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Cable modem/CMTS

CMTS Upgrades Soften Arris Sales

A new software-based licensing approach to cable modem termination system (CMTS) upgrades did wonders for Arris Group Inc. (Nasdaq: ARRS)'s margins in the second quarter, but they also took a big bite out of revenues.

The second quarter marked the first financial period influenced by the approach, which lets MSOs add capacity on the fly using a new field-upgradable line card for Arris's flagship CMTS, the C4. Under that model, MSOs, for example, can double the downstream density of blades from 16 to 32 ports using a license key. Arris is developing a similar upgrade path for its upstream cards. (See Arris CMTS Blades Go Field-Upgradable.)

Its main CMTS rival, Cisco Systems Inc. (Nasdaq: CSCO), also offers MSOs a pay-as-you-grow upgrade option on CMTS ports. (See Cisco Pops Pay-As-You-Go CMTS Play.)

In the second quarter, Arris shipped 79,000 CMTS downstream ports, with a large portion of those covered by software licenses.

That helped gross margins reach 40.2 percent, up from 36.3 percent for the previous quarter, when Arris's hardware margins were stressed by Cisco's market aggression. But Arris missed on revenues, posting US$265.8 million, about $6 million less than analysts were expecting. (See Arris Beats the Street and Cisco Cuts Into Arris CMTS Margins.)

Arris expects a lower mix of CMTS software upgrades in what's expected to be a stronger third quarter for revenues. "North American customers are holding their capex as tight as they can, but we do think there may be some loosening up in the second half," Arris President and CEO Bob Stanzione told investors on Wednesday's earnings call.

Sharpening the next-gen edge
The card upgrades are coming ahead of Arris's next-generation product, the E6, a super-dense converged edge device that will likely conform to the specifications envisioned for the industry's Converged Cable Access Platform (CCAP). (See CMAP & CESAR Get the Urge to Converge and Comcast Reacts to CMAP, CESAR & CCAP.)

Arris has yet to show the E6 in public, but Stanzione says it will be used in a customer field trial by year-end. Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC), two key contributors to CCAP, are Arris's 10 percent-or-greater customers.

But Arris won't see the fruits of that labor for a while. The E6 fits into a "2013 deployment cycle," said Bruce McClelland, president of Arris's Broadband Communications Group.

— Jeff Baumgartner, Site Editor, Light Reading Cable

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