CommScope Q2 2007 Earnings Call Transcript

Jul.30.07 | About: Commscope Inc. (CTV)
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CommScope, Inc. (CTV)

Q2 2007 Earnings Call

July 30, 2007, 5:00 PM ET

Executives

Philip M. Armstrong, Jr. - VP of IR and Corporate Communications

Jearld L. Leonhardt - EVP and CFO

Frank M. Drendel - Chairman and CEO

Brian D. Garrett - President and COO

Analysts

Celeste Santangelo - Merrill Lynch

Marcus Kupferschmidt - Lehman Brothers

Jeffrey Beach - Stifel Nicolaus

Brian Coyne - Friedman, Billings, Ramsey & Co

Simon Leopold - Morgan Keegan & Co. Inc.

Kevin Sarsany - Next Generation Equity Research

Glen Anderson - CIBC World Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the CommScope Conference Call. During the presentation, all participants will be on a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded Monday, July 30th, 2007.

Your speaker today is Mr. Phil Armstrong, Vice President of Investor Relations and Corporate Connections [ph]. Please go ahead, sir.

Philip M. Armstrong, Jr. - Vice President of Investor Relations and Corporate Communications

Good afternoon, thank you for joining us on this call. Frank Drendel, CommScope's Chairman and Chief Executive Officer; Brian Garrett, CommScope's President, Chief Operating Officer; and Jearld Leonhardt, CommScope's Chief Financial Officer joining me on the call.

Please note that during this conference call, we may make forward-looking statements regarding our financial position, plan and outlook that are based on the 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 the press release we issued today and CommScope's filings with the Securities and Exchange Commission.

In providing forward-looking statements, the company does not intend and is not undertaking any duty or obligation to update these statements as a result of new information, future events and otherwise. Also, please note that all dollar figures and percentages are approximations. After we review second quarter results and Frank make some closing comments, we'll open the lines up for questions. Jearld?

Jearld L. Leonhardt - Executive Vice President and Chief Financial Officer

Thank you, Phil. Today CommScope announced second quarter results for the period ended June 30, 2007. Company reported record second quarter sales of $590 million and net income of $61 million or $0.83 per diluted share.

Sales for the second quarter of '07 increased 26% year-over-year, driven by increased customer demand across all business segments, and price increases implemented in the first half of 2006. The Company experienced particularly strong sales growth in the Carrier segment.

Enterprise segment sales rose 17% year-over-year to $239 million, primarily due to higher sales volume, favorable mix and price increases implemented in 2006 in response to higher material cost. We continue to experience success with our high performance and industry leading products including the SYSTIMAX GigaSPEED X10D unshielded twisted pair cabling solution and the innovative iPatch Real Time Infrastructure Management System as enterprises upgraded their networks to support expected bandwidth requirements.

Enterprise sales grew in all geographic regions. In the quarter, we continued to see good market conditions and positive global trends. We believe this is part of a multi-year upgrade cycles big corporations invest in information technology to support bandwidth intensive applications, develop intelligent buildings and construct and consolidate large data centers. We executed our strategy effectively in the quarter and have seen an expanding base of global accounts. We intend to continue investing in sales, research and development and marketing and remain particularly excited about opportunities in emerging markets.

Broadband sales rose to $163 million, up 20% year-over-year, primarily due to higher sales volume, price increases that we implemented in the first half of 2006 in response to the higher material costs and the positive impact of the Signal Vision, Inc. which closed on May 1, 2007. Broadband sales growth was strongest in the North American and Latin American regions. Broadband sales have been favorably affected by the competition between cable operators and telephone companies, as they battle for end users with their expanded suite of video, data and voice services. This competition has sparked ongoing investments, as cable operators support the triple play of services.

During the second quarter, we acquired Signal Vision, a leading supplier of broadband radio frequency subscriber products to cable television system operators. We believe there are significant opportunities to increase sales of the Signal Vision passives, indoor amplifiers and addressable taps by building upon CommScope's existing broadband sales channels.

During the second quarter CommScope also successfully deployed its BrightPath system with three major broadband cable operators and has installations pending with three additional cable customers. BrightPath is an innovative fiber-to-the-home distribution system designed to work seamlessly with existing HFC networks. BrightPath is fully compatible with the existing DOCSIS-based headend and subscriber equipment, which allows operators to cost-effectively deliver their suite of analog, digital and interactive services over fiber to the home. BrightPath can be deployed if, selectively in new build applications to provide a competitive advantage with lower upfront cost and maintenance relative to traditional passive optical networks.

Carryover sales increased 64% year-over-year to $117 million. This robust growth is primarily the result of increased sales of our ICS product line to large domestic wireline carries. These large telephone companies are investing in their infrastructure to deploy broadband services to their customers and to compete with cable television companies. We remain very excited about what we expect to be a multi-year opportunity for our ICS product line. We do expect increase in competition in this segment. However, we believe that CommScope has a compelling naïve proposition for its ICS customers. Innovative cabinet designs, strong customer service, a proven record of quality and reliability, as well as supply chain efficiency, all come together we believe to differentiate CommScope from the competition.

During the second quarter, sales to all OEMs rose in our Carrier segment and sales to our largest OEM accounted for approximately 13% of our total company sales. While overall wireline sales increased significantly, wireless sales in North America declined year-over-year due to slower capital spending from domestic wireless carriers. This decline was partially offset by increased international wireless sales. Over the longer term, we believe the wireless operators will continue to invest in their existing networks and deploy new technologies.

CommScope's total international sales for all segments in the second quarter of 2007 rose 20% year-over-year to $160 million, or approximately 31% of total company sales. Total company external orders booked in the second quarter of 2007 were $548 million, up 12% from the year ago quarter. The book to bill ratio for the quarter was 1.06 times, with Broadband and Carrier above 1 and Enterprise slightly below 1.

Looking to gross margin, which for the second quarter of 2007 was 31%, was up nearly 500 basis points year-over-year. The gross margin improvements were primarily due to higher sales levels, the impact of cost management efforts, favorable mix and the positive impact of price increases implemented in '06 for certain products in response to increases in cost of raw materials.

SG&A for the second quarter of 2007 was $68 million, or 13% of sales compared to $58 million or 14% of sales in the year ago quarter. SG&A declined as a percentage of sales, primarily due to higher sales level.

Research and development was $8 million for the quarter, or 2% of sales. CommScope continues to invest in new solutions and ideas to better address the communication infrastructure needs of our customers.

Operating income for the second quarter of '07 more than doubled year-over-year to $86 million or 16.6% of sales. In the year ago quarter, operating income was $38 million or 9.2% of sales. Excluding restructuring costs, operating income would have been $42 million or 10.2% of sales for the year ago quarter.

Now I will turn to cash flow and balance sheet items. Net cash provided by operating activities in the second quarter of 2007 was $47 million compared to $15 million in the year ago quarter. Capital spending in the quarter was $7 million. Total depreciation and amortization expense was $13 million for the second quarter of '07. Second quarter of 2007 results include $2.4 million of pre-tax equity-based compensation expense, in accordance with SFAS 123R.

Now at June 30th, 2007, long-term debt including current maturities declined to $267 million and was 23% of booked capital structure. CommScope ended the quarter with $490 million in cash, cash equivalents and short-term investments.

Looking ahead, we expect continued strength across all of our business segments as well as higher costs. Material costs continue to rise and we may not be able to fully recover these costs in the short term. As a result of this volatility, we expect operating margin in the second quarter of the year to be lower... or the second half of the year rather, to be lower than the first half of the year. Please note that our guidance is for CommScope only, without giving effect to the proposed acquisition of Andrew.

Now for the third quarter, we expect sales of $510 million to $530 million, and operating margin of 15.5% to 16.5%, excluding any special items. This forecast represents a sales increase of roughly 9% to 14% year-over-year with operating income growing at nearly double that rate.

Please note that we had an especially strong Enterprise performance in the third quarter of 2006, which was affected by the timing of our last year's global manufacturing initiatives. Also note that the last significant cable price increases for the Enterprise and Broadband segments occurred in the second quarter of 2006.

We've also increased our calendar year 2007 guidance. For the full year, we anticipate sales of $1.90 billion to $1.94 billion and operating margin of 15.25% to 15.5%, excluding any special items. This calendar year forecast reflects a sales increase of roughly 17% to 19% year-over-year with operating income rising more than 70% year-over-year.

For the full year, we expect an effective tax rate of 31% to 33%, in that range. Overall, we are pleased to raise 2007 guidance and to be in a position to achieve record calendar year financial performance.

I'm sure you recall that on June 27, 2007, CommScope and Andrew Corporation announced the definitive agreement, unanimously approved by the respective Boards of Directors, under which CommScope will acquire all the outstanding shares of Andrew for $15 per share, at least 90% of which is in cash. The combined company will be a global leader in infrastructure solutions for communication networks, including structured cabling solutions for the business enterprise, broadband cable and apparatus for cable television applications, and antenna and cable products as well as other solutions for wireless applications.

We believe that with this acquisition, we are building upon our complementary global product offerings that will provide customers with a broader array of communication infrastructure solutions for video, voice, data and mobility. We also believe that the combination of our two operations will result in meaningful operating cost and sales synergies and offers benefits to our shareholders, customers and employees.

The total transaction value is $2.6 billion, based on Andrew's estimated 176 million shares outstanding on a fully diluted basis, which includes shares issueable under Andrew's existing convertible notes. CommScope expects to fund the cash portion of purchase price through a combination of new credit facilities and available cash on hand. CommScope has obtained customary fully underwritten debt financing commitment letters from Banc of America and Wachovia Bank and their respective affiliates. We believe these commitments which we signed with banks in June are attractive relative to current rates, primarily due to the recent turmoil in institutional credit markets.

We intend to work with our lenders to create a successful and efficient financing structure. The transaction is expected to close before the end of 2007 and is subject to completion of customary closing conditions, including effectiveness of the registration statement on Form S-4 approval by Andrew's stockholders, clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any other applicable laws or regulations.

As previously communicated on July 16, CommScope and Andrew submitted their pre-merger notification filings as required under the Hart-Scott-Rodino Act. And we look forward to closing the transaction before the end of 2007 and realizing the opportunities ahead. Today, however, we do not have any further updates regarding the transaction. Therefore during this earnings call, we intend to focus our comments or matters pertaining to our current results and outlook. Thank you and I will now turn it over to Frank for his comments.

Frank M. Drendel - Chairman and Chief Executive Officer

Thank you, Jearld and thank you for all who are joining us on this call. First of all I would like to thank the Andrew team and all the efforts that you've put forth in the last 30 days to make this transaction a success. The CommScope team, I want to thank for the amazing workmanship and outputs that you've contributed at reaching these record sales. I would like to point out that 10 years ago today was the public issue of CommScope stock with the same management team that's in this room today. So, for this team I want to thank you for 10 great years and for a record quarter.

Our combined global reach, the markets that we serve, the new Andrew CommScope will be a tremendous combination of performance and opportunities for everyone. When this combination is completed, we will have the world's largest and strongest combination of complete enterprise, wireless, wired, all the networking that is required to supply the last meter, the last mile and the last foot.

And in the end, I view this as to be the most significant accomplishment in CommScope's ten years. And with that, I will turn it over to Elizabeth and you can start your call, Elizabeth.

Philip M. Armstrong, Jr. - Vice President of Investor Relations and Corporate Communications

Operator?

Question And Answer

Operator

Thank you. [Operator Instructions]. Your first question comes from Celeste Santangelo with Merrill Lynch.

Celeste Santangelo - Merrill Lynch

Hi good afternoon.

Frank M. Drendel - Chairman and Chief Executive Officer

Hi Celeste.

Celeste Santangelo - Merrill Lynch

Hi. A question on the Carrier segment, the growth that you saw in Q2, do you think there was anything in the way of pull in and then how were you looking at that business. What's included in your outlook for the rest of the year?

Brian D. Garrett - President and Chief Operating Officer

Celeste, this is Brian. I would say very little in the way you have pulled in. The whole segment is scrambling their installed equipment right now, I would say that's the largest limitation at present. And if I look at channel inventories, I would say that they have not swollen, so pretty stable in that regard. But at the same time I would say, it represents the peak for the year and with an expectation modest downward movement into the third quarter and then the usual uncertainties in the fourth quarter, but I will tell you our current position is reflected in our guidance for the Carrier segment, represents a strengthening of our outlook for the fourth quarter, relative to where we were at this time last quarter. Does that help you?

Celeste Santangelo - Merrill Lynch

Yes, thank you. And was there anything in the Andrew results this afternoon that surprised you negatively or positively versus your original due diligence?

Frank M. Drendel - Chairman and Chief Executive Officer

Yes, Celeste, most of that we've understood in our early due diligence and we are very, very excited about where this takes us, so I continue to look at worldwide position that these companies will have, the markets and the up trend that we hope for in the domestic market when you consider that most of the opportunity is a returning to the domestic market, you look at the results we had internationally and Andrew had internationally, I'm very excited. So you just get any kind of improvement in the two major domestic wireless carriers - those results would be outstanding.

Celeste Santangelo - Merrill Lynch

Great. Thank you.

Operator

Your next question comes from the line of Marcus Kupferschmidt with Lehman Brothers.

Marcus Kupferschmidt - Lehman Brothers

Hey guys how are you?

Frank M. Drendel - Chairman and Chief Executive Officer

Hi, Marcus.

Marcus Kupferschmidt - Lehman Brothers

My first question so, I guess in terms of the obvious. I know you said you didn't want to talk about Andrew, but I'll ask, one obligatory one, on behalf of not me but just my team here focused on M&A and special situation. Any thoughts -- is that the low end of guidance is surprising to you in any way, shape or form can you even give us any insight into that right now?

Brian D. Garrett - President and Chief Operating Officer

Marcus, I don't think there is a surprise there, the big variable for them which they have disclosed many, many times is really having a good grasp on what the North American market's doing. And it's tough for all of us. We participate in business with Cingular and we know how difficult it is to forecast in that space. No, I would say, no surprises, they're showing continued strength in Asia-Pac and Europe and as stated, the story's all about life here at home in North America.

Frank M. Drendel - Chairman and Chief Executive Officer

I think Marcus, it's still a worldwide view what happens long-term and the demand for bandwidth and the expansion of bandwidth and clearly if you look at the domestic announcements that have taken place in the last 30 days, spread clearly, all of the effort that will be going forward in building these new networks should set the stage for a very successful combination of these two companies.

Marcus Kupferschmidt - Lehman Brothers

Okay. And then back to CommScope for the organic, if I could ask in terms your margins for the quarter. I was a bit surprised to see the broadband margins comedown slightly, a bit sequentially here on good sales and at the Enterprise, it was phenomenal. Can you give a sense of is there a one-time thing's effecting in a mix, is this kind of run rate going forward? It's tough to understand kind of where you are today, it would be very helpful.

Brian D. Garrett - President and Chief Operating Officer

Well, there are number of variables on the broadband side, Marcus, both from geographic mix and commodity cost, clearly those are the big pieces in the second quarter. Enterprise was just absolutely stellar, exceeded our expectations quite frankly and there were some one-time benefits that we derived in the quarter for Enterprise that we will not duplicate in the third quarter.

Frank M. Drendel - Chairman and Chief Executive Officer

Marc as part of the broadband issue was the Signal Vision acquisition and we have some costs with that acquisition, we are still very excited about that.

Marcus Kupferschmidt - Lehman Brothers

Meaning some costs included in the -- ?

Brian D. Garrett - President and Chief Operating Officer

Those were specifically there was the purchasing accounting issues that would depress gross margins.

Marcus Kupferschmidt - Lehman Brothers

Got it, thank you very much.

Operator

Your next question comes from the line of Jeff Beach with Stifel Nicolaus.

Jeffrey Beach - Stifel Nicolaus

Yes, congratulations on another good quarter, it's been quite a strength?

Frank M. Drendel - Chairman and Chief Executive Officer

Thank you, Jeff.

Jearld L. Leonhardt - Executive Vice President and Chief Financial Officer

Yes, thanks Jeff.

Jeffrey Beach - Stifel Nicolaus

I guess my two related questions are, you've talked about rising raw material cost or cost in general. Can you expand... aluminum is off, but can you talk about aluminum and then other cost pressures among all the businesses?

Brian D. Garrett - President and Chief Operating Officer

Well, they are same mix we've always dealt with Jeff. And the one... the good news, even though aluminum didn't move, it didn't move substantially for us sequentially because of the tonnage that we consume. Obviously we stay very-very close to that subject. On a sequential basis, obviously copper had an impact on us, in the quarter and moving forward, obviously we... I think... procurement people we have concerns about polyethylenes and plastics in the second half of the year as well.

Jeffrey Beach - Stifel Nicolaus

And given your third quarter guidance what, I call it flattish sales and flat to maybe a little lower margins. When does all this rising cost began, why isn't that hitting you in the third quarter based on your guidance.

Brian D. Garrett - President and Chief Operating Officer

Well, we are going to see some cost increases in the third quarter and not only in raw materials, but I think we've been just thinking about the second half of the year. We've been very open with you since beginning of the year, in terms of our intentions to continue to invest in this business. So we will see trending upward in R&D spending in the second half of the year, a whole of that are important pieces in the puzzle that we've laid out for you here in this guidance.

Jearld L. Leonhardt - Executive Vice President and Chief Financial Officer

And Jeff, our guidance for the third quarter on margin is less than our second quarter operating margin, so we are going to see some impact, at least our expectation is that we will.

Jeffrey Beach - Stifel Nicolaus

Alright well, we will see how the third quarter goes? Again a great quarter, thanks.

Frank M. Drendel - Chairman and Chief Executive Officer

Thank you, Jeff.

Operator

Your next question comes from the line of Brian Coyne with Friedman Billings

Brian Coyne - Friedman, Billings, Ramsey & Co

Hi guys.

Brian D. Garrett - President and Chief Operating Officer

Hi Brian.

Brian Coyne - Friedman, Billings, Ramsey & Co

Nice quarter.

Brian Coyne - Friedman, Billings, Ramsey & Co

To say the least. Couple of things, real quickly, just sort after that last question I have a couple of questions about cargo prices. Is there any way you could help us think of handicapping the likelihood of another round of price increases given the rising in copper cost, 350 or so, so obviously blow last May's peak but still higher than what we saw in the second half of '06. How does this work since we are clearly coming up on sort of a year-over-year? And then second question, is really one for Frank, I guess a view on bigger picture I guess, on what do you think the wireless opportunity is particularly as we get closer here to closing on Andrew, you know we think of your traditional cable customer base, I mean how do you see that sort of playing out, is that a big part of your view either sort of like '08 or '09? Thanks.

Brian D. Garrett - President and Chief Operating Officer

Brian, on the copper part our last price increases... particularly in Enterprise if you're speaking of copper was in the second quarter of last year. In that period, copper prices weren't substantially different than where we are today. As always, it's not about the spot price in any given week or month, could clearly if we saw trends extending into the second half with increase in copper prices and it would give reason for us to raise market pricing. So we've not seen that longer term trend yet into the second half obviously, and so we've made no decision on the subject. But I would just say, look at our track record in terms of how we behave, the value proposition that we have and our willingness to pass commodity costs on to the market.

Frank M. Drendel - Chairman and Chief Executive Officer

And to your question on the kind of the longer range here, I haven't deviated a bit on my view that these... this combination of Andrew and CommScope fills the last kind of still piece that you have a leg in the chair that gives us the complete coverage of this continuing growth and demand. If you look at the success of just innovation like the iPhone, and if you look at the kind of combination that's taking place in the accelerated build with clear wire and spread and all the opportunities that are driven by this increasing demand for bandwidth, the video, connectivity, the seamless connectivity between the human, the office and the home, I haven't changed my view at all. I think, at least in the first 30 days, if you look at the intellectual horsepower between these two companies and the ability to take forward a proposition for seamless connectivity, I think it's an opportunity that cannot be replaced, you couldn't recapitalize these companies for anywhere near their market cap. So, if anything I'm more bullish on where this all goes at the end of the day. Now clearly the domestic Carrier business is in kind of a stalls space right now where everybody evaluates what new technology they are going to use. So there's no question of bandwidth and the demands and the usages there, if you just look at the connectivity.

Brian Coyne - Friedman, Billings, Ramsey & Co

Good, it's helpful. So in conversations with cable operators, I mean is the subject of wireless coming up or is it still more like a 2008-2009?

Frank M. Drendel - Chairman and Chief Executive Officer

I think if you stay in the cable operator's good point, cable operators, see TV operators clearly are getting some good traction with their venture, their spread and they continue to look at the priority. But right now, they're having all they can handle and just hooking up the VoIP connections, so the triple play is continuing. Look at Comcast results which were stellar, so obviously the triple play will be there, when it goes quad play when you add wireless to it, so they continue to look at it. In the end though, it really is this bandwidth push is taking place across all of our businesses that makes it so fortunate the way we landed here and have access to all these products which fulfill these bandwidth needs.

Brian Coyne - Friedman, Billings, Ramsey & Co

Great, it's helpful. Alright guys.

Frank M. Drendel - Chairman and Chief Executive Officer

Thank you.

Brian Coyne - Friedman, Billings, Ramsey & Co

Thanks again.

Operator

: Your next question comes from Simon Leopold with Morgan Keegan.

Simon Leopold - Morgan Keegan & Co. Inc.

Thank you. I wanted to see if you could clarify one of your earlier comments and then I'll follow-up with the question. I think it was Brian who suggested that the Carrier business would be probably at a peak in the June quarter and given the comments that AT&T made on its recent earnings call, it sounds like they're still ramping activity for their access upgrade and I am wondering what's driving the thought about peaking. Is it a matter of you being a leading indicator, is it a matter of market share shifts, you mentioned that you didn't think there was a lot of inventory in the channel. So I want to see if I can understand that particular comment and then I will follow up with the question. Thanks.

Brian D. Garrett - President and Chief Operating Officer

Well, there's a couple of things, one of them you hit on correctly. I mean we've been very public for some time that, particularly as it would relate to the AT&T deployment that we have held a very, very high account share in that activity, as its got its feet underneath itself and become a more mature product and project for AT&T. So you know, the outlook moving forward, our expectations is that we will share increasing amounts of that business with others, but at the same time Simon, our expectations is that the business will continue to grow year-over-year. The other variable that still remains in the second half is the participation of the traditional BellSouth business in AT&T. I mean we've seen second hand public comments and announcements about the subject, but there still is not adequate clarity in our... in terms of our mind, in terms of what it means, in terms of revenues in the second half. So that may create some upside, but right now it's a statement of uncertainty.

Frank M. Drendel - Chairman and Chief Executive Officer

Simon, I might point on also, plans that you enter the fall and winner period and these are outdoor cabins, are installed outside and you always have this traditional kind of weakness in any outdoor construction projects in Telecom. But overall, we are still very, very excited about this business and where it's going.

Simon Leopold - Morgan Keegan & Co. Inc.

Okay, great. Now I wanted to see if you could drill down a little bit on the operating margin trends. This quarter Enterprise was huge at 20%, better than your Carrier segment even it digged up 16%. I think there was a comment earlier about some one-timeish sort of thing. Maybe if you could give us some sense of direction of how each segment will be trending on operating margins. Thanks.

Jearld L. Leonhardt - Executive Vice President and Chief Financial Officer

Yes, let me tell you something Simon here on the operating, Brian did use a phrase one-time but I would say we had a positive set of circumstances that probably won't duplicate as there wasn't an unusual item but I think we did have a favorable copper position as we went into this quarter and that was beneficial to the Enterprise margins in the quarter and we don't think that would duplicate in future quarters, but I wouldn't call it or refer to it as a one-time sort of event.

Frank M. Drendel - Chairman and Chief Executive Officer

And we don't expect them to burn off substantially from these points.

Brian D. Garrett - President and Chief Operating Officer

So, Simon, the other thing that happened that was important to enterprise in the quarter is the increasing mix of what we call apparatus or non-cable items and these are leading products much like the iPatch product that we've mentioned on numerous occasions, and apparatus is a very attractive segment of our business and it's becoming increasing percentage of the business. So if... should that continue, it's opportunity to continue to expand margins in that business segment.

Simon Leopold - Morgan Keegan & Co. Inc.

Okay, thank you for the clarification.

Brian D. Garrett - President and Chief Operating Officer

Yes.

Frank M. Drendel - Chairman and Chief Executive Officer

Yes sure.

Operator

Our next question comes from Kevin Sarsany with Next Generation Research.

Kevin Sarsany - Next Generation Equity Research

Hi, guys.

Brian Coyne - Friedman, Billings, Ramsey & Co

Hey Kevin.

Kevin Sarsany - Next Generation Equity Research

A quick question on the Andrew financing, how firm of a commitment do you feel that is ... as far you are concerned besides the caught in the wires, crossing the T's?

Brian D. Garrett - President and Chief Operating Officer

Well, it was for --

Jearld L. Leonhardt - Executive Vice President and Chief Financial Officer

It is a commitment from these two institutions, Banc of America and Wachovia. It is a firm commitment subject only to a few contingencies which we expect will be satisfied in the normal course of things as we move towards a closing here and more of which is that we do need to document a full credit agreement which we haven't done that yet. So, but other than that, these are fully underwritten commitments that we have.

Frank M. Drendel - Chairman and Chief Executive Officer

Maybe I can help you a little bit, I mean we are one of the largest employers in North Carolina; we are 60 miles away from Wachovia, Banc of America. This is not an OVO financing, this is not a triple debt leverage type of financing, this is a industrial financing effort and I think when we get out there and show everybody the capabilities of these two companies, we will get very favorable financing for this transaction. The world hasn't come to a complete end, not yet at least.

Kevin Sarsany - Next Generation Equity Research

Well, I guess on your book to bill you mentioned Enterprise being down and the other two being up. Why would Carrier revenue go down in the third quarter book to bill positive?

Jearld L. Leonhardt - Executive Vice President and Chief Financial Officer

Well I think you'd have to go back, there was just... one of these businesses are relatively short cycled in terms of supply, Kevin, so we've said it many times, they are not backlog businesses. So as such book to bills can be very misleading indications. We could have in the second quarter of this year, come into the second quarter with small book to bill very high revenue and ended with small book to bill.

Frank M. Drendel - Chairman and Chief Executive Officer

Again, we've always stated to all of our investors that this is not a backlog company, this is a company that provides products and services to satisfy the customers with a velocity of service, so that's what holds our market position.

Kevin Sarsany - Next Generation Equity Research

Okay. Then I guess looking at your backing into what the fourth quarter could be, you are providing guidance that has a sequential decline from the third quarter to the fourth quarter similar to last year, but last year you had huge third quarter Enterprise and then you had the AT&T BellSouth kind of pull back in the fourth quarter.

Brian D. Garrett - President and Chief Operating Officer

Yes sir.

Kevin Sarsany - Next Generation Equity Research

Is it just conservatism?

Brian D. Garrett - President and Chief Operating Officer

Well again, what we do is we give guidance to the best of our ability based on all the information we have from our customers, our sales force, but when you have a six-week backlog as you just pointed out, you do the very best you can and hope that the market condition continues favorably as they have been. And they have been very favorable, so we're just conservative. I mean we've been here for ten years and still have our jobs.

Frank M. Drendel - Chairman and Chief Executive Officer

And there is obviously always the seasonal downturn that we expect to get into the fourth quarter, Kevin, and so we pretty well know the direction and trying to estimate that level is always how six months still is little challenging.

Jearld L. Leonhardt - Executive Vice President and Chief Financial Officer

But we will see I mean we raised our outlook for the full year, part of that improvement in the outlook for the year came from a favorable, a more favorable view in the fourth quarter. So certainly nothing disastrous, it's going to be an attractive period for us in the second half.

Kevin Sarsany - Next Generation Equity Research

Okay, no don't get me wrong. Last year I think you got us surprised us with it and you were right as rain. I am just trying to take a cue from you. My last question on the Enterprise, your 20% operating margin excluding raw material, how do you get that higher or do you think that 20% is kind of the peak in Enterprise margins?

Brian D. Garrett - President and Chief Operating Officer

Well, I'll just say it from the longer-term perspective and I am not speaking in terms of next quarter or even the second half of this year. It really is about continuing to develop new products that create more value and so when we're speaking about investing in R&D, there is a large commitment here to continue to reinvest in R&D into that segment, one because of its channel and two because of the ability that we have with this group of people to expand the product line into higher value products than just wire and cable, so and that's really the goal for us.

Kevin Sarsany - Next Generation Equity Research

Thank you.

Brian D. Garrett - President and Chief Operating Officer

Thank you.

Jearld L. Leonhardt - Executive Vice President and Chief Financial Officer

Thank you, Kevin

Operator

Your next question comes from the line of Glen Anderson with CIBC World Markets.

Glen Anderson - CIBC World Markets

Hi guys, thanks for taking my call. Congratulations on the quarter.

Jearld L. Leonhardt - Executive Vice President and Chief Financial Officer

Thanks.

Frank M. Drendel - Chairman and Chief Executive Officer

Thank you, Glen.

Glen Anderson - CIBC World Markets

What I was looking for I guess is a little more color on the Enterprise business specifically. I mean obviously you had a fantastic quarter there, could you provide a little more color on what really drove that upside? Was it exploiting new channels that you haven't exploited, was it just helping markets, was it grabbing share, what sort of your thoughts there?

Brian D. Garrett - President and Chief Operating Officer

Yes, we've commented earlier in terms of the benefit of the copper commodity cost for us in the quarter; that was clearly a positive. But the other element is this mix that we've been talking about in prior questions between cable and apparatus. We had a particularly strong and favorable mix for apparatus. One of the elements that's really driving this business and the Enterprise business in particular and will continue to, is the investment that's happening globally in data centers and so, if you look at the mix of revenue in a data center deployment, it's much less cable intensive and much more apparatus intensive than it would be for the typical horizontal deployment in the office floor that you're currently on. And so, as data centers become a larger part of our business, it will continue to contribute to the margin.

Frank M. Drendel - Chairman and Chief Executive Officer

And I think if you look at just the way that these data centers are distributed worldwide, the position we have in supplying continue to supply and maintain what we have on all of these orders around the world give us a very, very strong position in what's going forward. We have the biggest global sales force, we have the best global distribution and clearly we have the best technical position for the customers and so we continue to see our position worldwide expand as the bandwidth demand continue to grow.

Glen Anderson - CIBC World Markets

Would you say then that this change in the enterprise business is leading to sort of a structural change in that operating leverage of the overall... of that segment with apparatus and the mix?

Frank M. Drendel - Chairman and Chief Executive Officer

I think Brian has stated this on numerous occasions. Brian built Enterprise business from scratch to CommScope. Before, in the early days of Enterprise, there were seven or eight companies that could make the products and you can mix and match and put it to together. Today, these are system complete designs. They are put forth the systems that carry a warranty; they have a tail on when you have to use our product for a long term, so it's an entirely different sale than it was just three years ago. So now you have a technical sale, a technical support, you have worldwide distribution, it is a much more difficult area for competitors to enter, given our technology and our position. Brian?

Brian D. Garrett - President and Chief Operating Officer

And then the other part I should have responded to, in Kevin's question, really relates to Andrew and we have been public about this as well. The solution for the office is really much more than wired and it is clearly becoming a wireless environment for voice, data, public security, building automation, any number of applications and our expectations, even though we haven't quantified it, we have public that we have great expectations in terms of taking Andrew's talent and capabilities and deploying it into this Enterprise space, to further to expand margins in this segment for us. So, it's an excellent opportunity for all of us.

Glen Anderson - CIBC World Markets

Thanks guys, congratulations.

Brian D. Garrett - President and Chief Operating Officer

Thank you, sir.

Philip M. Armstrong, Jr. - Vice President of Investor Relations and Corporate Communications

Operator, we will take one more question.

Operator

Your last question is a follow up question from Jeff Beach with Stifel Nicolaus.

Jeffrey Beach - Stifel Nicolaus

Hi.

Frank M. Drendel - Chairman and Chief Executive Officer

Yes Jeff.

Jeffrey Beach - Stifel Nicolaus

Can you... you've done this in the past or else, can you give us an idea on each of the growth in each of the three segments of price and then volume or price and volume and all other factors to give us an idea where the growth is coming from and including the broadband, how much Signal Vision contributed?

Brian D. Garrett - President and Chief Operating Officer

Well, in the Enterprise space, in the quarter, our current estimate is about 80% volume and... yes, volume mix 20% price. In broadband, the assumption again on a year-over-year basis, about... looking over here... about two-thirds volume mix, about one-third price and that would be inclusive of Signal Vision and then Carrier, critically it's all about volume.

Jeffrey Beach - Stifel Nicolaus

And then how much sales then did Signal Vision contribute in the second quarter?

Brian D. Garrett - President and Chief Operating Officer

Something in the magnitude of $4 million in a partial quarter.

Jeffrey Beach - Stifel Nicolaus

Okay, great. Thank you.

Frank M. Drendel - Chairman and Chief Executive Officer

Good day, Jeff. Thanks for the support, by the way.

Frank M. Drendel - Chairman and Chief Executive Officer

Operator with that, it concludes our call. I want to thank all the participants for joining and we look forward to the continuing work with Andrew to bring this combination of two great companies to closure by the end of the year. Thank you very much.

Operator

Ladies and gentlemen, this does conclude the conference for today. We thank you for the participation and ask that you please disconnect your lines.

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