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Arris Starts Off Year Strong

Alan Breznick

A year after closing its big acquisition of Motorola Home, Arris is most definitely on a roll.

Picking up right where it left off at the end of last year, Arris Group Inc. (Nasdaq: ARRS) rang up higher than expected sales and earnings for the first quarter as its shipments of cable and IPTV set-top boxes, next-gen video gateways, wireless data gateways, next-gen Converged Cable Access Platform (CCAP) devices, and DOCSIS 3.0 cable modems all posted healthy increases. The Atlanta-based video and broadband equipment supplier reported nearly $1.23 billion in revenue and adjusted net income of $68.7 million, or 47 cents per diluted share, for the quarter, beating Wall Street's consensus estimates and earning continued showers of praise from analysts. (See Arris Rides Capex Wave in Q4.)

Arris also impressed analysts and investors by significantly raising its financial guidance for the second quarter, prompting its stock price to jump more than 10% in after-hours trading Tuesday following the release of its earnings report yesterday evening. With a record backlog of nearly $1 billion in product orders, the company now projects that it will produce revenues of $1.41 billion to $1.45 billion in Q2, well above the Wall Street consensus estimate of $1.21 billion.

"We're clearly off to a great start this year," Arris Chairman & CEO Bob Stanzione declared on the company's earnings call with analysts late Tuesday. "I believe 2014 is shaping up to be a very impressive year."

Riding a fresh wave of higher capital spending by its leading cable and telco customers and posting market-share gains against its competitors, Arris reported that its customer premises equipment (CPE) division enjoyed another very strong quarter, generating $893.6 million in revenue, up from $766 million in the year-ago period and $859 million in the fourth quarter. Unlike its biggest rival Cisco Systems Inc. (Nasdaq: CSCO), which has continued to slump on the video home equipment side, Arris reported that cable and IPTV set-top box shipments rose 11% on a year-over-year basis, primarily due to higher shipments of low-end digital transport adapters (DTAs) for cable operators.

But while DTAs accounted for most of the set-top box shipment gains, Arris reported that sales of the far more advanced video gateways also continued to climb in the winter quarter. For instance, Stanzione said the vendor continued to see healthy shipments of the XG1, a new, hybrid IP video gateway that Arris is now supplying to Comcast Corp. (Nasdaq: CMCSA, CMCSK) for the giant US MSO's rollout of its next-gen X1 platform.

On the broadband equipment side, Arris said unit volumes jumped 20% from the previous quarter as the company shipped more DOCSIS 3.0 modems, DOCSIS 3.0 wireless gateways, and advanced DSL gateways to its customers. In particular, Arris officials noted that they supplied the WiFi-enabled gateways for Time Warner Cable Inc. (NYSE: TWC)'s "TWC Maxx" system upgrades in New York and Los Angeles.

Turning to the access network side of the ledger, segment sales actually slipped to $331.6 million in Q1, down slightly from the results of the previous quarter and the year-ago period. But the numbers still came in better than expected as Arris reported steadily growing demand for its integrated CCAP device, known as the E6000. On the earnings call, Stanzione said the E6000's deployment base more than doubled to cover cable systems with over 5 million subscribers, as more MSOs installed the powerful, high-density, space-savings CCAP devices in their cable headends.

"We would have shipped more [E6000 devices] if not for supply constraints, which have now been addressed," Stanzione said. He estimated that Arris pushed back about $20 million to $30 million of E6000 product order to the second quarter due to the supply constraints and the heavier than expected demand.

The only real downside in the earnings report for Arris was that its international sales performance did not match its North American sales performance in the first quarter, leading to international contributing a smaller portion of revenues than in the fourth quarter. But Arris officials shrugged off this blemish, noting that international sales are already rebounding in the second quarter. "We see international bouncing back quickly in Q2 and going on from there," Stanzione said.

As usual, several of the biggest US MSOs and telcos generated a significant share of Arris' sales in the fourth quarter. But some of the names on that list of biggest customers changed.

Not surprisingly, Comcast led the way again with $203 million in order, or 16.5% of Arris' total, followed by Time Warner Cable with $159 million (13%). But then came two new entries -- Charter Communications Inc. with $137 million (11.2%) and AT&T Inc. (NYSE: T) with $134 million (11%). An old standby, Verizon Communications Inc. (NYSE: VZ), did not make the list of top customers due to its dwindling investment in FiOS network expansion.

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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