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CommScope Holding Company Inc. (NASDAQ:COMM)

Q1 2014 Earnings Conference Call

April 30, 2014 08:30 AM ET

Executives

Eddie Edwards - President and CEO

Mark Olson - EVP and CFO

Phil Armstrong - SVP, Corporate Finance

Mark Huegerich - Director, Investor Relations

Analysts

Amir Rozwadowski - Barclays Capital

Brian Modoff - Deutsche Bank

Rod Hall - JPMorgan

Tal Liani - Bank of America/Merrill Lynch

George Notter - Jefferies & Company

Mark Delaney - Goldman Sachs

Mark Sue - RBC Capital Markets

Jess Lubert - Wells Fargo Securities

Kulbinder Garcha - Credit Suisse

Steven Fox - Cross Research

Matthew Hoffman - Mizuho Securities USA Inc.

Mark McKechnie - Evercore Partners

Operator

Good morning. My name is Regina, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the CommScope First Quarter 2014 Earnings Release. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. I’d now like to turn the conference over to Mr. Phil Armstrong, Senior Vice President of Corporate Finance. Sir, you may begin.

Phil Armstrong

Good morning and thank you for joining us today to discuss CommScope’s first quarter 2014 results. With me on the call today are Eddie Edwards, CommScope President and CEO; Mark Olson, CommScope Executive Vice President and Chief Financial Officer; and Mark Huegerich, Director of Investor Relations. I’d also like to take this opportunity to welcome Jennifer Crawford to the Investor Relations team working with Mark Huegerich.

You can find the slides that accompany this review on our Investor Relations website. And before we begin the presentation, I’ll cover a few housekeeping items. On Slide 2 of the presentation, you will 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 first quarter 2014 10-Q and other SEC filings. 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’ll provide certain non-GAAP measures. We believe that presenting these non-GAAP measures or adjusted measures provides additional meaningful information to investors. Detailed reconciliations of GAAP to adjusted measures can be found in the appendix to our slide presentation.

Slide 3 is our agenda for the morning. Mark Olson will provide an overview of the quarter, highlight our three segments performance, discuss balance sheet, cash flow, and capital structure and then provide our outlook for the second quarter and calendar year 2014. He will then turn the call over to Eddie Edwards for comments before we open the line for Q&A.

To make sure everyone has an opportunity to ask a question on today’s call, we request that you ask one question with no more than one follow-up. Please return to the queue for additional questions.

I will now turn it over to Mark Olson. Mark?

Mark Olson

Thanks, Phil, and good morning to everyone joining us on the call this morning. Let’s turn to Slide 4 for our first quarter 2014 summary. We are proud to deliver record operating results and earnings in the first quarter. Sales increased 16% year-over-year to $935 million. Record Wireless growth and a recovery in our Enterprise business drove the strong year-over-year performance.

Orders booked in the first quarter increased 30% year-over-year to $1.1 billion, providing a book-to-bill ratio of 1.2 times. Our book-to-bill ratio was positive in all segments with Wireless posting particularly strong order growth.

GAAP operating income in the quarter rose 94% year-over-year to $147 million. Adjusted operating income which excludes the amortization of purchased intangible assets and other special items rose 45% year-over-year to $192 million. We achieved a record adjusted operating income margin of 21% due mainly to our exceptionally strong Wireless performance.

For the quarter, the Company reported net income of $64 million or $0.34 per diluted share. Excluding special items, non-GAAP adjusted net income increased 74% year-over-year to $95 million or $0.50 per diluted share. Adjusted EPS increased 43% despite an increase of 34 million shares in our diluted share count primarily as a result of our recent IPO.

Diluted earnings are based on a 191 million shares for the first quarter. Adjusted net income and adjusted EPS rose substantially year-over-year due mainly to higher sales volumes, a very favorable regional sales mix as well as a favorable mix of products sold and the benefit from ongoing cost savings initiatives.

I’ll now discuss each of our three segments first quarter performance, starting with the Wireless segment on Slide 6. In Wireless we’re the global leader in merchant RF Wireless Network Connectivity solutions and small cell DAS solutions. Our solutions which are marketed primarily under the Andrew brand enable Wireless operators to deploy macro cell sites and small cell DAS solutions to meet 2G, 3G and 4G cellular coverage and capacity requirements.

Wireless segment sales increased 26% year-over-year to $627 million. The sales increase was primarily driven by higher spending by operators in the U.S, and in the Europe, Middle East and Africa region. Investment in LTE coverage and capacity remains a priority in the U.S., while operators outside the U.S are focused on network modernization. For example, we saw solid year-over-year growth in Europe during the first quarter as operators upgrade networks and begin to deploy LTE.

In the quarter, Wireless adjusted operating income rose 63% year-over-year to $154 million or 25% of sales. The Company continues to benefit from higher sales volumes and a favorable regional mix of sales as well as a favorable mix of products sold. Sales of our ion branded small cell DAS and tower top cellular solutions in the quarter were particularly robust.

Wireless orders in the quarter were also very strong. Operators appreciate our RF technology and expertise and increasingly trust CommScope to address their Wireless network challenges. We continue to believe that CommScope is very well positioned to benefit from positive global trends in the Wireless market.

Moving to Slide 7, I’ll discuss our Enterprise segment. We are the global leader in Enterprise connectivity solutions for data centers and commercial buildings. Our comprehensive solution 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 increased 5% year-over-year to $202 million, the first quarter of year-over-year growth since 2011. Sales increased in the U.S and Central and Latin America and in the Asia-Pacific regions. We delivered growth in essentially all product areas.

In the quarter, Enterprise adjusted operating income increased 5% year-over-year to $36 million or 18% of sales. Increases in sales volume and the positive shift in mix of products sold offset continued investments in the iTRACS and Redwood Systems growth initiatives. We are pleased with our progress as we position these solutions for long-term growth.

While we believe it is still early to call for a broad based Enterprise recovery due to ongoing global economic uncertainty, we’re pleased with what we’re seeing in the market and hearing from our customers. While spending in this market has been cautious for the last two years, Enterprises continue to create more data and consume more bandwidth. We believe we’ve maintained our global market position and state-of-the-art fiber and copper connectivity and we remain optimistic regarding our long-term growth opportunities.

I’ll now turn to Slide 8 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’re the leading global manufacturer of coaxial cable, or hybrid fiber coaxial 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 9% year-over-year to $108 million. The decline was primarily driven by lower sales in Central and Latin America. In the quarter, Broadband adjusted operating income declined year-over-year to $2 million or 2% of sales.

However, performance improved sequentially and cost reduction activities were initiated in the fourth quarter of last year to better align the segments cost structure with customer demand. As a result, we expect adjusted operating income improvement as we move through 2014. We also continue to evaluate alternatives to improve the performance of the broadband segment.

Next I’ll discuss cash flow and liquidity on Slide 10. The first quarter is historically one of the weakest cash flow generation quarters of the year. CommScope use $35 million in cash from operations and invested $7 million in capital expenditures in the quarter. Cash flow from operations improved year-over-year despite increases in working capital.

We expect to generate cash from operating activities for the remainder of the year. We paid cash taxes of $16 million and cash interest of $52 million during the first quarter. Adjusted free cash flow for the 12 months ending March 31, 2014 was $271 million. We ended the quarter with $305 million in cash and cash equivalents and had availability under our credit facility of $345 million, which combined with our cash balance provides total liquidity of $650 million.

I’ll now discuss our capital structure on Slide 11. Since the take private in January of 2011, we’ve reduced our net leverage ratio 2 times. We accomplished this by growing earnings and reducing debt. We are currently reviewing options available to refinance the $1.1 billion of 8.25% notes.

Based on our credit profile and current market rates, we believe we’ve an opportunity to substantially reduce interest costs. The current redemption premium is a little more than a $100 million, but declines in a linear fashion to around $45 million in the first call date in January of 2015. We will continue to monitor our options closely.

Finally, I’ll cover our second quarter and full-year 2014 outlook on Slide 13. While global economic conditions remain uncertain, our business trends remain positive. For the second quarter, we expect revenue to be in the range of $1 billion to $1.05 billion or up 9% year-over-year to mid point of the range.

We expect adjusted operating income of $215 million to $235 million, up 22% year-over-year at the midpoint of the range and we expect adjusted earnings of $0.58 to $0.62 per diluted share on a 192 million diluted shares.

Our calendar year 2014 outlook is also strengthened. Excluding special items and assuming business conditions remain relatively stable. We now expect sales growth in the high single-digits to low double-digits. We expect sales growth to moderate somewhat in the second half of the year as North American operators spending patterns appeared to be a bit more weighted into the first half of the year.

We expect adjusted operating margin expansion and adjusted effective tax rate trending down toward our long-term target of 35% to 37% and we now expect significant adjusted net income and adjusted EPS growth. 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.

And with that, I’ll turn the call over to Eddie to cover Commscope’s investment highlights before the operator opens the call for Q&A. Eddie?

Eddie Edwards

Thank you, Mark. First, I want to thank the Commscope team for their outstanding performance in the first quarter of this year. Our Wireless growth is a testament to the hard work over a multiyear period to increase our relevance with the end user. We believe that our radio frequency expertise, integrated solutions, manufacturing flexibility and reputation for customer service provide us the fundamental advantage over our competitors in the Wireless market.

I’m also pleased to see that the enterprise market shows initial signs of recovery after two years of cautious IT spending; it’s good to see sales growth. And as we move through the year, we expect our investment in iTRACS and Redwood Systems to begin to provide more sales growth opportunities.

I’m also confident that our broadband team will execute profit improvement initiatives that we’ve discussed; they will help us return the segment to a low double-digit adjusted operating margin profile. Overall, it was a great quarter and a very strong start to 2014. We are working hard to build on this momentum and we remain focused on positioning the Company for long-term success.

Now Mark and I’ll be happy to answer your questions. I’ll turn it back over to the operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Amir Rozwadowski with Barclays Capital. Please go ahead with your question.

Amir Rozwadowski - Barclays Capital

Thank you very much and good morning folks.

Eddie Edwards

Good morning, Amir.

Mark Olson

Hi, Amir.

Amir Rozwadowski - Barclays Capital

I was wondering if we could touch upon some of the trends in the Wireless business a bit here. I mean clearly for the last several quarters we’ve seen better than expected results out of the business, it seems that within the U.S the competitive environment is lending itself to ongoing investment. Just trying to assess how we should think about the progression through the course of the year, and effectively how much is left in terms of the spending trends that you’re seeing or the favorable spending trends that you’re seeing?

Mark Olson

Amir, we’ve come from making calls in September where the LTE was going to fall off the cliff to a position now where the LTE spend certainly here in North America is at a pace that is faster than we’ve seen it in the past. So as the capacity portion and the densification portion of the LTE spend certainly happens with the two larger carriers and as the other carriers here in North America continue to spin, we see that demand continuing and we’re very optimistic about what we see in the near to medium term within the Wireless segment. We also see a transition from stadiums and arenas in the in-building space to the towers, of the high-rise towers and I think that will be a focus not just at the end of this year, but in the years to come as we’ve said publicly there is only about 2% coverage in the large towers around the globe. So this is not a North American business for us, while more than half of it is here in North America where we sell to every carrier in the world as best we -- I can tell and we think that this business is in its one -- we talk about ways, its one of those ways of growth cycle. So we’re very optimistic across the board broad based support for our Wireless business.

Amir Rozwadowski - Barclays Capital

And then if I may just, one follow-up there Eddie, if we’re contrasting sort of what you folks are seeing versus some of the other suppliers to the telecom operators, I mean, you folks have made a constituted effort to move much more towards systems oriented products over the last couple of years. Has that served as providing a tailwind for the business and that carriers are spending a bit more on the types of products that you folks may provide versus some of what others may provide to the marketplace?

Eddie Edwards

Well, I think we’ve transitioned. We are not optimized yet, certainly not in Wireless. I think Enterprise as you know has been a solution seller for long time. I think the solution sale does a couple of things that it makes our discussion with the carriers different. It would also -- as we talked earlier or before about the margin profile, it’s a better margin profile providing solution than it is providing only products which can lead to commoditization, which we’ve seen in other business units. We think we’ve also gained market share during the course of the last three years as we’ve focused on dealing with our end user customers in a more precise way. Our expertise to solutions and what’s happening in the densification and small cell, I think are all examples. I think lastly we’ve talked about our customer in the Middle East where we’re doing really solution based sites -- cell site builds has changed the dynamics of that market. We are starting to see that business model be talked about in other parts of the world where, I mean, more developed parts of the world where you probably wouldn’t expect it from someone like us. So our experience and what we’ve is a broader -- a broad product and solution portfolio as well as what we think is our share gain has helped us all around.

Amir Rozwadowski - Barclays Capital

Great. Thank you very much for the incremental color.

Eddie Edwards

Sure.

Operator

Our next question will come from the line of Brian Modoff with Deutsche Bank. Please go ahead with your question.

Brian Modoff - Deutsche Bank

Yes, guys. So a couple of things. First, on the Enterprise side. You’re seeing recovery there now. Can you talk more about, is it new building builds you’re seeing, is it the cloud, is it a combination? Second is a follow-up on the cable side. Obviously, it’s good to see back at profitability there. You talked about other measures to improve profitability; can you give us a little more granularity? And then finally on the balance sheet you got this note that you’ve talked about perhaps refinancing at the most $871 million, refinancing that note, its 8.25%. Can you give us an update on the likelihood of that occurring this year? Thank you.

Mark Olson

Okay. Sure you want to start Eddie with the Enterprise.

Eddie Edwards

Yes, I will start with Enterprise. We’re seeing good growth in the data center market. It’s growing faster than the other part of the business, which we’ve talked about over the last couple of years, even in a down market. But we’re seeing the size of the orders also or the projects that we’re winning growth, that’s a big incentive as to why we forget about the future in Enterprise. Historically, this has been the most profitable, I guess, until this year historically this has been the most profitable business that we’ve had. So we’re very excited about the recovery from several years of slow to no growth in the enterprise market. So see a whole different level of exuberance within our Enterprise sales teams and our people within that segment. So we’re excited about what it brings us in the future. Hope the …

Mark Olson

From a broadband standpoint …

Eddie Edwards

On a broadband, the other alternatives we’re in the middle of process of evaluating what products we sell. It is the most product oriented business that we have by far. And so we’re evaluating we’ve an 80-20 process that we’re underway. We’re evaluating what products we sell there and who we sell to and how we sell to make sure that we can maximize the products in a very competitive price environment. So those are underway not finished. And we’re also evaluating the direction that we’re going to go in the portfolio that we have, so lot of different things. We are gaining traction with our restructuring that involve both the Wireless, Cable, as well as Broadband. It was delayed about six months because of a slow down in selling our bimetals business. That’s now done and well underway and I think we will start seeing the benefit of that during the course of late Q2 and the balance of the year. So I think we’re -- we maybe delayed somewhat at 12/31 as to where our target was, but we’re certainly trending in that direction and we have high confidence that we will get to that level.

Mark Olson

And then your final question Brian on the notes, we carried 1.5 billion of 8.25% notes for sometime. We pay down about $400 million of those notes with IPO proceeds. And we’re now studying very intently the opportunities to refinance the remaining 1.1 billion. And if you consider current market rates and we’ve been actively engaged with a number of institutions to discuss alternatives here, there could be as much as 300 basis points of opportunity in the rate on those notes. And that would put material reductions into our cash interest, cost as well as improvements in earnings per share. We have a first call date on those of January of next year. There is a redemption premium that today is still fairly rich that will diminish in a linear fashion here as we move throughout the second half of the year. So we’re encouraged by what the opportunities are given current market conditions.

Brian Modoff - Deutsche Bank

Okay. Well good luck.

Eddie Edwards

Good. Thank you.

Operator

Your next question will come from the line of Rod Hall with JPMorgan. Please go ahead with your question.

Rod Hall - JPMorgan

Yes, hi. Good morning, guys. Thanks for the question. Just a couple, I wanted that Eddie maybe get you to talk a little bit more about the phasing of capital spending in the U.S? I guess, kind of a question to my mind is whether we’re looking at project oriented spending here early in the year, which is going to really result in this tilt towards the front end of the year or are we alternatively looking at capacity spending which could actually result into higher spending overall through the whole year. And I just wonder if you guys have thought through that and whether you think there is possibly the latter of scenario that’s what we’re seeing playing out because we’re seeing some pretty aggressive pricing on data plans and so on which is probably driving higher and higher usage. So I’d be interested in your commentary on that and then I have a follow-up.

Eddie Edwards

Okay. I think what we’re seeing the stuff that we sell to our carriers its --we are -- it’s the same antennas and other apparatus that we sell them that they use for coverage or capacity. So its we’re indifferent to that, so we’re selling to the head support antenna products and also the project oriented business within DAS is certainly growing rapidly as it has in the past. So we’re -- I think we’re seeing a broad based spend, what they tell us is that and I guess they told us last year is that much of that coverage is done and I think we’re still spending there. And capacity is -- from our standpoint is equal value to us as its up the antenna and it’s the same sort of thing, the metro sale and the smaller sale applications for indoor are starting, but they’re not at the pace of what you see for the macro environment.

Rod Hall - JPMorgan

I just -- I’m just wondering you guys are obviously surprised and we are too at how strong things are up to this point of year, I mean, is there any reason to think that we won’t be just as surprised as we get into the back end of the year? I mean, I know everybody right now thinking well surely it’s got to decelerate, but maybe not?

Eddie Edwards

Well, we have good order into it right now. That makes us feel more comfortable. We are not expecting a collapse of any sort. And we’ve 1.2 book-to-bill so I think it says that we’ve a strength in the marketplace. And it takes a while to supply all of the products that we’ve in our order book right now.

Mark Olson

And Rod just to keep it in perspective of course we talk about moderating growth, that’s coming off of a 26% rate of growth in Q1. So …

Rod Hall - JPMorgan

Yes, I know it’s still extremely high. I appreciate that Mark. My follow-up on ION-E this quarter, could you guys give us a little bit of an update? I know it’s still pretty early, but help us understand what’s going on with the pipeline and trials and so on?

Eddie Edwards

Okay. First of all, advertising we think its going to be a big game changer and what this whole market is as to how CapEx is spend and the capabilities of something that has ease of use and ease of deployment. I think as you know and the people that we’re in Barcelona, we introduced this in Barcelona at Mobile World Congress. It’s introduced only in Europe for the time being and what we’ve said that we’d under go trials in the second and third quarter. Those trials are beginning not underway, but we’re -- we have selected the participants. It’s going to be two major European carriers as well as two customers. And our Enterprise business partners, they’re extremely excited about what this poses for them in Europe right now. And I think what we’ve seen in our conversations with the carriers, they’re very excited about the -- what we sell and its reported ease of installation and deployment. So having a Enterprise oriented sale and a Wireless technology marries the two larger segments of us together. In that sale we think that’s a great thing from our standpoint to have coverage when we introduce this on a more global basis. But all in all, right now we’re on target, where we though we’d be. We don’t expect material revenue from this solution during the course of the first three quarters and would expect orders to come later in the year. I think that’s what we’ve been consistent with. So it’s not going to be a game changer for ’14, but we think for ’15 its going to be a meaningful solution for us.

Rod Hall - JPMorgan

Would you launch it by the end of 2014 in North America Eddie or …?

Eddie Edwards

I think probably we have said that we will launch in other areas of the world as we get the bugs out in Europe. A lot of our support people are there and so we want to have a successful launch to make sure that makes sense, and then we’ll allot it in other parts of the world as appropriate.

Mark Olson

Rod, we need to move on.

Rod Hall - JPMorgan

Okay.

Mark Olson

The next question.

Rod Hall - JPMorgan

Yes. Thanks a lot.

Mark Olson

Sure.

Operator

Your next question will come from the line of Tal Liani with Bank of America/Merrill Lynch. Please go ahead.

Tal Liani - Bank of America/Merrill Lynch

Hi, good morning. My question is about seasonality. I have a few questions, but you grew 10.5% this quarter and in the last few years you declined on a sequential basis. The last few years you declined anywhere from 1% to 5% and that’s what I’m modeling actually for the next few years. So, how much of this quarters growth is project base, meaning a one time project or some concentration of orders that caused such a big increase or do I have my assumptions wrong and the seasonality could change in the first quarter? Thanks.

Mark Olson

Now the seasonality Tal is, we’re typically heaviest in the second and third quarter and little bit lighter in the first and the fourth. And so, overall we do not expect a change in broad seasonal patterns. But in response to your other question with regard to any major projects, so we don’t have any major projects that we would point to in our revenue stream in the quarter any different from historically what we have. Yes, I think in relation to wireless only the work that we’ve done over the past several years to be more relevant to the end user and the technological advances I think we made in some of the designs of in our active wireless businesses has helped us be in a position much better than what we were in the past.

Tal Liani - Bank of America/Merrill Lynch

So, how do I see it in the numbers, meaning is the growth related to LTE projects, I mean what is the attach rate or -- not the attach rate, what is driving up the numbers in such a big magnitude this quarter. Is it about certain LTE projects global trend of LTE or it's more about what you just said which is you’re selling new things into the same customer base. So, how do I see it in the numbers?

Mark Olson

I think its two different answers. In North America the LTE is a key driver and in the rest of the world we’re 70% 3G right now and we’re deploying full systems in 3G in other parts of the world, not necessarily Europe there are other parts of the world. We talked about we are going to do a lot. They are now a major customer in our definition and theirs is a full 3G network that they are deploying in multiple places in the world. So, that’s a critical part. So in some places well 4G will not be there for a long, long time and so having the capability to support all the technologies is important to us.

Tal Liani - Bank of America/Merrill Lynch

And the last question about this topic is, how much visibility you’re having to the next few quarters, in the sense that this LTE cycling the U.S. or the cycles you have in Europe. I am not looking for guidance but how long can they continue and is it a new level from the company which you grow normally from that level or is there some kind of cyclicality built in to your expectations longer term?

Mark Olson

Well from a cyclicality standpoint Tal, we tend to think about wireless rolling out in waves of technology. And so, when you think about LTE being deployed now in the U.S. it's really now beginning in Europe and outside the U.S. we had very good growth in the international markets this quarter as well. But we use the baseball analogy of being in the early innings of a major technology rollout that maybe began for us a year and a half, two years ago. And so we think that while U.S. operators now are in full stride with deployment there is still a lot of room for densification and capacity additions there. We think voice over LTE is something that hasn’t yet begun in earnest to affect U.S. spending. We see that as more of a 2015 phenomenon. Outside the U.S. we expect Europe to follow the U.S. as they have now begun with LTE deployments. And that as Eddie has just mentioned, we see very good activity in 3G network modernization activities outside the U.S. in particular in the Middle East and Asia. And well we put Africa out there too as well as an untouched virtually untouched area with Nigeria beginning to show signs of life. So, it's broad brushed around the world.

Tal Liani - Bank of America/Merrill Lynch

Great. Thank you.

Mark Olson

Sure.

Operator

Your next question will come from the line of George Notter with Jefferies. Please go ahead.

George Notter - Jefferies & Company

Hi, thanks very much guys and congratulations on a terrific quarter. I wanted to ask about manufacturing, obviously there’s a lot of demand right now. If I go back to two, three quarters ago you guys were talking about closing up some manufacturing and rationalizing some facilities. Kind of where are you in that and then how are you dealing with all this incremental growth, are you adding capacity in certain areas? I just love an update on manufacturing and utilization rates and how you’re dealing with all those demand?

Eddie Edwards

George, I think we’ve been very specific about the rationalizations in our North American coaxial cable manufacturing which is both wireless and broadband. We have consolidated -- we’re in the process of consolidating two facilities into one, where in other parts of the world, now that’s not a loss of revenue in wireless because we are -- what coax it maybe going down, the fiber is coming up. So it's sort of a neutral thing for us but the fiber is made in North America in another location. In the other product areas where we’re adding capacity whether it be people or redefining of what the floor space is used for. So, where demand supports building for the longer term we’re certainly doing that and we’re looking at needs that we have that more than just for this year what maybe coming and we’ll adapt to that as appropriate and when appropriate. So, we’re doing all that stuff and our people are excellent in doing, we’ve done it every year I think in the history of the company as to making sure that we’re in the right places.

George Notter - Jefferies & Company

Got it. And just one quick follow-up, but I also wanted to ask about margins and profitability. So if I look at your guidance for the June quarter I think it translates at the midpoint into roughly 22% operating margin. What do you think about the sustainability of that operating margin, obviously the volume is helping you a tone, but what other things structurally are going on inside the company that are new in the last couple of quarters that might be kind of helping you on that front or is just purely a volume story? Thanks.

Mark Olson

George, we typically point the four drivers of margins and first to your point is volume. And as we grew 16% a lot of that concentrated in wireless we get great leverage from that not only within manufacturing but also within the SG&A areas. The second factor is geographic mix and we had a heavy mix of North American we’re about 60-40 North America versus international markets in the quarter. And so that may moderate a bit, shift back to it's more historical pattern of low mid 50s in the U.S. as European LTE and further 3G modernization occurs outside the states, and that can put a little pressure on margins as we move outside the U.S. Solution selling is one of the keys for us though. And that is, we talk about solutions in the macro cell sites and the tower top SiteRise solutions and then in particular in our small cell DAS solutions, and we see positive trends in those areas. And then finally is cost reduction, and that’s something that’s part of our bread and butter. And Eddie has already commented on some of the programs underway in broadband in particular. So those are the four drivers for us and they can’t move the needle a little bit either way, but volume is the one that overarches all of those.

George Notter - Jefferies & Company

Got it. Thank you.

Mark Olson

Thanks, George.

Operator

Your next question will come from the line of Mark Delaney with Goldman Sachs. Please go ahead.

Mark Delaney - Goldman Sachs

Good morning and congratulations on a good quarter and thanks very much for taking my question.

Mark Olson

Sure.

Mark Delaney - Goldman Sachs

I was hoping first if you could elaborate a little bit more on the most recent question on how mix impacts the margins of the company and I am hoping specifically that you can help us understand the effects of growth in your DAS business and how helpful that can be to your operative margins going forward if DAS increases as a percentage of total sales for the company?

Mark Olson

Yes, we haven't quantified that before Mark, but what we do point to though is across our three segments. So, broadband today is a component sale and that’s apparent in its relative margins. Enterprise has always been a solution sale and that has had margins that are literally twice the best data points we can find in the industry. And then wireless you can really watch the evolution of that. Over the last three, four years we have expanded operating margins by 600 to 700 basis points as we’ve been able to shift from being a component supplier to a solution provider and that’s both at the macro cell site as well as within the DAS business. And so, Eddie has commented on our ION-E solution that we believe will contribute to a higher mix of solution sales within wireless and we’re optimistic as to the impact that, that can have on margins over time.

Mark Delaney - Goldman Sachs

That’s helpful, thank you. And for my follow-up question, can you provide an update on inventory levels and distribution and then what you’re seeing in terms of order rates from the distributors?

Mark Olson

Yes, sure. Our days of inventory I think you’re referring to the enterprise segment in particular, but our days of inventory in the channel are at normal if not perhaps even a notch below would be considered normal levels there, and that gives us encouragement around the enterprise business hopefully being the start of a trend as opposed to a one quarter event.

Mark Delaney - Goldman Sachs

Thank you very much.

Mark Olson

Thanks Mark.

Operator

Your next question will come from the line of Mark Sue with RBC Capital Markets. Please go ahead.

Mark Sue - RBC Capital Markets

Thank you. Good morning, gentlemen. I was trying to get a sense of just the breadth of some of the projects that you’re seeing in Europe as we’re starting to deploy the LTE, maybe across the range of customers some color there, and just kind of the ramp and how we should think about seasonality in that region? Thank you.

Eddie Edwards

Well I am not going to talk specifically about any individual customer Mark, but we’re seeing, I think as the other Mark sitting next to me said is that, that this is a broad based demand that we’re seeing from many of our customers. We had large growth in Europe from select customers there that they’re among the largest and we see that continuing. We have positioned very well with the people that are deploying LTE, certainly the ones that have done trials and then the ones that are doing further deployments. It's a different market for us. They have, I think over 40 providers there and so we have a coverage that’s different than what we see here in North America, but we feel good about the prospects. We think our portfolio of what we have to sell them is appropriate. Some things we have to adapt from what we sell here in North America for LTE but all those things are underway and our people are on top of what is necessary to see that growth, whatever that demand whatever pace it comes at.

Mark Sue - RBC Capital Markets

Okay, that’s helpful. Within data centers still doing quite well with some of the copper and also certainly doing well with the fiber, maybe the mix between the two how you see the transition from copper to fiber and the change in how we should think about that maybe as we move to the balance of the year?

Eddie Edwards

I think we said many times that the copper part of the data center is declining relative to fiber. I think that process is continuing. I think one of the benefits that we have in CommScope is the iTRACS acquisition that we made is going to help us sell other things in that discussion and it can be fiber or copper it doesn’t matter. Our envision intelligence within the enterprise market is also helping us have another dialogue and we’ve merged the capability in the box that attract sales now, that was done I think a couple of weeks ago and we think that’s going to continue to bring traction certainly in the data center whether it be an owned or co-located capability. So, I think as Mark said, one quarter is not a trend but what we see from our enterprise folks and what they’re hearing in the market place in some of the recent wins that we have gotten for data centers around the globe both in fiber and copper is heartening to what we expect to see in the future.

Mark Sue - RBC Capital Markets

Okay, that’s helpful. Good luck gentlemen. Thank you.

Eddie Edwards

Thank you.

Mark Olson

Thanks Mark.

Operator

Your next question will come from the line of Jess Lubert with Wells Fargo Securities. Please go ahead.

Jess Lubert - Wells Fargo Securities

Hi, guys, thanks for taking my questions and congratulations on a nice quarter. Couple of quick ones here, first I had a follow-up on the wireless business and with North American strength expected to moderate in the second half, I was hoping to better understand how we should be thinking about gross margin and should that also moderate during the second half. And then if you can also comment on what if any benefit you’re seeing from activity in China, what kind of remaining growth you’re seeing from some of these 3G modernization efforts going on in the emerging markets that would be helpful. And then finally on the broadband business return to profitability this quarter, I was hoping if you could update us on your efforts to right size the cost structure there and to what extent you still think you can get back to double-digit adjusted operating margins in the timeline there, I think that would be helpful. Thanks.

Eddie Edwards

I think that’s about five questions, but I’ll try to cover some of them. In broadband I think that we are working hard to get to that level. I think as I said earlier it will probably take a few months longer than what we have anticipated and as we got started late because of the sale of our bimetals business, but I think they will exit the year close to that trend, and we’ll take the steps necessary to ensure that we get the maximum profitability out of the unit as we possibly can.

Mark Olson

I think from a margin standpoint Jess, we may have touched on that earlier but when you look ahead to the next several quarters in the U.S. and we talk about perhaps moderating growth, again that’s off of a 26% growth in the wireless segment in Q1. So we don’t expect to maintain 26 points for growth in the ensuing quarters, but we do expect to continue to see growth certainly. As the U.S. carriers have shifted a bit from coverage to capacity, we talked about the importance that the solutions play in our gross margin profile and so that will be a positive, so we see a lot of that. Again at the midpoint we had made the comment about 22% operating margin at the midpoint and we are comfortable with that as far as guidance for Q2.

Eddie Edwards

Okay, and so your last two questions, one is on China and how much impact does that have and what we’re seeing as far as growth. I think we have been very clear repeatedly of what our position in selling into the Chinese market is. We have relationships with all three carriers in both domestic OEMs that do business in China and we sell to them. We sell in a different I guess of not a broad based approach there. Our expectation is that we will make a profit and what we see certainly in cable is that’s a very hard thing to do, so our cable business in China is small -- very small, and in the case of other things that go into the macro environment we bid on all jobs, we win a few but for the most part that is a market that is highly price competitive and from our standpoint to a point that is not profitable. So, we’re very selective as to orders that we take. We do maintain relationships with those customers and they do buy in select areas, but it's not something that is a needle mover as far as what we see in our projections. If the market shifted certainly that would be different. In the case of 3G modernization, we’re well positioned in that with the carriers in the developing countries are those areas that are predominantly 3G. We’ve talked about the solution sale with sectorization or factory build sectorization of antennas up the tower, all the things that go into tower. That is continuing, and as I said earlier we think that that’s the experience that we’ve had with our Middle Eastern customers will be transferable to other parts of the world. So, we are excited about that. We’re agnostic as to the technology, we cover them all and so we’re happy to supply products or solutions to our customers irregardless of what their need is.

Mark Olson

Thanks Jess, we need to move on.

Operator

Our next question will come from the line of Kulbinder Garcha with Credit Suisse. Please go ahead.

Kulbinder Garcha - Credit Suisse

Thanks. Some of my questions have been addressed, but there’s just one maybe that, to put the out-performance lets say in revenues versus some of the infrastructure completing perspective, it doesn’t look like they’re going to grow much more than 5% or 6% this year, you’re clearly going to grow faster than that, you clearly did in Q1. And in terms of the additional lets’ say wallet share that you’re having, is it a market share shift against your traditional kind RF type competitors you’re seeing. Is it a mix shift within CapEx which means you’re outperforming or is it just all of the solutions comments you’ve made, can you try and break that down or I’d be curious how you would answer that. And my other question is just on the guidance for this year, even if I put in the 20% op margin with 10% sales growth you’re op income to be down in the second half. And given your order book, given that you talk about this being a multi-year technology investment wave, this feels very conservative, I’ll be curious to about your comments there. Many thanks.

Eddie Edwards

So I am going to answer the easy part and the answer is, yes. We think that we’ve gained share. We think that our solutions that we have today puts us in a unique spot given what the customers are wanting right now. And we think that all of the money that we spent on technology in the past years and developed new products certainly for the outdoor side and now coming with indoor in Europe with ION-E, we think is creating a lot of dividends for what we’ve done in the past. So, this is not something that we think is a flash in the pan, we’ve worked hard at it. The relevance that we have with our customers is certainly different than what we’ve seen over the past years, and we -- as I said, we planned to build on that momentum. And I’ll let Mark answer the second question.

Mark Olson

Yes, Kulbinder, as far as the guidance for the full-year, I think I followed your comment, I don’t know that we gave it in specific enough terms to get it down to a first half versus second half comparison of an operating income margin. But we had expanded nicely as you know up over 500 basis points over the last three years. We have continued to expand margins for the factors I had addressed previously in the first quarter, and it will be the mix of those factors as we move through the year that will continue to drive our op income margin. So we remain optimistic.

Kulbinder Garcha - Credit Suisse

Thank you.

Operator

Our next question will come from the line of Steven Fox with Cross Research. Please go ahead.

Steven Fox - Cross Research

Thanks. My two questions are as follows. First of all, can you talk about the book-to-bill by business segment at least relative to the corporate average that you talked about? And then secondly can you give us an update on the two small acquisitions that have been, I guess a slight drag on earnings, what kind of progress you’re making there in sort of improving profitability and sales growth? Thanks.

Eddie Edwards

So, I’ll take the last part of that Steve, and then Mark can talk about the book-to-bill question. We are still excited about what iTRACS and Redwoods offer us. We’re getting traction in both. I guess the one thing that we underestimated was the sales cycle and how long it takes from introducing our self to actually closing a transaction. And so we’ve adjusted to that and so things will come at a slower pace than anticipated at least early on. It has created a lot of excitement in being able to talk about these two capabilities to our enterprise customers or to our broadband customers that happened to use enterprise kind of product, so that’s all good. So, we are still investing but less, and we think that we will be on track to see growth in the second part of the year and maybe not to the level that we first anticipated but certainly in directionally correct and are excited about that. I think the other one that we don’t talk about as much maybe is data center on demand, we’re seeing a lot of interest in that for this module of data center capability that we have and we expect those three within the enterprise market to be a big sale’s increases for us in the future.

Mark Olson

And then Steve relative to the book-to-bill ratio it was nicely above one for each of our three segments in the quarter, and we continue to see that trend as we begin the second quarter.

Eddie Edwards

Operator, I think we’ve got time maybe for two more questions.

Operator

Our next question will come from the line of Matthew Hoffman with Mizuho. Please go ahead.

Matthew Hoffman - Mizuho Securities USA Inc.

Thanks and good morning. So, our calculation shows both inventory days and DSO is up sequentially in year-on-year, so are those metrics that need to increase to support the much higher order book or there’s onetime effects in those working capital items that might cause the growth in days to kind of level off even if sales continue to expand? Thanks.

Mark Olson

Thanks for the question, Matt. With respect to DSO’s, you’re calculating I mean of course of the phase of the balance sheet, we do a little bit more scientific calculation internally but we calculated at 66 days at the end of the March quarter which is down about 2 days from the end of the December quarter and about 4 days favorable to the year ago period. And so our days of sales were more driven geographically, so they are down a bit largely because of a little bit heavier mix of sales coming from North America. And with respect to inventories, so we turn our inventories about five times, so we carry a little over two months inventory on hand, and that profile has really been steady for us now over quite a lengthy period of time.

Matthew Hoffman - Mizuho Securities USA Inc.

Okay, good. Thanks for the color. And you’ve given I guess a 60-40 split on North America versus the international component. You may not want to do it, but I’ll ask anyway, would you like to breakdown the components into (indiscernible) wireless obviously there’s a driver there, but can you talk about the enterprise and broadband splits too? Thanks.

Mark Olson

We don’t typically dispose quite that level of detail, but as you know Matt our broadband business is a little bit more U.S. centric and the other two segments tend to follow more of the corporate average.

Matthew Hoffman - Mizuho Securities USA Inc.

Thank you.

Operator

Our final question will come from the line of Mark McKechnie with Evercore. Please go ahead.

Mark McKechnie - Evercore Partners

Great, thanks. That horse has not fully been beaten yet on the Q&A, but I have got a couple here for you, and of course congrats on the numbers but first is, you talked about 3G is being 70% of your international business still, so can you breakout how much is 3G versus 4G in the U.S. and when you talk about your double-digit growth for the year are you anticipating a 3G falloff and a acceleration in 4G overseas? And then the second is, Nokia talked about some component tightness that constrained some of their shipments in Q1 and into Q2, given that ramp are you seeing any of that either with your own products or with any of the other products that go into these networks? Thanks.

Eddie Edwards

The last one is a very good question, and the first one I think -- the 70% numbers of our total wireless business is not just non North America so I think you can see by that the bulk of the world outside of North America is still primarily 3G even in Europe for the most part except in urban areas. I don’t think we’ll breakout in U.S. I don’t have that number with me as to what that breakup would be, but 4G is predominantly what we’re seeing today going forward. And if that’s important we can get it to you after the call. And the question about components is a good one. I think China is gobbling up a lot of components that are out there because of their build. We have seen delays or been notified of delays. We have adapted to that and generally have coverage. We don’t think right now it's going to be concerning to us. We buy a lot from a lot of different people and so we have dealers out to make sure that we can access components. It may cost us a little more but that’s not a material cost increase. But we don’t see anything right now that stops us, and I am sure that Nokia Siemens they buy a lot more than we do and the complexity of their products is, in generally different, and so they probably see this as to other electronic companies like that. So, we’re making due our supply team has been hard at work at this for some period of time, and we have something that’s workable for us in the near-to-medium term.

Mark McKechnie - Evercore Partners

Eddie, thanks. I mean definitely a high class problem but can you share with us, is there anything specific that might be tied or it a bit more broad based?

Eddie Edwards

No, we don’t want to share that.

Mark McKechnie - Evercore Partners

Okay, perfect. Thanks.

Mark Olson

Mark, (indiscernible) thanks for your call and Eddie any final …?

Eddie Edwards

Yes, I think we had a lot of questions, lot of good questions this morning, we appreciate it. We’re very happy at the quarter we turned in and we’re equally excited about the guidance that Mark has given you for Q2, and we look forward to build -- as I said earlier to building on this momentum and I appreciate your interest and your time. So thanks very much.

Mark Olson

Thanks all.

Operator

Ladies and gentlemen, this does conclude today’s conference. Thank you all for joining and you may now disconnect.

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