CommScope Holding Company Inc (COMM) 2010 Q2 法說會逐字稿

Good afternoon. My name is Shanelle and I will be your conference operator today. At this time, I would like to welcome everyone to the CommScope second quarter 2010 earnings conference call. 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 will now turn the call over to Phil Armstrong, Senior Vice President of Corporate Finance.

Thank you, Shanelle. Good afternoon. Thank you for joining us on the call, and sorry about the technical difficulties there. Joining me today on the call is Frank Drendel, CommScope's Chairman and CEO; Eddie Edwards, CommScope's President, Chief Operating Officer; and Jearld Leonhardt, CommScope's Executive Vice President and Chief Financial Officer. Please note a slide presentation that accompanies this call can be found on CommScope's web site at www.commscope.com under the Investor Relations tab. If turning to that presentation, if you'll take a look at slide two, which is our forward-looking statements, will you find the cautionary language related to forward-looking statements.

During this call, we may make forward-looking statements regarding our financial position, plans, and outlook that are based on information currently available to management, management's beliefs, and a number of assumptions concerning future events. Forward-looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors which could cause the actual results to differ materially from those currently expected. For a more detailed description of factors that could cause such a difference, please see our press release and CommScope's 10-Q filed today with the Securities and Exchange Commission. In providing forward-looking statements the Company is not undertaking any duty or obligation to update these statements as a result of new information, future events, or otherwise.

Also, note that all dollar figures and percentages are approximations. In addition to GAAP information, we will provide certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides meaningful information to investors. Detailed reconciliations of GAAP to adjusted results can be found in the press release we issued today and in the appendix to our slide presentation.

On one other planning item, please note that CommScope intends to host an analyst meeting on November 15 and 16 in Dallas, Texas at the Cowboys' Stadium. After a formal management presentation, the Chief Technical Officer of the Cowboys organization will provide a behind-the-scenes IT tour of the facility. Now, I will turn it over to Jearld Leonhardt. Jearld?

All right. Thanks, Bill. We will review the second quarter 2010 results with you today and our outlook, and then I will turn it over to Eddie Edwards to make a few comments before opening it up to questions.

Slide three, starting there provides a snapshot of CommScope's second quarter 2010 performance. The second quarter 2010 saw sales increase by 7% year-over-year and 16% sequentially to $838 million. In the quarter, foreign exchange rates positively affected sales by $3 million on a year-over-year basis but negatively affected sales by $6 million on a sequential basis. As anticipated, North American wireless operators significantly increased spending in the quarter on their 3G and 4G wireless infrastructure. And from a geographic standpoint, the US market was the most robust in the quarter. Strength in the North American wireless market and global enterprise markets were somewhat offset by lower sales in India and China. Our gross margin for the second quarter of 2010 was 30% and includes a gain of $9 million for an arbitration award related to warranty costs arising from a business that Andrew had acquired several years ago prior to the CommScope/Andrew merger. Now, excluding this special item, adjusted gross margin was 29%. Gross margin rose modestly on a sequential basis but declined year-over-year due primarily to higher material costs, a return to normal business practices for salary and incentive compensation, and lower prices for certain cable products.

SG&A expense for the second quarter of 2010 was $117 million, up $18 million year-over-year, primarily due to the reinstatement of certain incentive-based employee cash bonus programs in 2010 that had been suspended for 2009, and higher selling costs due to higher sales. Operating income in the second quarter of 2010 was $81 million compared to $74 million in the year-ago quarter. Adjusted operating income, which excludes the amortization of purchased intangibles and other special items, declined 19% from the year-ago period to $101 million. The decline in adjusted operating income is primarily attributable to a decline in broadband operating income. However, adjusted operating income increased 53% sequentially, primarily due to improved wireless performance.

Interest expense for the quarter was $23 million compared to $43 million in the year-ago quarter. Last year we incurred non-cash charges of $17 million related to an interest make whole payment and the write-off of deferred financing fees in connection with accelerated debt payments. Excluding these items, interest expense in the year-ago quarter was $26 million. Interest expense declined year-over-year due to lower debt levels.

The Company's effective income tax rate for the quarter was 25%, while the overall tax rate on adjusted pre-tax income was 28%. These rates included a benefit of $2.5 million, approximately, for adjustments to valuation allowances related to various tax matters, and a $2.5 million benefit related to adjustments to the estimated tax impact of repatriation of foreign earnings.

CommScope reported second quarter net income of $44 million, or $0.43 per diluted share in the second quarter. The reported net income includes after-tax charges of $15 million for the amortization of purchased intangibles and $2 million for restructuring, offset by a $5 million after-tax gain that was related to the arbitration award. Excluding these special items, adjusted second quarter 2010 earnings were $56 million or $0.55 of diluted earnings per share.

Moving on to slide four, this shows our revenue and adjusted operating margin performance over the last six quarters. Second quarter 2010 sales of $838 million were the highest they have been since the fourth quarter of 2008 as sales rose sequentially in all segments. Sales of North American wireless operators, two of them were particularly strong and included more than $50 million solutions for initial rollouts of next-generation LTE wireless applications, including active and passive equipment as well as cable and some environmentally secure cabinets. Due mainly to the 16% sequential increase in sales, adjusted operating margin rose 52% sequentially to $101 million or 12% of sales, which was generally consistent with our expectations. With that summary, I will now provide some specific commentary about each of our segments.

Slide five highlights the financial performance of our Antenna, Cable and Cabinet Group, or ACCG segment, which includes product offerings of primarily passive transmission devices for wireless infrastructure purposes, including base station and microwave antennas, coaxial cable and connectors, as well as secure environmental enclosures for both the wireline and wireless applications. ACCG sales improved in the second quarter, rising nearly 20% sequentially, but they were down modestly year-over-year. Sales grew on a sequential basis mainly due to US operators increasing investments in next-generation wireless and wireline communication infrastructure. This robust North American spending was somewhat offset by a decline in the Asia Pacific, or APEC region due to lower sales in India and China. Cautious operator investment ahead of the Indian 3G auctions was compounded by lingering security clearance process issues. The combination of these two items diminished sales into India. Sales there were below expectations and declined by more than 50% year-over-year and particularly affected sales of microwave and base station antennas. And, at the same time, sales in China also declined year-over-year, primarily due to the timing of investments in 3G infrastructure, which were quite strong in the first half of 2009. Overall, we are pleased to see the sequential improvement in sales and operating margins and believe that we remain well-positioned to benefit from the transition to next-generation wireless networks around the globe.

Turning to slide six, our Enterprise segment, which provides structured cabling and connectivity systems for business enterprise applications, delivered another quarter of outstanding results. Enterprise sales increased 34% from the year-ago period and 12% sequentially. Sales increased across all regions and product groups. And user demand for our products was, once again, the primary driver of sales growth, as global sales into the distribution channels roughly equaled the sales out of the channels. Enterprise segment sales rose as corporations and other large entities continued investing in strategic information technology. We believe that our end-to-end intelligent solutions, our robust fiber portfolio, our in-building wireless solutions, our global sales force, and our commitment to R&D all combine to separate us from the competition.

We see many exciting opportunities as we look ahead, particularly in the sectors of technology, US Federal Government, health care, and education. We are also pleased with our progress in expanding in-building wireless solution sales for Enterprise applications, which include fiber distributed antenna systems, repeater platforms, radiating cables, and other coverage solutions. Overall, it was a strong quarter for our Enterprise group.

Turning to slide seven, our broadband segment sales consist mainly of coaxial and fiber-optic cable for cable television operations. Broadband sales increased 9% year-over-year and 16% sequentially. The year-over-year sales increase was due primarily to higher volume in the Central and Latin America, or CALA region, while the sequential sales improvement was driven by both CALA and a seasonally strong North American market. These sales increases were somewhat offset by reductions in pricing of certain cable products. The broadband segment continues to be essentially a maintenance market in the US and is influenced by housing starts, maintenance of physical plant, and competition between cable, satellite, and telephone companies.

Now, as you may recall, in the second and third quarters of last year, a number of positive key factors aligned, resulting in a typically strong broadband operating margins. This year was just the opposite. Lower prices, unfavorable mix, and higher costs combined to drive margins lower. Now, we are not pleased with our second quarter performance and are focused on improving margins and recovering our higher costs.

Turning to slide eight, our Wireless Network Solutions, or WNS segment consists of base station subsystems, location based and network optimization systems, as well as products and solutions that extend and enhance wireless coverage. Sales in the quarter were essentially unchanged on a year-over-year basis, but were up 16% sequentially. The sequential sales increase reflected unusually strong shipments of active products, such as power amplifiers and filters in North America for next-generation or LTE applications. This North American strength was somewhat offset by lower shipments in China.

We also posted strong sales from our Wireless Innovations, or WIG group, which provides capacity and coverage solutions for complex and challenging wireless signal distribution systems. Sales in the second quarter reflected the completion of solutions for a number of South African soccer stadiums used for this year's 2010 soccer World Cup competition. Now, while we do not expect the same level of strength in the third quarter, we continue to see numerous opportunities at large venues like stadiums across North America. We believe that our ongoing technology leadership and our service model uniquely position CommScope to benefit from growth trends in both outdoor and in-building wireless applications. We remain excited about the long-term progress and prospects in the WNS segment. However, it is obvious from this chart on slide A that the segment profitability has been relatively volatile since it is significantly affected by product mix and the timing of certain large projects. Despite the quarter-to-quarter volatility, we believe that this segment has the potential to be among the fastest-growing segments at CommScope.

Now, turning to slide nine, I will now discuss cash flow, the balance sheet as well, and liquidity measures. Slide nine highlights our overall debt reduction over the past few years as a result of the -- of capital markets transactions last year and strong cash flow from operations. Despite the $117 million sequential growth in sales, which consumed working capital, we generated $28 million of cash flow from operations during the second quarter of 2010. And with modest capital spending of $9 million, we generated $19 million of free cash flow in the second quarter. We also continue to strengthen our balance sheet. In the quarter, we reduced total debt outstanding by $53 million, primarily through a $50 million prepayment of debt. At July 30, 2010, total debt outstanding was $1.35 billion, or about 46% of our book capital structure. We ended the quarter with $577 million of cash and cash equivalents and short-term investments. And our net debt, which is total debt less cash and cash equivalents and short-term investments, was approximately $777 million. We also remain well within compliance of the financial covenants in our credit facility.

Turning to slide ten now, we have outlined some of the key factors affecting the current business environment. Recent economic and industry indicators have been mixed. Other issues include the timing of quarterly spending by global carriers as well as volatile input costs. And finally, while some supply chain lead times for components have improved, others have not, which, along with these other concerns, could be a restraining factor to our growth in the third quarter. Despite these uncertainties, however, we remain optimistic about improving performance in the second half of 2010. We believe that we have a strong competitive position. We will benefit from the economic recovery, even though recovery may be slow and may vary considerably among geographic regions.

We continue to expect strong North American wireless capital spending in the third quarter and the potential for increased wireless spending in India. Now, as the economy recovers, many corporations and other large entities have resumed investing in their data centers and other strategic and information technology. We also believe that our expanding in-building wireless portfolio will begin to create additional opportunities, but later this year. Now, longer term, the explosive growth in wireless data, global subscriber growth, and the transition to next-generation networks are expected to provide opportunities over the next few years.

I will now cover our outlook on slide eleven. Overall, we expect business conditions and our overall performance to remain relatively stable on a sequential basis in the third quarter, excluding special items. This guidance is based upon expectations of increased spending in India as security issues are resolved and as operators increase wireless spending for 3G networks, as well as adequate component availability, solid enterprise spending, and a stable business environment. Specifically, for the third quarter, we expect revenue of $815 million to $865 million. We expect adjusted operating income of $90 million to $110 million, excluding amortization of purchased intangibles, restructuring, and other special items. And we expect a tax rate of 32% to 36% on adjusted pre-tax income.

Regarding calendar year 2010, challenging conditions in India and broader economic concerns have contributed to slower-than- expected recovery in wireless spending in Europe and in the Asia Pacific region. In addition, raw material costs remain high despite the slow economic recovery. As a result of these factors, we believe that it will be difficult to achieve year-over-year growth in adjusted operating income for calendar year 2010. In spite of this, we anticipate stronger performance in the second half of the year. We continue to expect higher sales in adjusted operating income, excluding the special items, than in the first half of the year. Now, I will turn it over to Eddie Edwards for a few of his comments.

Thank you, Jearld. I think, as Jearld has pointed out, we're still clearly in the midst of an economic recovery, and I think it's going slower than many of us had anticipated. However, we remain the global leader in each of the markets that we serve, and we believe we have a compelling value proposition for our customers. What we've talked about for the last two quarters in LTE, I think you see is happening now. We did greater than $50 million, or over 10% of our wireless revenue was generated from LTE sales, not only in the United States but in other parts of the world. We have a very strong position in Enterprise globally and in most every market around the world. This is something we've talked about for the last two quarters, and we see that strength continuing throughout the year.

We also continue to invest in our technology. I think this is one of the reasons in our -- our new 4G products that we have a strong position in the marketplace. It's a -- it's something that we've decided to do and are dedicated to continuing that process.

We've also talked about our commitment to possible growth and our willingness to walk away from certain revenue that doesn't make sense to us. We're going to continue that diligence and focus on maintaining our bottom line profitability to the highest level that we can get to. As we focus on our cost-reduction to offset pricing pressures, we know that these cost benefits will be realized. During the course of the year, we've strengthened our balance sheet as Jearld has talked about. We've improved our liquidity, and although this quarter we had less cash flow generated, we did increase our revenue by over $100 million.

We continue to be excited about the growth in smartphones and also the new tablets, such as the iPad and the other ones that are coming out. And this is going to drive the growth of the mobile Internet. We have product that serve every part of that bandwidth user, and we expect good growth in that area. We continue to be focused on executing and helping our customers connect and communicate through each wave of the growth. We have talked about from 2G to 4G and beyond. I think that the technology that we've shown, not just in our wireless business, but what we're doing in Enterprise and Broadband to support the growth of wireless in the building or outside, shows our commitment to that industry. So, despite pressure on price that we've seen during the end of this quarter and in Jearld's comments of pressure in the price during the balance of the year, we think that we continue to perform well versus our peers and remain committed to the market. So, Phil, I will now turn the floor back over to you.

Thank you, Eddie. During the Q&A, we ask that you limit your questions to one topic, and if you have a number of follow-up questions, to step back in the queue. And, Shanelle, we'll be now glad to address questions.

(Operator Instructions) Your first question is from the line of the Simon Leopold with Morgan Keegan.

Simon, you there?

One moment, please. Simon, your line is open.

Okay, you can hear me, yes? Okay. Sorry about that. One multi-part question, I guess. I wanted to see if you could comment on what you're thinking about the product mix in Q3. I think you did make a suggestion that either WNS would be down sequentially or just the coverage enhancement would be down sequentially. But if you could delve a little bit more deeply about what's implied at the high end, low end of your guidance in terms of mix. Thank you.

Well, I can speak to WNS, Simon, specifically. If you look at the chart that Jearld presented, it's a -- it looks like a saw tooth. I think next quarter is the time it's supposed to be down relative to how it's followed the last six or eight quarters. But it is very project oriented. It's the timing of large projects that generate revenue at the end of periods, generally, and I think next quarter we'll see one of those periods that is less strong than this one was. Also, in this quarter, as Jearld mentioned, we had a significant revenue generated from the ten sports venues that were done in South Africa for the World Cup. And those things are not recurring.

There is another World Cup coming up in Brazil, so we will be actively pursuing that. But that's not for a couple of years. But we will see cyclicality there. And in that segment, we -- mix is a big driver of the bottom line, as you've seen, also, from the way the charts work. The other thing in -- from Q2 to Q3 would be India. We do see some growth coming back there. It's been out of our -- it is not something from a control standpoint that we can do much about. We're well-positioned there. We have relationships with most all the OEMs or the carriers in that market, but it's just been a market that is stagnant. We were -- we were only down 58%, versus some of the people saying down 70% plus. So it's -- it's a challenge in that market to address that when it's really controlled by the activities of the Government.

And for the Broadband segment and Enterprise statements, what's kind of the expectation of movement there? Broadband usually has some, I think, decent seasonal factors in Q3?

Well, it -- that's true. But what we -- remember when we talked about last year in Broadband, we were at 23.5% or 24.5% margin, and we said that those were not sustainable. We were on the good end of the difference between where our prices to our customers were and what we were paying for materials. And now we are on the other side of that. The pricing pressure throughout the world is very, very strong. That market is going to be determined by growth in residential housing. We don't see that being a growth model for some period of time. But we will continue -- we will continue to fight. One positive aspect there, and something that has just started, is the stimulus money. The rules are now out. We've won a couple of jobs and bidding on others right now. So, as the government continues to make sure the rules are well understood and the MSOs, or the smaller carriers apply for funding, we would expect to see some of that. And in Enterprise, as a Jearld said, the inventory of our distribution network remains a very balanced. We don't think there is any build up there. We think that's positive. And our people see a strong market through the balance of the year.

Thanks, Simon. Operator, we'll take our next question.

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

Good afternoon.

Hi, Jeff.

You've really had a remarkable swing in your operating profitability in Broadband, and back down to the single digits. Can you expand a little bit on the decline in the margin? I was surprised how much your -- how much is cost pressures, how much is pricing pressure from competitors, and what you see ahead. Are you going to be able to restore this margin back up in the double digits in, let's say, the next few quarters?

Well, Jeff. This is Jearld. Yes, we've -- I'd say in the raw material front, we clearly are a little surprised or puzzled that raw materials remain as high as they are with the economy as weak as it is. We would expect to see some improvement in that, typically, or in most cycles. But raw materials do remain high, and we will see some increases in areas like plastics even in the third quarter. So, there is continuing margin pressure there, and as we talked about, we had some extraordinary positive Broadband margins last year that I think we did say would not continue or would not last, and that has certainly been the case. There have been some price adjustments that we've mentioned as well in the Broadband segment. So, those are the factors that have made the margin a little lower. I'd say we are clearly not pleased with where margin is in our Broadband sector and would be continuously looking at opportunities to improve margin performance in that business.

And is there any issue from a change in mix that's occurred here in the last quarter or two in Broadband?

Yes. That mix change was also negative, if you would, looking from, particularly, year-ago period.

Okay, thank you.

Thanks, Jeff.

Your next question is from the line of the Amir Rozwadowski with Barclays Capital.

Thank you very much and good afternoon, folks.

Good afternoon.

In looking at your guidance for the third quarter, you'd mentioned that there is expectations that the spending in India would come back. I was wondering if you could give us a little bit of color in terms of the delta between the low and the high end of guidance. Is that, what are the puts and takes there that could drive you to either end of the spectrum?

I don't think we get to that granularity in talking about this but, I think -- Amir, this is Eddie -- it depends on when the government fully turns the people loose, or at least some of them. There are rules for some of the vendors today, and those are being adhered to. We are seeing orders now versus very few during the quarter. For the entire thing to be robust again, they are going to have to find a way that all the suppliers are in there supplying product. We have relationships with each and every one of them, whether they be western or Asian suppliers. So we are ready and poised. We have daily conversations with everybody in the food chain. So, it's not something -- it's something that we're poised. We have some inventory in place to take care of ramp issues because when they come back, they're going to come back with a fever pitch, and they will want things very quickly. So we've addressed that. As you know, we build many of our products there in India.

It is really a timing as to when things let loose, when the 3G licenses are fully implemented, and they start building for those. They're still adding tens of millions of people a month. So, the quality of their networks is going to degrade rapidly as they continue to add subscribers. It's a hard thing to gauge. We have built in reasonable growth. It's still, at the best, 5% to 7.5% of our total revenues. So, it's not the biggest market that we serve, but it is an important one to us, both that and China. In the case of China, the bidding for -- in China Unicom was delayed because of some legal issues over there. I think those have been worked through, and that should happen in the next six weeks. We're in incumbent supplier in antennas, and we believe that, with our approval by the testing authorities, that our smoothwall aluminum cable will be well positioned to win business there.

And so, Eddie, if we think about the broader picture than in India and China. If we look at the regulatory hurdles being cleared, certainly the carriers have spent a significant amount of money on 3G licenses. If we perhaps look out into the first half of 2011, do you expect that to be a material growth driver for you folks? Or the size of the opportunity, perhaps? Maybe some color around that?

Well, you know it could -- certainly, we would have expectations it would give back to the levels that it had been at before, when they were adding 16 million subscribers a month, and the market was booming, and all of that. We have all of the products that -- necessary for their build outs. And so we think it could get back to that level. When it happens is really something we that have to watch on a daily basis and address.

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

Your next question is from the line of Steve O'Brien with JPMorgan.

Hi. Thanks for taking my question. This quarter, AT&T and Verizon both had pretty substantial CapEx increases. ACCG business was up 20% quarter-over-quarter. I guess WNS up 16%. Have you seen signs that the carriers have completed their 3G and 4G coverage plans maybe ahead of schedule for the year and maybe ratcheting back some of their spending as we move to the second half? And if you could comment specifically on products like antennas and RF equipment, if there are any differing trends there, that would be helpful.

You know what, Steve -- this is Eddie -- what they have said publicly is that they -- at least one of them has said publicly is that they plan to spend through the year as opposed to cyclically. That would be a good thing. I think we're seeing signs that that's happening. We have installs in place with one of the carriers where we're doing the whole tower for them, for their LTE applications. We saw a lot of strength in the quarter in amplifier sales to -- with one of our OEMs in test sites. We would expect those tests to progress through the third quarter, and then we would anticipate buying patterns to come back toward the second, toward the end of the year. That's what they say. And I have no reason to believe that is not the case. But we've seen no slowdown. The antennas are being ordered daily. From that standpoint, and I think their spending patterns are going to continue as they have publicly said, and nothing different than that.

Okay. Thanks for that. And then, if I could, on sort of the same note with the European carriers maintaining really low CapEx levels right now. Vodafone talking about having ample network capacity. Do you think data plans and WiFi femto off loads in North America or Europe are maybe limiting the network strains that you might have anticipated when you looked out at 2010 growth opportunities?

I think the growth, North America-wise, is consistent with I guess some of the things we heard. We see nothing that's really changed that. And I don't think the femtos have come online fast enough to make a big difference from what we see. They're buying sort of the same mix that they told us they would, and I think we're -- we're optimistic about what they say for the balance of the year. I think in Europe, I think it's more a function of the economy is challenged right now. And they are trying to figure out how to finance some of their smaller countries and with the bigger countries having challenges themselves. I think the whole economy is challenged. It is not just the wireless market.

Thanks a lot, Steve. We appreciate it. Operator, we will take the next question.

Your next question is from the line of George Notter with Jefferies.

Hi. Thanks very much, guys. I wanted to ask about your operating income guidance. Obviously 2010 I guess lower than 2009. What assumptions do you have built in there in terms of accruals for compensation? And memory serves, you guys were talking about $30 or $40 million in additional incentive comp for this year. Is that factored in there, or at some point, once you dial that back, given the new outlook?

Yes, I will take that, George. Yes, we do adjust that based on expectations for outlook, but yes, there is incentive compensation based into both, obviously, our current results and into our outlook guidance as well. Our incentive plans are performance based, and as various business units exceed or fall short of their goals, they do get adjusted. Of course, here at midyear we're estimating that as best we can. So yes, there is some adjustment for that. That is both in, obviously, our results as reported as well as into our outlook. And keep in mind what's extraordinary is that last year there was none.

There were zero amounts paid out in incentive. That would be a most extraordinary year based on purely performance, and, in fact, performance last year under our plans that time would not have indicated that -- a payout of that. So, we took some extraordinary measures last year because of the extraordinary situation that we felt that the economy, as well as our Company, was in, and decided that it was not a practice that was -- that should be continued into 2010, and restored the program. So that cost that you have is still a pretty good estimate of what that cost would be for the full year.

Got it. And just one quick follow-up. Just on India and China, how much did you say that is as a percentage of sales this quarter? I think each market in the past was up 5% to 7% of sales, but where are we now just as a benchmark?

India -- George, it's Phil. India is quite low, 2% for range on the wireless would be a big number. It was, as Eddie said, it was down well over 50% year-over-year.

Okay. And China?

It would probably be toward the low end of the ranges that we talked about. The 5% to 7%, 4% to 7%. Something like that.

Great. Thank you.

Your next question is from the line of Amitabh Passi with UBS.

Hi. Thank you. I had a clarification and then a question. The clarification, Eddie, on your commentary with respect to the North American wireless operators, did I interpret your comments correctly in that your expectation is that your business with them should be up subsequently in the third quarter? And I also wanted to clarify the $50 million for next-gen LTE spending. Was that all in 2Q, or is that cumulative for the first half? And then, my question is just around margins. I was hoping you could help me understand North America and EMEA were big contributors to the second quarter. I had assumed these were better margin businesses -- segments for you. Enterprise did well. So, just trying to understand why margins in Enterprise and ACCG also continued to sort of lag expectations.

I will answer some of those, and then Jearld can help on some of the rest. The greater-than-$50 million number that we said for LTE is entirely in the second quarter. So it's shipments in these three months. So it's, we think, is a reasonably good number for our business in the new technology. I don't know that I said sequentially if North America was going to be up or not. I don't believe I said that in Q3. We'll have to look at that.

I believe that on a sequential basis, all of our businesses were -- did show very nice sequential growth in operating income from the first quarter this year, as expected. And again, the issues that we've talked about, again, stubbornly high costs, if you will, and some slowdown in some markets that we were not able to address in the quarter I think were the primary reasons for lagging margin, if you will, based on the revenue growth that we were able to generate in the quarter. And Enterprise did grow strongest in the period, as you pointed out. And we did incur some higher investment, I will call it, related expense around marketing programs there, around R&D, and around sales commissions. I will add that aside from other incentives, but sales commissions based on the strong sales. So those things did have a little bit of muting effect to the operating performance leverage from the increased sales.

Were those onetime investments?

Well, if they continue at higher rates, we will see those investments, higher revenue rates, we will probably see those investments continue, at least the sales commission part of that, which is not really an investment but part of that program. Yes, I think they're at run rates that are going to be sustained and not one time in that nature.

Got it. Thank you guys.

Your next question is from the line of Will Power with Robert W. Baird.

Great. Thanks. Good afternoon. I wonder if you could comment on the impact of component shortages in the quarter on your various businesses? I know that is something some of the other vendors have alluded to. I guess just trying to get a sense for how much that might have impacted results, and maybe any color on how that might have trended through the quarter if it did have a meaningful impact.

It was probably at the top of our list on a daily basis. I think the OEMs or the customers we have probably all have talked about it. I know our end user carrier customers have, and it -- from our standpoint, it impacted us by millions of dollars of revenue. It's primarily integrated circuits. It was in our amplifier and Enterprise business. From the standpoint of where are we now, the Enterprise business has recovered okay, and I think is in decent shape. And in the case of amplifiers, we still have very long lead times versus what is the norm. And it's up to us to get a good forecasts from our customers to be able to support their need, to meet whatever demand they may have during the balance of the year. So, it's something that's -- maybe it is not as desperate as it was during the middle of this quarter, but it's situations where we and our customer base were both leveraging the suppliers to get into queue as best we could. And an enormous amount of time and money spent to expedite, to hold hands, and work with our supply base as well as our customer base. But it's not an abnormal thing in this business. It's just -- it was just more acute than as normal.

All right. Thanks.

Operator, I think we've got time for about two more questions.

Yes, sir. Your next question is from the line of Tony Kure with KeyBanc.

Good afternoon. Just wanted to get some color. We haven't touched on this topic yet. Do you expect any cost savings to materialize in the second half with the closure of the smaller facilities? I think it was Ohio and North Carolina. Could you start with that?

Those closures, Ohio, is progressing, and it would be -- this year would be a small savings, if any. Those things, although you do at one point in time, you end up with lease accruals and severance accruals and things like that. Most of the savings there would come during the balance -- during the early part of next year. In the case of the larger one in Omaha we've talked about, that's going to be a multi-year transition, and that revenue, I mean that cost savings would be realized in the back end of '11 and then '12 and thereafter.

Okay. Anything beyond the facility closures sort of are you looking at it from a cost-reduction standpoint?

We do that every day. One thing that we did do during this quarter was the sub supplier for aluminum tubing. We are now vertically integrated. That business decided to do something else, so we now have that as an ability to save costs. It happens to be co-located at our factory, so it is very, very easy to do. That will help in the Broadband business, maybe generate some small revenue outside the third parties. But we're looking, given, as Jearld had said, we are not happy with where we ended up in some businesses. We are looking under every rock. We will take whatever action is necessary.

Okay. Thank you.

Your final question is from the line of Shawn Harrison with Longbow Research.

Hi. Good evening. Two questions. The first, just going back to the margins at ACCG, wondering if you could talk about the decline in margins year-over-year on relatively similar sales. Is it similar to the factors that you enumerated earlier in terms of the sequential headwinds, or are there other factors at work on a year-over-year basis pressuring margins?

It's mainly the year-over-year. This is Phil, Shawn. It's mainly the return of incentive-based compensation in ACCG. That's one of the biggest items.

Okay. There is no significant mix factor involved in terms of the year-over-year variance? It's just incentive comp?

But there is always mix year-over-year, but the biggest one is the incentive comp.

Okay. And then my follow-up question is on the Broadband business. You mentioned some pricing pressure. Now, is that a competitor- initiated pricing pressure or is that customer-initiated pricing pressure that you're seeing in the market?

Yes. One feeds on the other, and so it's a lot of this -- these auctions are done with eAuctions. That generates a behavior. There's a lot of pressure from outside the United States with product coming in that generates a lot of pricing pressure. But we're addressing all of that. We have inventory management systems and a service model that the other -- our competitors don't have, and we're going to exercise that to its fullest.

Okay, thank you.

Thank you. And, operator, just one final thing to follow up on Amitabh's question. I think we do expect an ACCG in North America to continue to be very solid sales moving into the second half. And with that, Eddie, I don't know if you have any final --?

No. I think, we're -- we met our guidance, we believe, in the quarter. I think that's positive. We do see the second half being better overall than the first half was. This economy, it's up for certain parts of the United States. It's still not healthy, and it is a fight every day. We're well-positioned. We're happy with the products we have. And we look forward to competition going forward.

Thanks very much.

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