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Cable/Video

Arris Settles Down

Arris Group Inc. (Nasdaq: ARRS) posted in-line first quarter numbers Tuesday following a tough fourth quarter marked by slower revenues and a disappointing forecast impacted by Comcast Corp. (Nasdaq: CMCSA, CMCSK)'s decision to take on Thomson S.A. (NYSE: TMS; Euronext Paris: 18453) as a second supplier of embedded multimedia terminal adapters (E-MTAs). (See Arris Slammed on Q4 and Arris Aims to Rebound .)

Arris revenues from Comcast were down by approximately $62 million from the fourth quarter, factoring in what also came in via C-COR Inc., which Arris acquired late last year. (See Arris Sews Up C-COR.) "That [revenue decline at Comcast] was across all of the product categories, but particularly in the EMTAs," Arris chairman and CEO Bob Stanzione said during Tuesday afternoon's earnings call.

However, he expects business from Comcast "to bounce back nicely as the year goes on," particularly with Docsis 3.0 products. Comcast, which has already launched Docsis 3.0 services in the Minneapolis area (using Cisco Systems Inc. (Nasdaq: CSCO) equipment), plans to have up to 20 percent of its footprint wired for the new platform by year-end, but has not said how much of it is committed to Arris or other Docsis modem and cable modem termination system (CMTS) vendors. (See Comcast Enters the Wideband Era .)

"In general, our visibility on the 3.0 rollouts and ramp in the second half of the year has increased significantly," said Bruce McClelland, the president of Arris's broadband communications division, noting that operators are teeing up plenty of Docsis 3.0 activity for the second half of 2008.

Despite the decline in revenues with Comcast in the first quarter, Arris made up for it in part with record business in the quarter from two other major MSOs -- Time Warner Cable Inc. (NYSE: TWC) and Charter Communications Inc. . Sales to Time Warner Cable jumped to $71 million in the first quarter from $46.4 million a year ago, while sales to Charter grew to $29 million, versus $18.5 million. Those sales included a mix of CMTS gear, E-MTAs, video-on-demand equipment, and OSS products. "It was really across the board," Stanzione said.

Arris also improved internationally, with more than 30 percent, or $85 million, of revenues coming from outside the U.S., including a recent Docsis 3.0 deployment in Japan with iTSCOM, an operator serving roughly 1.1 million homes. (See Land of the Rising Speed.)

SDV: Is there an echo in here?
While Docsis 3.0 prospects remain rosy, Arris also repeated what some of its competitors have been saying about switched digital video (SDV) deployments -- that they are coming along slower than originally anticipated. (See Harmonic: Waiting on SDV.)

Because of that, Arris expects to have trouble hitting a run rate of $10 million to $15 million per quarter on the D5, a "universal" edge QAM designed to support multiple services, including SDV, video-on-demand, and, eventually, Docsis data traffic. That's "simply because of the redirection of the switched digital video programs at our largest customer," Stanzione, referring to Comcast. In February, Comcast outlined a plan to install SDV in up to 15 percent of its systems by year-end. (See Comcast Spreads the Love and Comcast Taps Arris for Edge QAM Initiative .) Comcast is expected to update its SDV plans when it reports first quarter results Thursday morning.

Financial update: Arris falls in line
In preliminary and unaudited first quarter results issued Tuesday, Arris posted revenues of $273.5 million, up $38.2 million, or 16 percent, from the year-ago period, attributing the gain primarily to the C-COR acquisition. Arris's first quarter revenues were on the lower end of revised guidance in the range of $270 million to $285 million. (See Arris Posts Q1.)

Arris notched GAAP net income of 4 cents per diluted share, versus 34 cents per diluted share in the first quarter of 2007. On a non-GAAP basis, net income was 12 cents per diluted share, versus 50 cents per diluted share. Arris was expecting non-GAAP net income per diluted share of 8 cents to 12 cents, so it hit the higher end of guidance.

Arris ended the quarter with $293.0 million of cash and short-term investments, versus $391.8 million at the end of the previous period. The change is partly due to the repurchase of 13 million shares for roughly $76 million. In February, the Arris board approved the repurchase of up to $100 million of common stock. (See Arris Repurchasing Shares.) In the quarter, Arris also redeemed $35 million of convertible debt originally issued by C-COR, and meted out roughly $12 million "to retire various acquisition liabilities."

Looking ahead, Arris expects to post second quarter revenues in the range of $288 million to $303 million, with GAAP net income per diluted share of 4 cents to 8 cents.

Friedman Billings Ramsey & Co. Inc. maintained its "Market Perform" rating and $9 price target on Arris. Its stock closed Tuesday at $7.01 each.

But should Comcast "return to a more normalized spending pattern and launch Docsis 3.0 aggressively, and if Arris can maintain its momentum among its other customers, we could see significant upside to our current expectations in [the second half of 2008] and beyond," analyst Brian Coyne said in a research note.

— Jeff Baumgartner, Site Editor, Cable Digital News

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