Tom Stanton - Chief Executive Officer Roger Shannon - SVP and Chief Financial Officer.

Ashwin Kesireddy - JPMorgan Doug Clark - Goldman Sachs Paul Silverstein - Cowen and Company Michael Genovese - MKM Partners Simon Leopold - Raymond James Rich Valera - Needham and Company Greg Mesniaeff - Drexel Hamilton Bill Dezellem - Tieton Capital George Notter - Jefferies.

Ladies and gentlemen, thank you for standing by and welcome to ADTRAN's Second Quarter 2016 Earnings Release Conference Call. [Operator Instructions] After the speakers’ remarks, there will be question-and-answer period.

During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management's best judgment based on factors currently known.

However, these statements involve risks and uncertainties including the successful development and market acceptance of core products; the degree of competition in the market for such products; the product and channel mix, component cost and manufacturing efficiencies; and other risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2015 and Form 10-Q for the quarter ended March 31, 2016.

These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements, which may be made during the call. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of ADTRAN. Sir, please go ahead..

Thank you, Carolina. Good morning, everyone. Thank you for joining us for our second quarter 2016 conference call. With me this morning is Roger Shannon, Senior Vice President and Chief Financial Officer. I'd like to begin this morning by discussing the details behind our Q2 results and I will end with some comments on what we see for the future.

Roger will then discuss our Q2 performance in more detail and we will then open the call up for any questions you may have.

As we stated in our earlier press release, revenues for the quarter were $162.7 million, coming in as expected with a 14% quarter-over-quarter increase driven by a 12% increase in our network solutions business and a 32% increase in our services and support revenue.

Our total network solutions revenues including both international and domestic market came in at $138.5 million and total services and support revenue came in at $24.2 million. Revenues from our domestic markets came in strong at $133.6 million or 82% of the total and the international revenues were $29.1 million for the quarter, or 18% of the total.

On a year-over-year basis our domestic revenue rose 28% as we saw strong growth in GPON and 100 meg vectoring and continuing momentum in CAF II demand. These positive trends affected both our product and services revenues and we saw a solid year-over-year increase in our Tier 1 markets as well as our Tier 2 and 3 markets.

Our international business was up sequentially 12%, but as expected was down year-over-year. This quarter was additionally impacted by a delay in lab approval by a large Latin American carrier and our current expectation is that we will see that lab approval in later part of this year.

Moving down a little deeper, our access and aggregation category had a solid quarter growing 13% sequentially and 33% over the same period last year. Our customer devices category had a similar result with revenues up 22% over Q1 and 34% over the same period last year.

The growth in customer devices was across most product families including fiber ONTs and IP gateway.

From a technology perspective, during the quarter we began deployment of our XGS-PON platform, a technology that ADTRAN has pioneered and one which substantially changes the economics of 10 gigabit deployment for wireless backhaul and Business Services. In Q1, we continue to advance our SDN platform trial.

We believe we're the only access vendor with SDN controls, software modularity and application virtualization. Of course, being a full line vendor means our Mosaic solution is media and platform agnostic. Our trials now include two Tier 1 carriers.

G.fast continued to progress as well and we continue to grow our trial customer base by including two new Tier 1 international carriers. Our awarded business here in the U.S. continues to progress well through the integration cycle and we expect to see shipments in the first half of 2017.

The quarter also marked our first lab shipments of our new super vectoring product line. Looking forward, our focus remains on being the world's most comprehensive access solution provider.

With clear industry-leading solutions and fiber access, ultra high-speed copper solutions and the world's most complete access virtualization product, we believe we are well-positioned to capitalize on the evolution in access as carriers around the world upgrade their infrastructure to meet customer demand.

For the rest of 2016, we expect the trends in the U.S. market to continue as CAF progresses and bandwidth expansion continues.

I'll remind you that ADTRAN customers in total have accepted $9 billion in price cap carrier CAF II funding, and although we have yet to see a significant impact, we believe the enactment of CAF II rate of return carrier regulations, which provides over $11.5 billion in government support over 10 years to Tier 3 carriers, will be positive for ADTRAN.

I would now like Roger Shannon to review our results for the second quarter of 2016 and provide comments on the third quarter, as well. We will then open the call up for questions.

Roger?.

macro spending environment for carriers and enterprises; currency exchange rate movements; the variability of mix in revenue associated with project rollouts professional services activity levels, both domestic and international; the timing of revenue related to the Connect America Fund projects; the adoption rate of our broadband access platforms and inventory fluctuations in our distribution channels.

With that, I'll now turn the call back over to Tom..

Thanks very much, Roger. Carolina, at this point, we're ready to open it up for any questions people may have..

[Operator Instructions] We will go ahead and take our first question from Rod Hall with JPMorgan. Your line is open..

Yeah, hi. Thanks for taking my question. This is Ashwin on behalf of Rod. Tom, I was wondering if you could give any comment on your expectations for EMEA for the rest of the year and possibly into 2017. And also it would be great if you could elaborate on some of the factors that led to this delay at LatAm carrier..

Sure, I'll cover both of those. So in Europe, as you know, we have a large carrier there that drives the majority of the business today. I do want to touch a little bit on some of the other activity we have going on there, but that drives our business today.

We expect basically the level of business that we saw in Q2 to remain consistent, plus or minus a few million, but consistent through the end of the year. And our expectation is that we would see a pickup – we would see a material difference at this point is what they are telling us in 2017 versus 2016.

So kind of flat through the rest of this year and then a pickup towards – starting next year. In Latin America, flat out we just have lab delays. We have two different products that's going through there, one is a copper-based product set, one is a fiber-based product set, and they are just delayed at this point by about four months.

Our current expectation is to get them out of the lab, at least one of them out of the lab sometime in the third quarter, which means you would see, potentially see revenue in the fourth quarter. And the other one I'm less confident we will get out in the third quarter. But we expect to have it done by the end of the year..

That's great. Thank you very much..

Okay, sure..

And we will take our next question from Doug Clark with Goldman Sachs. Your line is open..

Great. Thanks for taking my question. So actually the follow-up on the international point. Last quarter you had talked about international revenues being roughly flat year-on-year.

Is that generally still the case? And to follow-on on your comments on the EMEA revenues being consistent through the end of the year, which would buck the normal seasonality that we've seen over the past two years. I'm wondering what gives you visibility that there wouldn't be kind of the seasonal decline in the second half..

Yes, so usual – so that customer that drives our European business is very good about – let's say typically good about forecasting. And they are also good about having a fairly consistent order pattern that matches that forecast.

But I will tell you our visibility with that customer is better than with most, so that is us really talking about kind of backlog. I will tell you the risk there is that they have from time to time moved orders, but that's not typical and at this point I don't have any reason to believe that that will happen this year.

I won’t tell you it can't happen, but I don't expect it to happen. And then as far as for the total year, the big issue that we have as far as the international – if you will recall what I had stressed is international, we at that point expected to be flattish, but we wanted to have some flexibility between regions.

And the reason I was looking for that flexibility is I was looking for either a potential uptick in our European base, and that had to do with just some activities, not necessarily with that large carrier.

Or I was looking for us to be able to break out of the lab in our Latin American, and neither one of those is significant – material enough for us to feel comfortable by saying flattish. We have now slid the Latin American customer outside – no longer – I would expect revenue to be down from last year's performance.

And then we would expect it to be up in 2017 as these things exit the lab and our European base just get stronger as well..

Okay. That makes sense. And then my follow-up question is on mix and gross margins. Notice that customer devices were particularly strong in the quarter. I'm wondering if that had any positive mix impact on gross margins.

And if you could also provide a little bit more detail into what exactly drove that strength? I know you said it was fairly broad-based, but is some of that sustainable, as well?.

You know, that's a really good question and I don't know the answer to that. There are pieces that we think are very much sustainable. So what drove that – it is broad-based – I mean, everything from switches to routers to IP gateways, we saw a positive trend. But that's a multichannel distribution distributed product.

And I just wouldn't at this point say that this is a trend that we can map. There are pieces into that, so our EFM solutions are part of that, which are, as you may be aware, are undergoing a rollout in different areas. I will tell you, for instance, that product affects our international business, our Latin American business.

We had business in Europe there. And we, of course, brought on a Tier 1 carrier in the U.S. that is just now beginning to roll that out. So we expect positive trends there, and that's our Ethernet solutions CPE. And then we also expect fiber-to-the-prem to continue to be a positive. We had a very good fiber-to-the-prem quarter both from an ONT and OLT.

So there are things within that bucket that are more definable that we would expect to grow for the foreseeable future and then there are other pieces that just ebb and flow with economics and with distribution channels and with competitive situation.

Did that answer that question for you?.

That did. Yes, thanks for taking my questions. I appreciate it, Tom..

Sure, no problem..

And we will take our next question from Paul Silverstein from Cowen and Company. Your line is open..

Paul?.

Just a follow-up on the marketing question.

What do you think is reasonable best case gross margin in the next 12 months to 18 months and over the longer term?.

So our target coming into the quarter was roughly 46%, 47%, and needless to say we exceeded that and we exceeded that with a fairly high services mix. But let me tell you what – if you drive into the numbers, we did have some product mix that was factored into that. So we just had some positive trends in what we actually shipped.

We, of course, had a better geographic mix. But probably the biggest impact was we also introduced some cost reduced products, both in our European customer base and in our U.S. customer base, which had a positive impact.

So we're not ready to say that our target has changed, even though we're kind of guiding higher than that, we are guiding higher than that target for the Q3, but I don't see any real negatives. We will have the shift – we will have a growth in our European business next year, which is liable to offset some of the margin that we see here in the U.S.

So I don't think we would change it, although, I would fully concede that it's – that we're going to be higher than that for a period of time..

Hey, Tom, I apologize.

Can you remind me what the long-term target is?.

The only thing that we stated is we expect to kind of get into the 47%-ish range and we expected that 47%-ish range to be this year.

We really haven't set a longer-term target and, to be real honest with you, it's – so we have multiple – really $100 million-plus deals that are out there, and depending on which ones we get when and which ones we ultimately prevail in, that will drive our gross margin. So it's really tough for me to forecast.

As you know, we have RFPs that we are at the tail end of in Europe and we have RFPs that we are at the tail end of in the U.S. and they are across multiple different product technology. So it depends on which ones of those come in. So I would say at this point we're comfortable kind of saying 47%-ish, say plus or minus a point and a half.

And I would probably just stick it there until we kind of see how things roll out into next year..

Got it. Two quick follow-ups.

Tom, when you talk about multiple $100 million opportunities, are you talking about five to six? Can you give some sense of how many such opportunities there are to be won?.

And the $100 million-plus, I would say – if you bring it down just a little bit, let me not get too granular on it just from competitive reasons. But you're in the ballpark, maybe slightly high, but you're in the ballpark..

I appreciate that. One last quick one. The huge jump up in services – if you already said this, we could take it off-line, probably because I'm traveling.

But that huge step-up sequentially, was that one particular project or was that split across multiple projects?.

It was multiple. So it was multiple customers and it included – as you know, we have some turf business that we secured last year. So it included turf business, it included CAF business, it included 100 mg vectoring business and it was across more than one customer..

I appreciate it. Thanks..

Great..

And we will take our next question from Michael Genovese with MKM Partners. Your line is open..

Thanks very much. I believe last quarter you gave us gross margins from products and services.

Did you give that this quarter?.

Did we? I don't - I don't believe we actually - we don't go down to that granularity. I don't know what we actually reported in our Q. .

I think it was in the Q, we did not report it on the call..

Let me do this. So let me go back and if it's something that we can report on the call, then we'll start doing that. But if you will, let us take it off-line and let us figure out what we want to do with that..

Okay, sure. And then on the revenue guide, I just thought the comment about better than typical seasonality is interesting because from my perspective you had a couple of tough years where things were not that good and you had some rough third quarters the last few years, but I don't consider that to be typical.

I look at the period before that and I see typical seasonality. I expect it to be up slightly sequentially. I just want to get your view on that..

Yes, so I will say as we - there were two big factors that have driven that seasonality. I think if you look at the three-year seasonality, the five-year seasonality and the one-year seasonality, they are all in the same direction. And what's driven that is two things.

One, as we've moved out of HDSL - if you go back eight years, HDSL drove our seasonal pattern and HDSL very much, you know Q1, Q2 growth, Q3 growth, Q4 decline. As we moved more into broadband business, we really started seeing Q1 and Q2 be really strong, Q3 would be flattish and then Q4 would be down.

And then you have now the international mix, which greatly exacerbated it because you really saw really strong first half and then starting to decline in Q3. So, I would agree with you that it's kind of - depending on the period of time you look at that you can get mixed messages.

I will tell you, our sense is right now we see more activity in the first half of the year than we do in the second half of the year, and we still see Q2/Q3, the revenue levels there flattish. You'll see bookings actually typically decline a little in Q3, especially as you get towards the end of Q3.

But you'll see total revenue levels to be flattish between Q2 and Q3 and that's pretty much across - now, regardless of the geography - although it may be exacerbated by what happens in euro..

And I would just add that we do tend to see services actually tick up a bit in Q4 as it starts the product will slow down some going into the year for weather. But the project is getting finished out with services. We've tended to see that tick up..

But that really - the total revenue pattern I think would still be consistent. We….

Got it. .

Q2 pretty flat, Q4 down. .

Very helpful. That was great color.

My final question is, basically would you expect CAF II-related solutions to be up sequentially in the third quarter? And, as you talk about that, can you give us some sense, I mean if there's 10 CAF II carriers, price cap carriers, how many of them are you seeing moving forward, how many are perhaps not as active as you would like to see yet? Any kind of color there would be helpful, thank you..

I'll say the big ones are moving forward. I would say not all of the big ones are in full stride yet. So let's say you take a look at the top half versus the bottom half, so not everybody is fully in. I'm not sure how - what other color to give you.

So, but get back to your revenues and really how it impacts us, right now from Q2 to Q3, our numbers kind of suggest this and if you take a look at what I just did about our European business, in international in general, we expect a flattish environment at this point.

Some of this has to do with, of course, just what we can get done because we do a lot of installation of some of - a lot of the CAF II and really other projects here in the U.S. But right now I think it's - I think the markets are reflective of the guidance that we gave..

Okay, so then on the first part of that question I asked is if CAF II solutions should be up sequentially, the answer is sort of flattish? Is that…?.

No, so - I was really talking about the US market in general. They are probably - depending on what we actually get done, I would expect CAF II direct shipments probably to be up. But that may be offset by some other projects that we have..

I appreciate all the detail. Thanks so much..

Okay, all right..

And we will take our next question from Simon Leopold with Raymond James. Your line is open..

Great. Thanks for taking my question. I wanted to circle back on international to try to get a better understanding of the dynamics and maybe a little bit of a historic perspective.

When I look back from the middle of 2013 through the middle of 2015, you generated roughly $60 million a quarter, on average, in international, certainly bouncing around with some seasonality. And in the last couple quarters, you're averaging about half of that.

Understanding there are currency issues that play here, can you help us understand some of the dynamics to compare that past period to the current trend, taking into account competitive aspects, customer project activity and currency?.

Yes, so you can take about - so of that decline, I think the rule of thumb is probably - and I'm not sure exactly where the $60 million was, but you can take about 25% - I'm going to give you rough numbers, but say 25% of typically the majority of that number. And you can take that right out of the currency exchange rate differential.

Then if you look at the net of that, it really depends on the quarter. So there were quarters where we have - we had stronger European mix.

But I think the net of your question is what's the competitive environment today versus what it was there and why do we think it's actually going to get better than what it is today? Are we going to get back to that performance level, if I kind of read into your question?.

Yes, yes. That's it. .

And the real answer is, we do believe from talking to our large European customer that we expect them to give us - to have better performance with us in 2017 than they did in 2016. There were competitive dynamics that factored into it. There are always competitive dynamics. I've told you before I can go in there and buy market share if I want to.

But if you don't actively buy market share, then they will build out what makes sense for them to build out in a particular time. And where they're building out today is a less, let's call it ADTRAN footprint and more of a different footprint.

And we fully expect - now they are still doing both, but the shift, it was a shift in that footprint that they are going back and repopulating with vectoring.

And they fully, we fully expect them and they are fully committed to us, to the extent that a carrier ever commits, that you will see them filling in the ADTRAN footprint more aggressively in 2017. We also have the dynamics of super vectoring coming into play sometime in 2017. I did mention we delivered our super vectoring solution.

So, where we are today, we're okay with where we are today..

Is there an aspect that your primary competitor in that market is under new ownership? Is the new owner or new management more rational in pricing than the prior management at your competitor? Is that part of what you're seeing, or you don't know?.

Yes, well we have three competitors in that market. So Huawei probably should talk about. We have a Chinese vendor and we have a European competitor in that market. And I don't think that the thing that you're talking about really impacted anything one way or another.

I do think that they make decisions through the years of what particular footprint - and everybody has some footprint, right? So they make particular decisions on where they are going to build out and upgrade.

And they will - those decisions ebb and flow, sometimes because of competitive natures and sometimes because they just need to build out a particular footprint. So the direct answer to your question is, no, I don't think that really impacted this particular situation..

And then very recently, BT provided some updates on its trial progress for G.fast and gave some metrics in terms of performance.

Can you talk about the performance of your product, particularly relative to competitors and maybe an update on how you see the progress from that, I'd say potential emerging customer?.

We still feel that's getting pretty granular, so as you know there's still a competitive situation going on. We feel as good as you can about where we are without having an award in our hand. So let me just leave it at that. We're actively working, actively doing things, active trial that's actively expanding.

We're feeling good about where we are, but we haven't won anything yet..

Okay, and then one last one, on the U.S.

Tier 1 where you've got a G.fast trial that we've talked about earlier this year, what's the timeline of when does that go into field trial and when would you be able to give an update in terms of actual live deployment? What's the schedule look like for that one?.

So what I said is first half of next year ….

For revenue or for trial?.

No, no, for revenue. We expect to be in rollout in the first half of next year..

So what's the timing of the field trials? Have those started yet or is that more of a fall event?.

I will get burnt so bear by anything I say more granularly than first half of next year that ….

Okay..

As you know, we have - sometimes you can get in trouble with that. So, I'm comfortable with first half of next year. As you can imagine our schedule is better than that, but I'm going to say first half of next year because schedules change..

Okay. Appreciate it. Thank you for taking my question..

Sure..

And we will take our next question from Rich Valera with Needham and Company. Your line is open..

Thank you. I was hoping you could comment on OpEx, which were a little higher than we had expected this quarter and it sounds like you're expecting them to remain at these levels through the balance of the year. But it sounds like some of those expenses could be transient, perhaps project-related expenses.

Can you give us a view of OpEx, perhaps into next year relative to the levels that we saw in the second quarter?.

Let me touch in and then, Roger, if you want to add anything to it. So we have - you are absolutely right, we expected a normal uptick in expenses because of higher revenue. There are components to our operating expenses that are directly tied to revenue and things like commission.

We did, this quarter, undertake some additional development, two additional pieces of work that were for very specific customers. As I mentioned before, there are some very large RFPs out there that, in order for us to secure those RFPs, we needed to do some things that were out of the box. And that's what we're doing.

They are finite, so they are not necessarily - they are not a bunch of full-time headcount that we've added. Some of this is contracted out, some of this is actually development that's going on with another company. And we expect those to close out, right around - now I'm going to - right around the end of this year, I believe, is the last.

Both of those the timing is very similar, but they are for two different customers..

That's right. .

Did that answer your question?.

So would that suggest we could model lower OpEx as we enter 2017 relative to your exit run rate for this year?.

Well, we don't give guidance that far, but I'll tell you, those will be gone and we are not adding a lot of headcount..

Fair enough. And just wondering, Tom, if you can give any incremental color on the second phase of CAF II, as you noted, it's sort of been formalized and enacted.

Can you give us any sense of what you're seeing from your customers there and any updated thoughts on the potential timing impact of that for you from a revenue perspective?.

Timing is, I don't know. I know that there were some real changes that were positive, right, so they increased the funding methodology so that you could have multiyear funding. They did some things that I thought were very positive, they allowed you to do upgrades from a 10.1 to 25.3.

They did things that I think a lot of the smaller carriers were looking for. But the reality is that we haven't seen that impact yet. That market itself actually did pretty good Q2. We actually saw growth on a year-over-year and a sequential basis, but I would not say it's broken out yet. I don't think that it's really hit its stride yet.

If it wasn't for the fact that this was the beginning of the year, I'd be more confident in saying we would hit the stride this year. But now we’re getting into the third quarter, we would expect actually Q3 to be a pretty good quarter for the Tier 3 market, Q4 would probably be down.

My expectation is we really would start seeing that impact in 2017..

And just to revisit your prior comments on that, so you do think that it will be incremental to the current business when that comes into effect in 2017?.

Yes, really good question. For price cap carriers, we've always felt that that was an incremental spend and I think we've actually seen that. Without a doubt we've seen that incremental spend.

For rate of return carriers, we've been more speculative because we've been more nervous about that because there is a USF fund right now that they are drawing money on that had the flexibility to allow them to do some of these network build-ons.

So the net answer to your question is, I think, yes, I think it will be pointed that way, but I don't think it will have the same incremental effect that we've seen with the Tier 2 carriers. .

Got it. That's helpful color. Thanks, gentlemen..

Thank you..

Now we will go ahead and take our next question from Greg Mesniaeff with Drexel Hamilton. Your line is open..

Yes, thank you. Good morning. I was wondering if you can give us some updates on any product refreshes for the TA5000? And I was specifically wondering if there was any backend work that needed to be done in integrating some of your SDN offerings with some of your legacy platforms? Thanks..

Yes, there is a lot of backend work. So the biggest thing that we've been working on in the access, which is the biggest part of - portion of R&D centers around two big things. We've gotten the vectoring piece behind us, we've gotten the super vectoring piece behind us.

We still do a material amount of R&D in that area, but it - those products are, by and large done. They've been rolled out in most of our product families. So we're comfortable with where we are there. And so the bigger piece of what we're doing is - centers around G.fast, which has got multiple generations to it.

A lot of interest across the world in the product and of course the larger the carrier the more they tend to want you to customize it for them. So there's a significant amount of R&D burden associated with G.fast.

And then we have multiple chip variations and we will see multiple standards implementations in that if the standard is matured and you're going to see a next-generation chip coming out, I think probably within - by the end of next year. So that's going to be an ongoing burden.

But it's a burden we're very happy to undertake, because of the interest level and the RFP activity. And, of course, we've got Tier 1s already that we've been selected for, so there's that piece. Right with it, if not slightly ahead of it, is the activity that we have going on in the fiber access business.

And in there we're not just talking about 2.5 gig standard GPON, the majority of the work we have going on is in our next generation GPON in GPON 2. And, as you know, as you may know there's activity, there's RFP level going on there.

And then XGS-PON, which I talked on our call, that we had our first actually shipping customer for that, which is, I think, fairly early on in the cycle. So those on the PON side, you have that as well as the multitudes of ONTs that you end up having to have in order to meet particular customer requirement.

And then the third leg, which is here again our very resource - takes a lot of resources, the whole software piece that you were talking about. And I mentioned that on my notes, because we believe that we have a real competitive advantage at this point and there is a good thing and a bad thing to it.

The good thing is, it's always better to be in the front than in the back. The bad thing to it is sometimes you will be ahead of where you see revenue, right? And without a doubt the customers that care the most about a software-defined controlled architecture in all of the application suites that we're bringing to bear are the larger carriers.

The good thing is, is we're in trial with at this point in time a couple of Tier 1s. The bad thing as I don't expect revenue near-term on it..

Got you. Got you.

Now when do you think there could be a meaningful positive impact to gross margin from the SDN offering? Is that way out in the future?.

Well, so let me step back - in the SDN architecture in its full glory, I wouldn't venture a guess, because I don't think it's something that is going to - it's not going to affect 2017. And we're not even giving 2017 guidance at this point. In doing the SDN architecture, though, it affected multiple product families.

So you mentioned the 3000, we are now offering a suite of applications associated with the 3000 management that give you substantially better customer experiences, gives you substantially better provisioning and turn-up time.

So there are things - there are elements out of that that are enhancing our product portfolio, but not necessarily in and of itself a software element. They just improve our competitive piece. The third piece is our G.fast architecture is very much centered around our SDN architecture.

So, our first real revenue from that is going to come out of our G.fast, not only the things that we're bidding, but the things that we've already won. But it will take time for them to be material to the overall margin profile of the business. That was a very long answer to not that long of the question, but I hope I covered the base..

Absolutely. Thanks for the color..

Okay, sure..

And we will take our next question from Bill Dezellem with Tieton Capital. Your line is open..

Thank you.

I'd like to touch on accounts receivable and the $20 million or so increase this quarter versus Q1 and maybe how that relates to linearity that you experienced in the quarter? And then tied into that, for the first half of the year, I believe that last year accounts receivable was up a couple million, whereas this year it was up more like 17 million, just trying to understand all the dynamics surrounding this, please..

Sure, and this is Roger. And that one is actually pretty simple. It has to do entirely with the timing of the shipments in the quarter. We had a very strong month of June. So compared to a situation where you would have a more linear spread over the quarter, we had a very strong June, which resulted in the AR balance being higher in the quarter..

And so if I carry that to other times that we have seen the last month of the quarter experiencing a fair amount of strength, often times that will then lead to the following quarter being quite strong because it's really part of a ramp.

And yet you've guided Q3 to be up, but not necessarily the same degree to which a very strong June might indicate it.

Does this give us some confidence that there may be some upside to your guidance, just depending on how things unfold?.

Well, yes, we probably wouldn't talk about upside or we'd have to rethink about our guidance.

But, so we would expect that, what should end up happening in the third quarter is you see a stronger July and what you're trying to forecast is what does the tail look like? So you'll see a stronger July, then we would expect a little bit less in August and then you would just see that normal downtick.

One of the things that drove our last month higher is we did have a higher services component mix and completion of services jobs. People tend to think about quarter boundaries where they put their line in the sand and this is our customers, as to when they want certain things done.

So that drives probably more of - as the services piece, and for whatever reason, by the way, service jobs tend to get done around that period. They are not as linear as you would hope. So, I wouldn't be surprised to see that continue as our service business continues to grow.

But I wouldn't read into stronger guidance for Q3 than what we've given because we're trying to forecast something that's three months out with very little visibility and we're really forecasting a tail. I would absolutely expect a stronger July, though, than the other two months..

Thank you, both..

Okay..

And we will take our last and final question from George Notter with Jefferies. Your line is open..

Hi. Thanks very much, guys. Just a quick modeling question from me, on other income, I think you said it was $1.6 million this quarter and I think it's down about $1 million, $1.5 million versus what we've seen in prior quarters.

If memory serves me, you guys had some equity investments in other businesses that you had been selling off I think over time that's been driving that other income line.

Is the number lower this quarter because that's now behind us and $1.6 million is the right run rate to model off of going forward or is there some other movement going on there? Thanks..

As we've talked about before, we typically don't talk about any particular investment. There's nothing that we're particularly out of in our investment portfolio. We, of course, as we bought back shares we do have a lower balance.

We do continue to look at what we have in, kind of on the margin in equities versus long-term bonds, which are fixed income, which are typically the majority of what we have in our portfolio. But, as you know George, we tend not to talk about any individual instruments or any individual percentage. But I don't know what else to say about it..

I guess the other piece of this is just is that the right level to model off of going forward?.

I think that's probably - that's not - we have seen fluctuation, it's been strong. I don't know if we gave particular guidance on it, but I would - that's probably not a bad model to look at or a bad level to be looking at. We won't know, of course, until the end of the quarter, but that's probably not a bad level..

Got it. Thanks. .

Okay. All right, with that, thanks everyone, for joining us on our call. And we look forward to talking to you next time..

And this concludes today's program. Thank you for your participation. You may now disconnect..