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Vendor notches big cable modem termination system sales in the second quarter, but Docsis-based CPE shipments are slowing down

Arris Pumps Up the Docsis 3.0 Volume

Jeff Baumgartner
LR Cable News Analysis
Jeff Baumgartner
7/31/2009
50%
50%

Cable's Docsis 3.0 deployments are still in the early innings, but the majority of Arris Group Inc. (Nasdaq: ARRS)'s cable modem termination system (CMTS) shipment hits in the second quarter were of the wideband variety. "Greater than 60 percent" of those CMTS shipments had that distinct Docsis 3.0 flavor, Bruce McClelland, president of the vendor's Broadband Communications Systems unit, noted during Thursday afternoon's second-quarter earnings call. Overall, CMTS-related revenues hit an all-time high at Arris in the second quarter, as the company shipped out 32,005 CMTS downstreams, 30,852 upstreams, and 314 CMTS chassis. That compares favorably to rival Motorola Inc. (NYSE: MOT), which shipped 15,103 downstream ports, 13,052 upstreams, and 222 CMTS chassis in the same period. CMTS sales also contributed to non-GAAP gross margins of 42.2 percent, well ahead of last quarter's 37.8 percent. And revenues in the category could rise further. "The Docsis 3.0 cycle is just beginning," claimed Arris CEO and chairman Bob Stanzione. Although CMTS sales were off the charts, thanks in large part to Comcast Corp. (Nasdaq: CMCSA, CMCSK)'s aggressive deployment strategy, the company came in shy of Wall Street's revenue expectations. Earnings, however, were a nickel better than analyst forecasts. (See Comcast: Wideband Build Is Nearly Half Done .) Table 1: Arris Q2

2Q08 2Q09 Change (%)
Revenues ($M) 281.1 278.5 -1%
EPS ($)* 0.15 0.27 80%
*Non-GAAP
Source: Arris


Table 2: Analyst Comparison
Analysts' Consensus Estimate 2Q09 Actual 2Q09
Revenues ($M) 281.00 278.50
EPS ($)* 0.22 0.27
*Non-GAAP
Source: Arris and Morgan Keegan


Although revenues were down year-on-year, Arris has boosted earnings without cutting expenses, Stanzione said, noting that R&D investment is up 5 percent versus last year. CPEs not keeping pace
However, the Docsis 3.0 story on the modem and embedded multimedia terminal adapter (EMTA, or integrated voice modem) wasn't as wonderful, as the vast majority of those product shipments remain of the Docsis 2.0 variety. That's something Broadcom Corp. (Nasdaq: BRCM), a leading Docsis chip maker, lamented late last week. (See Broadcom Anticipates Docsis 3.0 Push.) Overall, the consumer premises equipment (CPE) side of Arris's business was down 4 percent, as Arris shipped out 1.27 million Docsis devices, attributing the decline in part to the down economy. "EMTA sales are likely to continue to be challenged by wireless substitution and lower churn in the housing market," notes Jefferies & Company Inc. analyst George Notter. Earlier this week, Time Warner Cable Inc. (NYSE: TWC) confessed that "cord-cutting" is occurring in the voice service category. (See TWC Pinpoints Two WiMax Markets.) Stanzione said CPE remains a profitable business for Arris, and he expects growth to resume as the economy recovers and the product mix shifts to Docsis 3.0 and other "higher functionality" devices: "I see the Docsis 3.0 wave gaining momentum, with CPU volume picking up as the year goes on." Staying conservative
Those bright prospects caused analysts to wonder openly on the call why Arris offered up a cautious third-quarter revenue forecast of $260 million to $280 million, below Wall Street's expected $290 million. When pressed, Stanzione would only say that Arris is hesitant to provide aggressive guidance, "given the circumstance of the market." Arris, however, does expect EPS to be in the range of 22 cents to 26 cents in the third quarter, in line with the Street's forecast of 23 cents. Arris shares were down 42 cents (3.27%) to $12.44 each in early trading Friday. — Jeff Baumgartner, Site Editor, Cable Digital News

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