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Arris's $100M Opportunity

1:15 PM -- When it comes to the set-top box market, being the new guy is starting to pay off for Arris Group Inc. (Nasdaq: ARRS), which entered the fray in 2009 by putting up $20 million for Paul Allen's Digeo Inc. (See Arris Digs Digeo .)

That original investment could soon help the company drive an additional $100 million quarterly in sales thanks to wins with six still unnamed Tier 2 operators, Jefferies & Company Inc. analyst George Notter estimated in a recent research note that's bullish on Arris's gateway play. Those customers are in addition to BendBroadband and Shaw Communications Inc. , which are already deploying Arris's Moxi gateway products. (See Arris IDs Its First Video Gateway Customer .)

Notter's estimate is four times the $25 million in Moxi revenues Arris expects to pull in during the fourth quarter. Arris, meanwhile, already believes its gateways, which are capable of feeding in over-the-top content from sources like Netflix Inc. (Nasdaq: NFLX) alongside a cable operator's traditional video services, will represent at least 10 percent of 2012 revenues, which Notter expects to come in at about $1.31 million, better than his prior estimate of $1.2 billion.

Arris's 2012 gateway estimates are much more conservative than where Notter thinks that piece of the vendor's business is headed based on its current customer pipeline, putting the revenue opportunity for Arris at "several hundred dollars" per home. He also thinks Virgin Media Inc. (Nasdaq: VMED)'s early success with TiVo Inc. (Nasdaq: TIVO)-powered boxes (about 6 percent of customers have taken the product in its first quarter of availability) is an indicator of the kind of success Arris may get from its deployment with Shaw.

And Arris, which just rebranded its whole-home DVR products under the Moxi label, will be able to get more money in the door faster once early installation bottlenecks for the devices are cleared up.

But the analyst also likes that the gateways will give Arris a recurring, high-margin revenue stream because they require much more software than the other CPE gear in its portfolio, which include Docsis modems, data gateways and voice modems. He expects Arris's "portal" service to keep money flowing in the door even after Arris sells the boxes.

And the timing of Arris's set-top fortunes is interesting in that it's coming to life as Cisco Systems Inc. (Nasdaq: CSCO) and Motorola Mobility LLC have seen their set-top businesses struggle in recent quarters. And there are still many who see the set-top dying off as their functions become virtual as software that's embedded in connected devices like TVs and tablets. (See The Disappearing Set-Top .)

The form and function of the set-top is certainly changing, but Arris's solid execution of its Digeo acquisition so far seems to show that the box market still has plenty of runway left as MSOs make the push for IP video.

— Jeff Baumgartner, Site Editor, Light Reading Cable

Jeff Baumgartner 12/5/2012 | 4:49:13 PM
re: Arris's $100M Opportunity

While $100M won't put a huge dent in the US STB market, it would be quite a feat if Arris can to that point rapidly.  It's taken Pace years of toil to penetrate this market when it was extremely tough to crack. Cable's move to a hybrid IP infrastructure for video seems to be the key enabler here for Arris, and possibly for many others that want a crack at this market.  The door's not gaping open, but at least it appears to be unlocked. JB

cmmurrey 12/5/2012 | 4:49:12 PM
re: Arris's $100M Opportunity

Jeff,


Do you have any idea what the cable operators are paying on a monthly basis to set-top box providers like Arris and TiVo? Also, can you enlighten us on any more details from the analyst report (i.e., number of subscribers to reach $100M in quarterly sales)? That seems like it must be quite a few subscribers. 


Thanks,


~Sam

Jeff Baumgartner 12/5/2012 | 4:49:11 PM
re: Arris's $100M Opportunity

I haven't seen these numbers confirmed, but Notter has it at $275 for the TiVo/Virgin example. Notter did note that the per household number , though at "several" hundred dollars each on average (gateway + two Moxi mates, is a bit lower than his previous estimate of $500/household.


As his modeling goes, he's thinking 1.5 million subs at Shaw plus what the 6 other operators can help to get Arris headed toward that $100M number.  There's some wiggle room there because we don't know who they are yet. But he did compile a list of potentials that include sizable operators, including Charter and J:COM in Japan.


And here's some data on how he tied the Virgin Media/TiVo deployment to help establish a revenue model for Arris:


Virgin Media and TiVo…A Case Study for Shaw/ARRIS?  We note that Virgin Media (VMED, $24.25, Hold) has recently launched a campaign centered on a TiVo set top box with similar capabilities as ARRIS’ MOXI Gateway. The UK-based operator has been very successful in driving uptake of the set top box – after the first full quarter of TiVo availability, 6% of the subscriber base has adopted it. The company added 163k TiVo set top subscribers in Q3 and the rate increased to roughly 200k/quarter in the first 26 days of October. We believe the Virgin Media/TiVo example could prove a meaningful indicator for Shaw/ARRIS. If we scale the rate of Virgin Media’s TiVo subscriber additions (163k – 200k) to the size of Shaw’s Basic/Digital TV/Internet Subscriber base (45-60% the size of Virgin Media’s), we arrive at a Q4 shipment potential of 75k-125k (Chart 1 illustrates.) With an average revenue/home of roughly $275, we arrive at a Q4 revenue estimate right around $27.5m – in-line with ARRIS’ projection for $25 million plus in Q4. 

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