CommScope scapegoats Arris CEO for frail Q2

In an almost eerie series of events, just a fortnight after Faultline Online Reporter discussed how CommScope needed to reassess its product line after acquiring Arris earlier this year, the company posted poor second quarter results – triggering the plaintive departure of former Arris CEO Bruce McClelland.

McClelland’s abrupt exit, just six months since the $7 billion takeover completed, comes as CommScope CEO Eddie Edwards eliminated the COO position and absorbed the role himself, promising to turn the ship around following a disappointing second quarter net loss of $209.2 million.

The move is antagonistic on a number of fronts and an overhaul of the Arris side of the business is almost guaranteed, reaffirming our initial qualms over the acquisition that the Arris brand would be engulfed along with any remaining video technologies. These concerns have been quashed on numerous occasions by Arris and CommScope contacts throughout the year, yet under new ownership the Distributed Access Architecture (DAA) side of the Arris business has certainly been emphasized to complement CommScope’s core offerings.

What went so drastically wrong in Q2 to usher McClelland out the door in such hurried fashion? Declining cable operator spending was blamed for challenges facing the industry, although the inheritance of Arris boosted total net sales by 108.5% year on year to $2.6 billion – not the sign of a company in turmoil. Nevertheless, CommScope cited strategic plans to streamline the business, including the Ruckus wireless assets acquired by Arris, to further reduce costs and maximize cash flow. Read this as job cuts and phasing out product lines.

Arris contributed over half of total net sales with $1.4 billion. The CPE division saw net sales increase by 6% to $889.7 million as a result of higher sales volumes, partially offset by reductions in certain selling processes. On a regional basis, lower sales in Asia Pacific were offset by strong CPE performance in North America and EMEA. Operating income climbed healthily by 24.2% to $98.5 million, so clearly the CPE business isn’t the problem here.

Seemingly against the grain, the bad apple in CommScope’s second quarter was the Network and Cloud segment, where net sales decreased 36.7% to $347.7 million year on year. Lower cable operator spending was particularly visible in this segment, declining across North America, EMEA, Latin America and the Caribbean. Asia Pacific was the only area to increase Network and Cloud sales, but this was not enough to offset declines elsewhere.

Connectivity Solutions also took a blow in Q2. Net sales were down 9.4% to $670.9 million, declining in all territories, while Mobility Solutions saw a 6% spike to $529.4 million. Sales at the Ruckus business meanwhile decreased 9.7% to $151.4 million.

Edwards, rather unconvincingly, commented, “Looking ahead, the new CommScope is well positioned and ready to shape the future of communications connectivity. We remain confident in the long-term growth potential for CommScope and our ability to help solve our customers’ networking and connectivity challenges better than ever before.”

Canada contributed the largest year on year sales increase, surging 276% to $101.9 million, followed by the Caribbean and Latin America where sales increased 265.9% to $225.4 million. US net sales jumped 110% to $1.5 billion, while Europe increased 86% to $471.3 million and Asia Pacific sales were up 46% to $267.4 million. So, while total sales increased across the board by region, CommScope as a company requires some serious streamlining to boost the bottom line. Unfortunately for McClelland, his exodus is positioned as the start of this streamlining strategy.

Getting more technical, we should expect to see increasing cohesion between the respective CommScope and Arris product lines, particularly in the realm of DAA products for enabling 10G services. CommScope recently explained to Faultline Online Reporter that both newly launched DAA products come from the legacy Arris side of the house, with the 2×2 RD1322 R-PHY device unveiled a couple of weeks ago designed to add breadth to this existing portfolio.

This is tailored to the needs of operators who maintain a traditional segmented OSP architecture (in which each fiber optic node is followed by a cascade of amplifiers). Its current 1×1 RPD is tailored to its fiber deep nodes. This can support more deployment models in that the RPD can support “analog overlay” of video services in case operators still have analog video channels or are not yet ready to migrate their all-digital video system to a native R-PHY implementation.

Arris was quick to get in touch earlier this year when we suggested the company’s radio silence pre-Anga Com could be cause for concern following its takeover by CommScope. As we highlighted at the time, trepidation that an innovative vendor might drift off the Faultline radar after being snapped up by a company more averse to public appearances in our industry is only a natural feeling – so we were relieved to hear that Arris would have an even bigger presence post-acquisition with a double stand and a trio of core technology demos.

However, news of McClelland’s departure has resurfaced these concerns, although diving into CommScope’s report paints a more reassuring picture that the CPE business is not just here to stay, but thrive, along with newer DAA frontiers.