of your recent acquisitions, and the market isn't growing that fast. So in your core enterprise business can you just talk about whether what you're seeing from competition, whether some of your core business could come under attack, even as you guys try to move upstream and the potential risks around that? Thanks.

I think Steve, this is Eddie, the markets may be more rational than what we see in some other markets. So we don't sell feet of cable, or fiber meters, we sell solutions, end-to-end solutions that we warrant. We sell and what we're proud of doing we sell at the higher end of the market, and so the more common products we can make, but that's not what our focus is. And we sell quality and capability, and that's what our customers expect from us. And that's how our distribution partners assist us in going to market.

Thanks. And just a quick follow-up clarification. In terms of the wireless margin improvement quarter-over-quarter can you just break it down between how much was volume driven versus mix? Thanks.

I don't know if we would have a specific break out there, Steven, but we point to several factors, I think that we have already covered in the call here. But volume certainly is a component of that, and the more that we can sell as a solution, whether it be at the top of a tower or in our small cell data solutions, the better that serves our margins. So both of those were key contributors for us.

Okay. Fair enough. Thank you.

Thank you.

Your next question comes from the line of Kulbinder Garcha of Credit Suisse.

Thank you. A couple of questions around guidance and outlook. On the wireless business, if I'm looking at this right, your guidance for the full year probably slices up half of a half revenues are down. And I'm just wondering in the context of what sounded like an improving outlook from the infrastructure vendors, I'm from US wireless CapEx, and I was at the forum where you guys actually guide for the year. It looks like it's half of a half growth there despite moderation in year-on-year trends, so I am just wondering is that something, are you being conservative, or is there something happening in other regions, or is it a timing thing on their revenues versus theirs, how you would explain that delta? Then the second thing is on the wireless margins to be specific, is there anything exceptional in them? So for example if your revenue base let's say in the wireless business was flat half over half, is there any reason why the margins would moderate as much as your guidance implies? Thanks.

Sure. Let me take a cut at that, and then maybe Eddie wants to add to it. So your first point we are half over half revenue, so we grew about 15% in the first half, and if you use our full-year guidance or the mid-point, it would be in the range of 10% in the second half, still about 12% growth for the full year. So there is no new news here in that guidance, other than we strengthened it for the full year. When we came into the first quarter looking at 26% growth in the wireless segment, of course we knew that was not a sustainable profile. But still very optimistic. As far as not only the full year, but moving forward.

I get just to be clear what I'm getting at is that your second half over first half may decline in wireless? I'm just thinking that seems conservative in the context of the comments we have had, companies you supply into on the US carriers?

Sure. We do expect our second half to be moderated from the first half. So we had 26% growth in wireless in Q1, and 23% growth in Q2. So we don't expect those rates of growth in the second half. And comparing first half, of course, then to the second, then you would have the same math that would play there. But we still see, Yes, longer term, this is still a great market for us. We see growth as we talked outside of the US now beginning in earnest in Europe. Very strong growth in India, albeit a relatively smaller market for us, and continued strength in the US market. We expect for quite some time to come, with densification in networks.

One tidbit, we've talked about the growth of wireless in baseball analogy, and one of our customers talked about the growth of DAS in baseball analogy. We've been in the early innings of a game, and they say we're in the first inning of a double-header, so given our position in this market, we're very enthusiastic about what the densification part of the wireless business is going to become.

And then just on the margins, if your wireless business produced this level of revenue in the second half for argument's sake, is there anything in the margin number in Q2 that is exceptional, that would make it go down, does any geographic mix change, or a product change that we should be aware of?

No, again we would come back to the two primary drivers being volume and mix. Geographically in western or developed countries, we tend to see approximately the same margin profile, so whether we are seeing growth in the US, or growth in western Europe, it is an inconsequential difference there, but we do see our DAS solutions continuing to grow faster, and to your earlier comment, we do see lower rates of growth in the second half, and so volume can work on both sides there.

Thank you.

Your next question comes from the line of Mark Sue of RBC Capital.

Thank you. Mark, just a quick one, I am just trying to mentally draw a picture of your lead times for some of the popular wireless products. Can you give us a sense of what it has been historically, the high, the low, the average? I think currently you said a couple of weeks?

Mark, this is Eddie. I don't think that we talked about that publicly. What I did say is that our lead times in the first of the year were extended. That caused consternation with our relationships with partners, and we had to work through that. That no longer is the fact, we have probably as good a lead times or better than most, based upon our ability to ramp, and the capacity that we have. So it is no longer an issue, and we worked through the committal of the first half, we worked through that acceptably, so I think that we are in good shape now.

Okay. That is helpful. Maybe on broadband, I recognize you are going to be operating improvements you have made, what are some of the planning assumptions for an uptick in demand in the broadband division? What the MSOs are? Seeing the CapEx actually grow? Some unit almost 20% slashed, so maybe how you see the outlook there, also does the business need more scale? What are you thoughts on adding to the arsenal for the broadband business? Thank you.

I am going to do that maybe in reverse order. What we have said in broadband is that we consider it more of a maintenance business, relative to the other two more growth oriented businesses. Residential construction, greenfield residential construction still remains from our standpoint one of the leading indicators of growth opportunities, significant growth opportunities. That is not happening, however you are seeing buildouts relative to competitive pressures and high speed delivery systems, I think that is driving some demand in the market. You are seeing more fiber which is causing issues with delivery times in fiber amongst some of our competitors. And we are seeing a growth in business in our truck and distribution business there, so that is all good. These guys have done a great job in turning the business around from what we saw in late 2013, and I think they are going to meet the targets, or come near to the, what I said last quarter is that we started a quarter late in getting these cost initiatives taken care of, so we will be a little behind that double digit as we exit the year, but absolutely on trajectory to meet our targets.

Thanks. Tanisha, we only have time for two more questions.

Okay. Your next questions comes from the line of Mark Delaney of Goldman Sachs.

Thanks very much for taking the question. You commented that you viewed the wireless business as a growth business still, and I am wondering if you can comment at all on 2015, and if you think that comment will hold for next year? I know you wouldn't give guidance at this point, but if you could just talk about some of the directional puts and takes, if there is anything in North America and the trends internationally?

Well we won't give guidance, and we are initiating the start of that process to figure out what we are going to say for next year. I think the only way to answer that Mark, is that we believe this is a long term growth business, it does operate in ways of employment, we have seen a great wave here in North America for LTE in the last several years, just not a 2014 phenomenon. We are starting to see that in Europe and other parts of the world. I think we have talked at length about parts of Asia and how we attack those markets, so that is not a key indicator for us. But we see this as a long term business, the technology will change as we go through the out years of availability of employment, and we will have a new technology. So we are a leader in what we do, we are a leader in technology and technical development. We are going to spend the money to make sure that we stay at that point, and we are going to continue to be prosperous in this business.

I appreciate the thoughts. Thank you very much.

Thank you.

Your final question comes from the line of Mark McKechnie of Evercore.

Great. Thanks Eddie and Mark. Appreciate it. Two questions if I may, the geographic patterns, it looks like international Europe, up 11% sequential, APAC up 24% sequential. What is in line with some of the trends that we are seeing, I am curious as to one, how far that you think you are in the builds over there? I still think its kind of certainly early stage? And then second on that, your content opportunity, you did outgrow the US pretty well with some system sales at this part of the cycle, and I wanted to get some proof points that you are actually seeing a similar pattern overseas? And then finally, the big question is, you might have answered this, but I missed some questions earlier. On 2015, relative to your long term targets of mid-single digit revenue growth, some margin expansion and delevering. If you could comment in any way or form on that, that would be great? Thanks.

Covers every aspect of our business, so I think as relative to the 2015, all you are going to get out of us today is our long term targets. I think that is what we would have to say in the absence of having plans in place. In the case of impact of the growth of some of the non-North American markets, EMEA was impacted by one of our Middle Eastern customers having big builds in 2013 and early 2014, and those builds are done for the most part. But we may have some rebuilds in some of those areas, but we will have to see. In the case of India, we saw good growth in the carrier base in India, starting to spend money. For a change Europe was strong, and some of our highest percentage of growers, not in absolute dollars but in percent growth from Europe, and our carrier market there. So it is all a mixed bag. Go back again to in the wireless market we serve over 200 carrier customers, so it is well diversified and so we see a lot of moving targets around the globe.

Okay. Great. Thank you.

Thank you. Great And we thank all of you for your attention and very good questions this morning. And we look forward to talking to you next quarter, and thank you very much.

Thanks everyone.

This concludes today's CommScope Q2 2014 earnings call. You may now disconnect.