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Cable modem/CMTS

Cisco Cuts Into Arris CMTS Margins

Arris Group Inc. (Nasdaq: ARRS) shipped a record number of Docsis 3.0 downstream ports in the first quarter, but Cisco Systems Inc. (Nasdaq: CSCO)'s line of new, denser cable modem termination system (CMTS) line cards put the squeeze on margins.

Arris shipped 62,000 CMTS downstream ports in the first quarter, up 36 percent from the previous quarter, but revenues, at US$267.4 million, were flat compared with the year-ago period. The company's Broadband Communications Systems (BCS) division, which houses Arris's CMTS products, posted gross margins of 37.3 percent in the first quarter, down from 45.4 percent in the year-ago quarter.

Blame a lot of that on Cisco's 3G60, a modular CMTS line card that packs in 72 downstreams and 60 upstream ports, and its 20/20 card for integrated CMTS deployments. (See Cisco Aiming to One-Up Cable's Upstream , Cisco Reclaims CMTS Lead and Cisco Alters CMTS Vision With '20/20' Card .)

Arris is countering with a new field-upgradable CMTS line card for its flagship box, the C4, but the vendor "had to continue to adjust pricing to remain competitive" in the first quarter, company President and CEO Bob Stanzione said on Wednesday's earnings call. "We did not want to lose market share … so we had to forward price."

But Stanzione's confident that margins will improve in the second quarter as it begins to deliver a capacity upgrade that doubles the downstream density of existing CMTS linecards -- from 16 downstreams to 32. Arris said MSOs can use the new 7.4 software release to boost blade capacity without having to remove it from the C4 chassis.

Bruce McClelland, president of the BCS unit, said the field upgrade, enabled through a license key, applies to all CMTS cards the company has been shipping since mid-2008. Arris expects to release a similar feature later this year that will double CMTS blade upstream capacity.

But some analysts are skeptical. The company's "growth prospects remain very uncertain, particularly in light of the software-driven upgrade cycle and implicit CMTS price erosion currently facing the company," Jefferies & Co. Inc. Analyst George Notter wrote in a note issued this morning.

Looking ahead, Arris is still working on its next-gen CMTS, dubbed the E6 cable edge router -- a product that's expected to be its entry into the budding Converged Multiservice Access Platform (CMAP) market. Arris expects the E6 to reach lab trials later this year. (See Comcast Targets First CMAP Field Trial .)

Gateway growth
Although Arris's CMTS business is under assault, it's starting to gain some traction with a hybrid QAM/IP video gateway that is the result of its acquisition of Digeo Inc. The company said Tier 1 Canadian MSO Shaw Communications Inc. has signed on to buy some. BendBroadband of Oregon was the first announced customer for the product. (See Arris IDs Its First Video Gateway Customer .)

Arris has not realized any revenues for its new video gateway product, but McClelland said he expects 2011 sales for it to reach into the "tens of millions of dollars."

For more on Arris's gateway, including how it uses a workaround that lets the device support Netflix Inc. (Nasdaq: NFLX) streaming in the MSO-leased boxes, please check out this video interview with Arris VP of Service Provider Marketing Tom Williams:



— Jeff Baumgartner, Site Editor, Light Reading Cable



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