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Arris Dives on Q2 Warning

Shares of Arris Group Inc. (Nasdaq: ARRS) plunged 16 percent in after-hours trading Tuesday following a warning that second quarter revenues would miss the mark. (See Arris Lowers Guidance.)

Arris now anticipates second quarter revenues to be in the range of $278 million to $280 million, down from its original guidance of $288 million to $303 million. (See Arris Settles Down.)

The company also expects earnings per share to be at, or near, the lower end of the earlier guidance of between 4 cents and 8 cents per diluted share.

Arris chairman and CEO Bob Stanzione cited "maturing demand" for embedded multimedia terminal adapters (E-MTAs) (i.e. voice modems) as the main reason for the shortfall, though lower than expected sales of plant extension and installation gear also contributed to the expected miss.

"We're just looking at a weak economic environment and a maturing of the deployment of cable telephony," Stanzione said.

The vendor's share price had closed Tuesday at $8.90, but news of the shortfall sent its stock down by $1.40, about 15.7 percent, to $7.50 in after-hours trading.

The E-MTA situation is becoming a regular refrain at Arris. The company took a big hit in the fourth quarter after feeling the effect of Comcast Corp. (Nasdaq: CMCSA, CMCSK)'s selection of Thomson S.A. (NYSE: TMS; Euronext Paris: 18453) as the MSO's second source for the equipment. Before that, Arris had virtually all of Comcast's E-MTA business. (See Arris Slammed on Q4 and Arris Aims to Rebound .)

Arris, which expects second quarter gross margins to improve based on shipments of cable modem termination systems (CMTSs), says the E-MTA shortfall in the period had nothing to do with Comcast or any loss of market share.

In fact, E-MTA shipments to Comcast rose in the second quarter, Stanzione said during a Tuesday afternoon conference call with analysts and reporters. However, expected shipments to other customers in the quarter were delayed. "The demand [for E-MTAs] has leveled off somewhat, so we're looking at a macro situation," he noted.

Docsis 3.0 viewed as second half driver
Despite a second quarter shortfall, Arris is betting that shipments for its higher-margin Docsis 3.0 modems and cable modem termination system (CMTS) will pick up during the second half of 2008, citing a significant backlog for the equipment. Docsis 3.0 supports IPv6 and uses channel bonding techniques to produce shared Internet speeds in excess of 100 Mbit/s.

Stanzione said Arris began shipping Docsis 3.0 gear in June, but noted that revenues won't start flowing in until "customer acceptance" is achieved. Arris expects to post record CMTS shipments in the second quarter, "and that's without one penny of Docsis 3.0 revenue coming in," the CEO added.

Still, Arris has already announced that Comcast has selected its Docsis 3.0-qualified C4 CMTS for a portion of the MSO's rollout of Wideband Internet services. However, Comcast is using Cisco Systems Inc. (Nasdaq: CSCO) gear for its initial Docsis 3.0 deployment in Minneapolis and St. Paul, Minn. (See Comcast Buying Arris Docsis 3.0 Gear, Comcast Enters the Wideband Era , and Cisco, Arris & Casa Make the CableLabs Grade.)

Comcast and other operators will start to replace Docsis 2.0 modems with the new, faster modems, but "it's hard for us to precisely predict the timing," Stanzione acknowledged. "We'll have to wait and see what the uptake is for Docsis 3.0. I'm pretty optimistic about it," he added.

Arris will issue guidance for the third quarter when it releases second quarter results on July 30.

— Jeff Baumgartner, Site Editor, Cable Digital News

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