CommScope Q3 2007 Earnings Call Transcript

CommScope, Inc. (CTV)

Q3 2007 Earnings Call

October 30, 2007 5:00 pm ET

Executives

Phil Armstrong - VP of IR

Jearld Leonhardt - EVP and CFO

Frank Drendel - Chairman and CEO

Brian Garrett - President and COO

Analysts

Celeste Santangelo - Merrill Lynch

Marcus Kupferschmidt - Lehman Brothers.

Jeffrey Beach - Stifel Nicolaus & Company

George Carter

Kenneth Muth - Robert W. Baird

Simon Leopold - Morgan Keegan

Brian Coyne - Friedman, Billings and Ramsey

Eric Buck - Brean Murray

George Notter - Jefferies

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the CommScope Third Quarter 2007 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). And as a reminder, this conference is being recorded, Tuesday, October 30th, 2007.

And it is now my pleasure to turn the conference over to Mr. Phil Armstrong, Vice President with Investor Relations. Please go ahead.

Phil Armstrong

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

During this conference call we may make forward-looking statements regarding our financial position, plans, the Andrew acquisition, and outlooks that are based on information currently available to management, managements' 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 Security 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 or otherwise. Also, please note that all dollar figures and percentages are approximations. After we review third quarter results, and Frank makes some closing comments, we will open the lines for questions.

Jearld?

Jearld Leonhardt

Thank you, Phil. Today, CommScope announced third quarter results for the period ended September 30, 2007.

The Company reported record third quarter sales of $514 million, and net income of $60 million, or $0.81 per diluted share. Sales for the third quarter 2007 increased 10% year-over-year, primarily driven by increase volume in all three segments, with particular strength in the carrier side.

Enterprise segment sales rose 1% year-over-year to $240 million, primarily due to higher sales volumes. Enterprise revenues grew despite unusually strong sales in the year ago quarter. Remember that during 2006 CommScope was implementing major global manufacturing initiatives, which affected our manufacturing capabilities during the first half of last year.

These changes along with the volatile commodities markets, combined to create unusually strong orders coming into the third quarter of 2006, which resulted in very strong sales in the year ago quarter. This issue affected year-over-year comparison, and is the primary reason that domestic enterprise sales were down slightly year-over-year. International enterprise sales grew modestly in the quarter.

While our sales into distributors grew slightly, it is important to know that sales to the ultimate customers, or point-of-sale, showed double-digit growth. We saw this solid point-of-sale growth on relatively stable channel inventory. So despite this economic uncertainty in domestic financial market, we experienced solid end user demand and positive global trend.

While no company is immune for major economic changes, we continue to believe that we are experiencing a multiyear upgrade cycle. Large corporations are investing in mission critical information technology to support bandwidth-intensive applications, to develop intelligent buildings, and to consolidate large data centers.

Now as large enterprises demand vaster infrastructure solutions, sales of CommScope's industry-leading products such as the SYSTIMAX X10, unshielded twisted pair cabling solution, and the innovative iPatch Management System continue to benefit. We believe that video, data-intensive applications, mobility and dynamic websites create an ongoing need for intelligent infrastructure solutions, and we remain excited about the long-term trends in the enterprise market.

Now, late in the third quarter, CommScope announced price increases on selected enterprise cable and apparatus in response to higher costs. The Company expects limited revenue in gross margin benefit from these price increases during the fourth quarter of 2007.

Broadband sales rose to $161 million, up 12% year-over-year, primarily due to higher sales volumes in the Central and Latin American region, as well as the positive impact of the Signal Vision acquisition, which closed on May 1, 2007. The Signal Vision units, CommScope has the leading supplier of broadband radio frequency subscriber products to cable television system operators.

Competition between MSOs and Telcos continued to drive investment by MSOs in their networks as they deploy new service offerings, which include multiple channel, high-definition video, with a variety, and higher tiers of available programs. While the slowdown in domestic housing market has had some effect on broadband sales, we believe that demand for bandwidth and competition remain the primary drivers of broadband spending in the US.

International broadband sales were particularly strong in the third quarter, and were positively affected by large bills in South America. Carrier sales increased 32% year-over-year to $112 million. This robust growth is a result of strong growth in all carrier product areas.

CommScope's integrated cabinet solution, or ICS business, increased as large domestic wireline carriers continued to deploy their sophisticated electronics deeper into networks to offer higher bandwidth, broadband and video services. While we expect lower sales of ICS products in the fourth quarter like last year, we remain very excited about what we believe is a multiyear opportunity for our ICS product line.

We continue to expect increasing competition as these carriers deploy their networks. However, we believe CommScope has a compelling value 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.

We also continue to innovate as we introduce a new series of cabinets during the third quarter, including the new quieter 52 Universal Cabinet Series designed for residential applications. Also introduced was the 30EC Modular Battery Cabinet, designed as a reserve power storage system capable of using multiple vendors' batteries, which supports increased DSL capacity in previously deployed systems.

Our domestic wireless sales improved substantially from the second quarter, and we experienced strong year-over-year international sales growth of CommScope's Extremeflex smooth wall aluminum cables, which were deployed by international wireless carriers.

Sales of our smooth-wall aluminum cables now represent the majority of cable sales for the wireless growth. We believe that this technology, along with Andrews leading global channel will create some existing revenue synergies over the longer-term.

CommScope's total international sales for all segments in the third quarter of 2007 rose 19% year-over-year to $169 million, or approximately 33% of the total company sales. Total company, external orders booked in it the third quarter of 2007 was $432 million, up 25% from the year ago quarter. The book-to-bill ratio for the quarter was 0.94 times.

Now, gross margin for the third quarter of '07, was 31% up approximately 100 basis points year-over-year. The gross margin improvements were primarily due to higher levels of sales, and are more favorable mix. Now, as expected the gross margin was down slightly, sequentially, due primarily to higher material cost.

SG&A expense for the third quarter of 2007 was $69 million, or 14% of sales compared to $63 million, or 14% of sales in the year ago quarter. SG&A expense grew primarily due to higher sales levels and spending to support, and expand global sales initiatives.

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 third quarter of 2007 increased more than 25% year-over-year to $81 million or 16% of sales.

Now, in the year ago quarter operating income was $65 million, or 14% of sales, excluding restructuring cost in the year ago quarter, operating income would have been $68 million, or 15% of sales.

Now, I will turn to cash flow and balance sheet items. Net cash provided by operating activities in the third quarter of 2007 more than doubled year-over-year to $81 million. A strong cash flow performance results from operating improvements and ongoing focus on effectively managing working capitals. Total depreciation and amortization expense was $12 million for the third quarter of '07, and capital spending was $7 million. The third quarter of 2007 results includes $3 million of pre-tax equity based compensation expense.

Now, September 30, 2007 long-term debt including current maturities declined to $262 million, and was 21% of gross capital structure. CommScope ended the quarter with $572 million in cash, cash equivalents and short-term investments up 34% year-over-year. So, overall, we are pleased to deliver another strong quarter, has all of our operating segments continue to benefit from the global demand for bandwidth.

As we look ahead, consistent with historical patterns, we expect lower sequential sales as we move into the seasonally slower fourth quarter. And as we have noted throughout '07, our carrier segment remains a most volatile segment. Again, this year we believe lower sales of ICS products in the fourth quarter will be followed by robust recovery in the first quarter of 2008.

And please note that our fourth quarter calendar year 2007 and calendar year 2008 financial guidance is for CommScope only, without giving effect to the proposed acquisition of Andrew Corporation.

So, for the fourth quarter we expect sales of $420 million to $440 million, and operating margin of 11% to 12%, excluding any special items. This represents a sales increase of 7% to 12% year-over-year with operating income growing by 20% to 40% year-over-year.

Now, based on the fourth quarter 2007 financial guidance, sales for calendar year 2007 are expected to be approximately $1.89 billion to $1.91 billion, up approximately 16% to 17% year-over-year. Operating margin for calendar year '07 is estimated to be approximately 14.75% to 15% excluding special items. Calendar year 2007, capital spending is expected to be approximately $24 million to $27 million.

For calendar year 2008, CommScope expects modest sales and operating income growth assuming relative stability in the business environment and in raw material costs as well. The Company intends to provide calendar year 2008 guidance after it closes the Andrew transaction and completes its planning for the combined business.

Excluding intangible amortization, transitions and other nonrecurring items, and including synergies, the Company expects the transaction with Andrew to be accretive to its 2008 results. As we approach the closing of the Andrew acquisition, which we expect will close by the end of this year; we are increasingly excited about the prospects of combining our talented workforces and extensive portfolio of last-mile solutions.

CommScope and Andrew employees have been working together on the integration planning. More than 50 teams are working to determine the best way to integrate the various key functions in the two companies. Each of these teams has presented a high level integration plan, which have been approved, and detailed action planning is now underway. We believe that once this transaction is completed, we will be well prepared to begin the integrating of our two industry-leading organizations.

Regarding merger status, CommScope refiled its registration statement on Form S-4, which included an amended preliminary prospectus and Andrew's proxy statement with the US Securities and Exchange Commission on October 11. We expect a registration statement to be declared effective soon. Meanwhile, CommScope and Andrew have been cooperating fully with the Department of Justice and their review.

Regarding financing, we have net worth of rating agencies, received updated ratings, and are in the process of supporting the syndication of the credit facility. The transaction is expected to close before the end of 2007, and is subject to completion of customary closing conditions, including effectiveness of a registration statement on Form S-4, approval by Andrew's stockholders, clearance on the Hart-Scott-Rodino Antitrust Improvements Act, and any other applicable laws or regulations.

We look forward to closing the transaction and realizing the opportunities ahead. We continue to believe that cost reductions, growth opportunities and other synergies inherent in this combination will drive increased value for our stockholders.

Thank you. And now I will turn it over to Frank Drendel for his comments.

Frank Drendel

Thank you, Jearld. And obviously, ladies and gentleman, we're very pleased with the record results in this quarter. And I want to specially thank all of the CommScope employees around the world for achieving these record shipments. As we continue to look at the Andrew opportunity, we are more encouraged as to the opportunities for all the integration that can take place in bringing CommScope to the leader in the last-mile technologies.

As I look forward to what's happening in the wireless market, the iPhone, the Google presentations, I am more and more excited about ongoing competition between cable and telco and wireless operators. And I believe that when this is completed, our company will represent the best investment vehicle full pertaining to the last-mile opportunities.

With that, operator -- I think its Mark -- we will open it up for question and answers.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). One moment, please, for our first question. And our first question is from Celeste Santangelo from Merrill Lynch. Please go ahead.

Celeste Santangelo - Merrill Lynch

Good afternoon.

Frank Drendel

Hi, Celeste.

Celeste Santangelo - Merrill Lynch

Hi. What type of growth by segment did you incorporate into your outlook for only modest growth in 2008?

Jearld Leonhardt

Celeste, we do expect growth in all segments and are very positive about next year. But our growth rate this year was in the 20% sort of range for the year, and so we expect that that will not be growing at those types of rate.

Frank Drendel

Celeste, it's Frank. We clearly were looking at, hopefully, in the single digit growth rates. And obviously, there are all kinds of opportunities with the integration of Andrew to put some of those things together in that opportunity.

Celeste Santangelo - Merrill Lynch

Okay. And then what specific impact on margin expectations for the core business next year from that outlook?

Jearld Leonhardt

The margin improvement?

Celeste Santangelo - Merrill Lynch

Where were the margin expectations for the core business for this outlook?

Jearld Leonhardt

Well, Celeste, we've been growing margin this year. We're very pleased with the results of that growth with most recent quarters in the mid teens sort of range. We expect next year that our operating income, overall, will be growing more or less in line with our sales growth as we move forward.

Celeste Santangelo - Merrill Lynch

Yeah.

Frank Drendel

If you can appreciate, there are all kinds of opportunities with manufacturing level, the cost level and the margin improvement level with this combination of two companies. So obviously, we expect to have a substantial improvement across the board in every one of these areas.

Celeste Santangelo - Merrill Lynch

Okay. And then, just looking from now from Q3 going into Q4, looking at maybe midpoint of your outlook on the operating margin line more than 400 basis points declined, could you kind of quantify what's in there as far as volumes, raw materials?

Jearld Leonhardt

The biggest piece there is certainly volumes. If you look back at last year of our change in operating volumes and operating margins from the third quarter to the fourth quarter, you will see a somewhat sort of decrease.

Celeste Santangelo - Merrill Lynch

Okay. And then, just one last one. Could you talk about your expectations for wireless and demand in '08 for the product that you and Andrew sell?

Frank Drendel

Well, we can't obviously speak to Andrew's performance, but our wireless input has been the strongest it's ever been in this quarter and is achieving record levels. So we are beginning to see across the board and improvement in the wireless infrastructure. Brian, you might want to comment also our aluminum product reached greater than 50% of our sales.

Brian Garrett

Yeah. For a metal global perspective I think we're optimistic, you know, lot of those details related to the Andrew product line, we have not been able to review anything in great detail. We are encouraged less by our sequentially very high growth in our wireless business in the third quarter. I think it's indicative of a number of things. One in particular, of course, is 4G deployments by Sprint Nextel discussions of like opportunities with AT&T next year are encouraging. I'd also say that, I think, both businesses CommScope and Andrew are expecting in planning on modest recovery in AT&T in '08. So that's about all the detail this time.

Celeste Santangelo - Merrill Lynch

Great. Thank you.

Operator

And our next question is from the line of Marcus Kupferschmidt with Lehman Brothers. Please go ahead.

Marcus Kupferschmidt - Lehman Brothers.

Hi, Good afternoon, guys.

Frank Drendel

Hi, Marcus

Marcus Kupferschmidt - Lehman Brothers.

Lot to ask about. I guess the first I'd like to understand is little about the fourth quarter's assumptions. You know it sounds to me like your fourth quarter sales outlook is incrementally tougher than what you would have thought a quarter ago, is that all carrier related or is there any other weakness in some of other product areas?

Brian Garrett

Well, Marcus, I would say it's broadly a reflection of all of them. We've made adjustments in each of the three business segments, certainly having a little to do with our confidence in the market for our year-over-year performance. I mean from a year-over-year perspective, we're expecting an extraordinary fourth quarter. I characterize it more as having the opportunity to look at sales three months further downstream more than anything else, nothing fundamentally changing in any of these business segments.

Marcus Kupferschmidt - Lehman Brothers.

So if nothings fundamentally changing, then, you worry about inventories in the channel?

Brian Garrett

Not worry about -- absolutely not worried about inventories. Inventories in the enterprise segment have fallen in the third quarter. I can say specifically in the carrier segment as it relates to our Integrated Cabinet select products that channel inventories are down as well. And so I think we're very well positioned for a good fourth quarter.

Marcus Kupferschmidt - Lehman Brothers.

All right. And then in terms of the margins, can you help us understand why 4Q is a little weaker than what you thought. I mean, clearly, you're talking a bit about some higher material cost. Anything else there?

Brian Garrett

Yeah, I think pieces. You know as Jearld -- without lines, good piece is always volume. And there are some further adjustments in there for material pressures in the quarter.

Marcus Kupferschmidt - Lehman Brothers.

All right. And then, a couple of quick things. In terms of how 3Q progressed, did the average activity slow over the course the 3Q because of the volatility we've seen in the financial markets in in-housing?

Brian Garrett

Not visibly. And you know, one of the -- one perspective for you that may help you out in the enterprise segment, again Jerald spoke to the issue about the comparisons year-over-year, which are more a reflection of last year than they are at the success of this year. Point of sale in enterprise was up 20% year-over-year in the quarter and has been 20% year-over-year year-to-date. So, it tells me that the third quarter is a continuation of the strength that we have seen all year.

Marcus Kupferschmidt - Lehman Brothers.

Okay. And two other quick things. You are not increasing your prices on broadband yet the margins were pretty weak here in 3Q, help us understand that?

Brian Garrett

Well, we are under in the pressures from increasing materials, particularly in plastics watching oil, I would say those pressures ongoing subside anytime soon. There has been on a international basis. There has been some price increases implemented in the broadband space. And we're going to have to continue to watch it, if we can't see relief in material prices or reductions in produced costs; we're going to have to come back for subject to price increases to the market.

Marcus Kupferschmidt - Lehman Brothers.

So circumstances kind of prices we could see broadband pricing being increased again?

Brian Garrett

That's a very real potential.

Marcus Kupferschmidt - Lehman Brothers.

I'll ask you for more, if there is time. Thank you.

Brian Garrett

You bet

Frank Drendel

Thanks, Marcus.

Operator

And our next question is from Jeffrey Beach with Stifel Nicolaus and Company. Please go ahead.

Jeffrey Beach - Stifel Nicolaus & Company

Good afternoon.

Frank Drendel

Hi, Jeff.

Brian Garrett

Hi, Jeff

Jeffrey Beach - Stifel Nicolaus & Company

I have two questions, back on fourth quarter sales guidance, a sequential decline of $75 million to $90 million, when I go back and try to play and adjust for that extremely strong quarter last year in enterprise. I kind of judge the sequential decline more like $50 million with a pretty harsh decline in carrier to be down maybe $80 million, 60%, 70% more this year.

You say it's broadly among all of the segments. I would have thought that that fourth quarter seasonality was more in the range of maybe 5% and enterprise and broadband and something. Can you just…

Frank Drendel

Yeah, Jeff. My comment was specifically as it related to the change in the guidance. And as a percentage, the guidance change is a percentage for each of the three business segments near-like amount. That was the nature of that comment.

Jearld Leonhardt

Right. This is Jearld. Last year we were down about 16%, I believe, between the third quarter, 15.5% between the third and fourth. So we are not looking for substantially different than that this year.

Jeffrey Beach - Stifel Nicolaus & Company

So last year was extraordinarily strong?

Frank Drendel

Yeah. If you look at it on a dollars basis, if that was the nature of your question, sequentially between the three segments the largest sequential change in the fourth quarter will be carrier.

Jeffrey Beach - Stifel Nicolaus & Company

Is it more with cabinets?

Frank Drendel

Substantially, it will be cabinets. That's correct. No, I think -- and from memory now, Jeff, I can't be absolutely positive on this -- I think fourth quarter in wireless as well was off modestly but not substantially.

Jeffrey Beach - Stifel Nicolaus & Company

Okay. One other question regarding, I guess, general broad comment about 2008, I think you had mentioned moderate growth from sales and operating income, and then later said you thought you could increase your margins in all three of your divisions next year. If that does occur, your operating income will be up more than moderate, won't it?

Frank Drendel

Yeah, Jearld said it right. Our expectations are that we will grow operating margins greater than we will topline revenues.

Jearld Leonhardt

Market size. That's exactly correct, Jeff. I'm sorry, as we continue to review the Andrew, CommScope combinations, we see lots of opportunities to improve margin in this business by just a combination of the assets versus the sales growth. We're expecting sales growth, but understand, we're aiming at the margin.

Jeffrey Beach - Stifel Nicolaus & Company

Last question. On this very profitability in carrier in the third quarter, margins 19.5% on lower sales in the second quarter, was that mix, was there price increases, and what can we look at for next year? I think you said you thought you might be able to improve the margins in all three businesses, that means carrier still may have upside?

Jearld Leonhardt

Well, I don't think we've spoken to private client or segment margins probably. I mean a lot of that detail we'll probably discuss in the next call. I will tell you I'm immensely pleased with the profitability in the margins in that business. It would be a big expectation, I think, in the baseline plan to consider expanding that further.

The results that we had sequentially in terms of profitability really have a lot to do with our teams' ability to continue to reduce cost. It is not reflective of any price increase activity in the quarter.

Jeffrey Beach - Stifel Nicolaus & Company

That was a nice performance. Anyway, thank you.

Jearld Leonhardt

You bet. Thank you, Jeff.

Operator

And our next question is from the line of [George Carter].

[Technical Difficulty]

George Carter

Hi guys. Can you hear me?

Jearld Leonhardt

Yes.

George Carter

Great. I want to ask you a question on the enterprise business. You mentioned you're looking at raising prices or instituted a pricing increase here late in Q3. Can you tell us what the magnitude of that pricing increase is, and then any sense for when that might roll into numbers next year? I mean I know that it probably won't hit in Q4.

Frank Drendel

I think the midpoint of the price increase is varied by product line and by geography. I think the working number is something in the neighborhood of 5% as an average, 4% or 5%. And expectations, these things always take time to move through projects and channels. I think we'll begin to see it having an impact in the first quarter of '08.

George Carter

Got it. And then any update on the mixture of business between Cat5, Cat6, Cat6a within enterprise?

Frank Drendel

Well, Cat5 largely isn't a subject for us going forward. And Cat6 remains to be the largest part of the business. We were encouraged to buy North American POS in our 10G product. We've been watching this particular product line that we launched some six or seven quarters ago. And in the third quarter, sales within copper products, the 10G reached the 10% level. So, it was a real benchmark for us. It was with the extraordinary quarter.

George Carter

Got it. Thanks a lot.

Frank Drendel

Mark?

Operator

Yes. Our next question is from the line of Kenneth Muth from Robert W. Baird. Please go ahead.

Kenneth Muth - Robert W. Baird

Hi. Looking out on the broadband category, can you say if there is any, kind of, landscape changes going on there? You have had some major upgrades and build-outs going on here some under invested assets more investable in 2007. But going forward a little bit, how do you see, kind of, that landscape changing maybe and then, also, pricing if you could address that in that vertical?

Jearld Leonhardt

Ken, you know a number of things are going on in the industry. One in terms of 1 gigahertz deployments, we are seeing, those increase in the frequency. We are seeing, all that are seeing optical nodes going deeper into the network. But from the perspective of cable, whether it's coaxial or fiber, now, these activities don't have a substantial impact.

I mean this market, again, particularly as it relates to North America is largely a service and maintenance type of activity. Now, what we have seen this year and particularly in this quarter is large growth in our international business. And that has a larger impact on both volumes and margins to the business.

Kenneth Muth - Robert W. Baird

Okay. And then, just quickly on the enterprise verticals, is there anything change in there either competitively or from a pricing perspective?

Jearld Leonhardt

On enterprise?

Kenneth Muth - Robert W. Baird

Yes.

Jearld Leonhardt

You know we did have discussions in the call here about price increases in September on a global basis. Majority of it in terms of products affected, I would say are non-North American. Yes, from competitive perspective, we like where we are. I think we have been very successful in sales into and sales for other channel, new product, I mentioned 10G is beginning to get traction. And I think we have global leadership and the position of 10 gigabit over UTP and again, high growth in our fiber segments. So our perspective is it our enterprise business is running on '08 cylinders.

Kenneth Muth - Robert W. Baird

Okay. Thank you.

Operator

(Operator Instructions) And our next question is from the line of Simon Leopold with Morgan Keegan. Please go ahead.

Simon Leopold - Morgan Keegan

Thank you. I want to see first, if you could clarify the other income line this quarter was a bit higher just under $3 million, what was going on there and how is that line trending?

Jearld Leonhardt

Yes. The biggest benefit in other income was foreign exchange gains and those are more one-off, I wouldn't say if the trend that we're experiencing but they have been more favorable this year in the target.

Simon Leopold - Morgan Keegan

And how should we think about that in the coming quarters?

Jearld Leonhardt

I would think typically more modest than we saw in the third quarter.

Simon Leopold - Morgan Keegan

Okay.

Jearld Leonhardt

More modest than the third.

Simon Leopold - Morgan Keegan

Okay. Now, regarding the commentary and the guidance you talked about the ICS business rebounding robustly in the first quarter. I want to combine that with really another question in trying to understand your conviction and views on this. There has been a lot of charter about your customer AT&T potentially looking at alternative tactics, such as buying a satellite player to accelerate its video offering. If you could talk about how you think about that, how you asses the risk as well as if they were to go through and make that kind of acquisition. How that might impact your outlook in your business?

Frank Drendel

Well, let me take a cut at there. I mean, first of all, if they were to buy either one, the direct satellite players. It is still a one-way service and it doesn't allow you to have high speed internet connection. It doesn't allow impulse pay-per-view. I mean it just have just have so many limitations. Clearly, if AT&T would do that, they would have the capability of having a rate card competitive with what the cable industry has. They would have a content provider, but there is all those contracts protected including the NFL protected, which this cable industry doesn't have.

So my view would be, a, it's adding to the conviction, another continuous rollout of the wired and wireless network both video, visual and both audio. When you conserve from moment to-date, AT&T has got about $330 for home passed and their capital cost. And by a Direct or Ecostar, you are talking someone north to $3000 or so. So it shouldn't change their attitude about happen to have a high speed interconnectivity.

And that's my cut out in all the experience I've had in 30 years of broadband. I could bet wrong but I still believe they are committed to a rollout on physical infrastructure.

Simon Leopold - Morgan Keegan

Well, I agree with you, but in the scenario that they do it, I imagine they would probably do some slowing. Could you asses what level of spending they could go through in that scenario?

Frank Drendel

I mean that's an interesting point that, my view would be that if anything they would be able to accelerate the connectivity and get deeper penetration with the homes that they've already passed. The argument here is can you compete effectively against a cable VoIP offering, which is really the competition on the ground, without a wired infrastructure connection?

So I would believe that this is so modest incrementally to what they're doing. The success that Verizon and AT&T have had in somewhat decapitalizing the market values in cable, it's been pretty effective. I mean cables are the big hit in this quarter. And so, I think the competition just increases.

Simon Leopold - Morgan Keegan

Sure. And then, just one other question, if the Andrew deal were closing, let's say eminently, where are the interest rates right now in the LIBOR plus?

Jearld Leonhardt

Well, I think we disclosed in our last quarterly review, Simon, that we expected to raise between 225 and 275, if I recall. And we're still within that range plus LIBOR and, of course, LIBOR has been trending down carefully.

Frank Drendel

Included within the modeling we did earlier on in this program.

Simon Leopold - Morgan Keegan

Great. Thank you very much.

Frank Drendel

Yes, sir.

Operator

And our next question is from the line of Brian Coyne with Friedman, Billings and Ramsey.

Brian Coyne - Friedman, Billings and Ramsey

Hey, guys. Good afternoon.

Frank Drendel

Hi, Brian.

Brian Coyne - Friedman, Billings and Ramsey

Hi. First, I just wanted to chill down a little bit on carrier. It seem like it was a little bit stronger than I expected in the quarter. Last quarter, as I recall, I don't think you saw any pull into 2Q, but then with the third quarter perhaps did you see anything going on there? Could that be perhaps any explanation on why it could be potentially that much weaker, well, again I guess weaker for the fourth quarter, whether potentially competition in this past third quarter perhaps not hitting you as much as you had expected?

Brian Garrett

Clearly, not a competition perspective, Brian, elements there. It is the entirety of seasonality. If you recall last year, we gave our guidance based upon input that we get from our customers, which are pretty accurate. We did get into late in the fourth quarter and there was the need to accelerate very quickly into the first quarter of this year. And that gave us some upside actually to our forecast. I will tell you this year we had good visibility in to our demand in the fourth quarter, which is leading our guidance. I can tell you this visibility that we had into the first quarter, says, we're going to have a big wave to deal with in the first quarter, to the extent that we can start that in December. It may create some upside for us. But you really should read anything into this, other than the seasonality, and the desire for AT&T to get on with light speed. They are very happy with the program today.

Frank Drendel

And I think I'll take another cut at that. The flex manufacturing capacity that we have in supporting this customer is on trail on by any of our competition. And as you can see what we have been able to do for that relationship in modulating it up and down, it's been an outstanding complement to our employees and our management team.

Brian Coyne - Friedman Billings.

That's great. My next question was just really about the sustainability of that margin, I know you touch down it earlier, but, again, you know, if 1Q ends up being sort of a nice rebound in this business, you think you sort of get back to the same very strong margins you've seen in the past couple of quarters?

Frank Drendel

Well, there are a lot of things that are happening in the first quarter in going forward, I mean there will be changes in product mix and which will have an impact throughout the year. There will be higher volumes of unit and in '08, which will help us favorably. And the expectation is that, you know, over the year we will grow operating margins as we grow revenues.

Brian Garrett

And clearly, we continually design these products to take our costs and improve their features and performances. So that's always been have comes to hallmark.

Brian Coyne - Friedman, Billings and Ramsey

All right. That's great. And one other one, just quickly on the Andrew, you talked about lot of teams doing of a lot of work and getting toward the goal on here. Do you have any updates to give us better feel, perhaps on some of the cost synergy guidance that you gave us? I know I think you talked about $90 million to $100 million range of couple of years, where do you think it'd be laid on that potentially?

Jearld Leonhardt

Well, that's what we are in the midst of. You know we're just trying to reconfirm our early estimates, and I can tell you that we look at it weekly and continue to validate our initial thinking. You know, hopefully, in the first quarter, we will have a lot more, say about, the merger with a lot more details.

Frank Drendel

So, far we haven't found any surprises and make us deviate from the time we have given you.

Brian Coyne - Friedman, Billings and Ramsey

Do you still think that procurement, I think as you described on the M&A call, procurement sort of is going to be the biggest source?

Jearld Leonhardt

Yes, sir.

Frank Drendel

It will be a big bucket.

Jearld Leonhardt

It will be a big bucket. There is a $2 billion procurement between the combined companies. 1% improvement is $20 million. I mean to say, I mean you just have to put this in perspective we are the biggest in the world of all these sectors. So our purchasing powers should reflect some substantial improvement.

Brian Coyne - Friedman, Billings and Ramsey

Got it. That's great. That's all I had. Thanks guys.

Jearld Leonhardt

Yes, sir.

Frank Drendel

Thank you, Brian.

Operator

Your next question comes from the line of Eric Buck with Brean Murray. Please go ahead.

Eric Buck - Brean Murray

Yes. Good afternoon. My question was actually kind of on the Andrews subject as well as, they reported today and I guess you're probably not prepared to comment there, but clearly the numbers were ahead of the expectations that were out there. It was like that was a pretty strong quarter in the wireless area.

When you first announced that deals instead of could be accretive and since then, your numbers have gone up meaningfully. And I thought, maybe, it was going to be tough to be accretive in '08. Has there been changes at Andrew or increases in your synergy assumptions that keep you thinking it's accretive or things not really changed since the deal?

Jearld Leonhardt

Well Eric, It's Jearld. Yeah, we have always been excited about possibilities there with this good combination of the two companies. We have talked about synergies. We are very excited about the synergy opportunities. So we have some revenue synergies that we haven't actually talked about but they are serving potential there.

We think the business of Andrew has been -- in North America certainly has been somewhat depressed in the current markets. Some think it gets worse, certainly from current positions and more likely to get better than worse. So we think it's a reasonable time to be thinking about their growth in the US market for wireless business. And we have other opportunities through synergies to make this accretive transaction, financing costs still remain very reasonable, and so we have a good opportunity with it.

Frank Drendel

Eric, you follow this sector quite closely. And clearly, Andrew did a tremendous job making up the revenue shortfall from the domestic through their international businesses. Their footprint, combined with our product lines, offer a unique possibility around the world. And clearly, we're seeing on our domestic wireless business very accelerated capital spend, especially around the WiMAX, WiFi, 4G deployment.

Clearly, Sprint Nextel is doing that. AT&T just spent $2 billion plus for 4G frequencies. You have the 700 megahertz options coming forward, and you clearly have the approaching Google whatever they do in the wireless market to accelerate. So I think we're at the absolute bottom of spending in wireless and I expect it to be substantially better next year.

Eric Buck - Brean Murray

Okay. And then, obviously there are opportunities on the carrier side when you hook up with Andrew. But have there been anything that you're getting close to internally in terms of additional carrier customers for the cabinet?

Frank Drendel

Well, we have been independently, Eric. We have been very successful in early trials with one of the wireless carriers, and we think it's going to contribute nicely to the '08 sales. And Andrew can only help accelerate that proposition in North America.

Eric Buck - Brean Murray

Okay. Great. Thanks.

Jearld Leonhardt

Thank you, Eric.

Phil Armstrong

Operator, we have time for two more questions.

Operator

Okay. And our next question is a follow-up question from the line of George Notter from Jefferies. Please go ahead.

George Notter - Jefferies

Hi. Just a couple of easy ones. Any commentary on 10% customers in the quarter, and then also I wanted to get a sense for how much Signal Vision helped you in the quarter, and maybe if you could compare that with Q2 that would be interesting? Thanks.

Phil Armstrong

Hi, George. This is Phil. Signal Vision was not quite $7 million in the quarter, and sales to a large OEM was roughly 12% in the quarter, only 10% customer in the quarter.

George Notter - Jefferies

Got it. I assume Anixter was also a 10% customer?

Phil Armstrong

Yes.

George Notter - Jefferies

Distribution basis, sure.

Phil Armstrong

Thank you.

George Notter - Jefferies

Thanks.

Jearld Leonhardt

Our apologies to [Bob Drbul].

Frank Drendel

Thank you, Bob.

Operator

And our last question will come from the line Marcus Kupferschmidt with Lehman Brothers. Please go ahead.

Marcus Kupferschmidt - Lehman Brothers

Hi, guys. Just wanted to ask a couple of basic assumption questions in what's your guidance. For the fourth quarter, are you assuming carrier revenues is up or down year-over-year?

Jearld Leonhardt

Those should be up.

Marcus Kupferschmidt - Lehman Brothers

Should still be up year-over-year, okay.

Jearld Leonhardt

Yes, it is.

Marcus Kupferschmidt - Lehman Brothers

And when you look at the operating margin in that business in the third quarter, really strong, doesn't get a lot better than that. I mean are we really seeing the benefits of doing a lot of aluminum sales or is that also showing how CommScope leverages a good volume on the cabinet side?

Jearld Leonhardt

Well, both contributed fairly. In terms of production, nearly 70% of our production was aluminum. I mean I will give you a sense of how these products are being broadly accepted in North America, and I'll say international sales are growing very, very nicely as well. So it's a key part of the integration with Andrew's we've outlined to you.

I think the technical proposition and the value proposition of that design in the hands of the Andrew sales and marketing organization will create real change in the industry. And then, as it relates to cabinets, the margin, it's all about volumes and it's all about cost reduction in the quarter, and both of them did very well. And yeah, I'll repeat, I think it would be very difficult to hurdle those margins.

Marcus Kupferschmidt - Lehman Brothers

And if you look at the three business units for next year, where do you think you would see the fastest and the slowest revenue growth in terms of -- I'm not sure if you said you thought they would also similarly but I think that's what you meant to convey earlier?

Jearld Leonhardt

Yeah, I think their growth won't be substantially different and we've said all along, we'd like these businesses to grow minimally 10% year-over-year.

Brian Garrett

Right. And we count all that and saying expecting stable business environment and relatively stable peer counts, which could come back to the pricing question. It's different from that and that's been part of the historical growth that has been in the sales price change.

Marcus Kupferschmidt - Lehman Brothers

And was there any pricing growth that boosted the year-over-year in 3Q here?

Brian Garrett

No, no. Most of that was worked in through the year.

Marcus Kupferschmidt - Lehman Brothers

All right. Thanks.

Brian Garrett

You bet.

Frank Drendel

Ladies and gentlemen, in closing, I'd like to remind you as we look forward to the Andrew combination of CommScope, I fortunately just reviewed a bunch of statistics on a wireless carrier. 1.3 billion phones will be sold worldwide next year. It takes a lot of infrastructure to connect 1.3 billion new phones, not including what exists.

The plans that are happening on 4G, advance wireless, the cable television industry's continuing growth in VoIP, all of those businesses, all that competition plays right into our last-mile strategy. So we continue to believe we have a unique company positioned well for these opportunities. And I thank you for being on this call.

Operator

Ladies and gentlemen, that does conclude our conference call for today. We thank you very much for your participation and ask that you please disconnect your lines.

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