Arris Expects Less From Comcast in 2010

The Comcast Corp. (Nasdaq: CMCSA, CMCSK) account will still be a big breadwinner for Arris Group Inc. (Nasdaq: ARRS) in 2010, but not at the same levels as in 2009.

"We expect Comcast sales to be down this year, while the large capacity augmentations done over the past 18 months are being consumed by growing volumes of traffic," Arris president and CEO Bob Stanzione said on Wednesday afternoon's fourth-quarter earnings call.

The news is not unexpected. Comcast, which has leaned heavily on Arris cable modem termination system (CMTS) gear for its aggressive Docsis 3.0 rollout, expects to complete its wideband network upgrade in the early part of this year. However, Arris believes Comcast and other MSOs will still have to add capacity 18 to 24 months after initial upgrades as that additional bandwidth gets exhausted. (See Comcast to Wrap Wideband, All-Digital Rollout This Year.)

Arris isn't saying how much less it expects to get from Comcast this year. In 2009, Comcast, still Arris's largest customer, contributed $353.7 million, versus $300.9 million in 2008.

Stanzione, however, was confident that "sales to other customers [will] more than make up for the difference as the Docsis 3.0 wave spreads across the globe."

Some of that should come by way of Time Warner Cable Inc. (NYSE: TWC), Arris's other customer representing more than 10 percent of revenues. TWC, which contributed $230.2 million to Arris last year, is in the process of expanding its Docsis 3.0 network upgrades beyond New York City and is expected to use equipment from Arris and Cisco Systems Inc. (Nasdaq: CSCO) to make it happen.

Stanzione said TWC's revenue contribution in the fourth quarter ($82.3 million versus $45.3 million in the year-ago period) was the best in Arris's history with the account, due to Docsis 3.0 deployments and purchases of the vendor's WorkAssure workforce management system.

Blow-out Q4, but slow Q1 under way
Although sales to Comcast were down in the fourth quarter ($89.8 million, versus $119.1 million a year ago), Arris still managed its best-ever quarter, pulling in $300 million versus $275.8 million a year ago, bettering Wall Street's expected $292 million. Non-GAAP net income was 32 cents per diluted share, up from 25 cents. (See Arris Posts Q4.)

Arris had upped its fourth-quarter forecast in January, attributing the surge to a run on CMTS inventory late in the year. (See Arris Swirls With MSO 'Budget Flush'.)

Even so, shipments of Docsis consumer premises equipment (CPE) continued to weaken. Arris shipped 1.16 million Docsis CPEs in the quarter, well off the 1.57 million shipped in the year-ago period, attributing the gap to the bad economy.

And Docsis 3.0 still isn't contributing much to the CPE mix. Arris estimates that less than 10 percent of fourth-quarter modem shipments were of the wideband variety.

Arris expects to get off to a routinely slow start in the first quarter, due in part to slower CMTS sales, forecasting revenues of $253 million to $273 million, and GAAP earnings per share of 10 cents to 14 cents.

"We're off to a seasonally slow but normal start, but we have strong indications that the business will gain momentum as the year goes on," Stanzione said.

But not everyone shares Stanzione's enthusiasm. Arris's weak first-quarter guidance "reinforces our concern that the company's recently strong results are not sustainable (particularly on profitability)," Jefferies & Company Inc. analyst George Notter said in a research note this morning. "We continue to believe that Arris's margins will come under pressure as Comcast wraps up its initial Docsis 3.0 rollout and the pace of 3.0 software upgrades subsides."

— Jeff Baumgartner, Site Editor, Light Reading Cable

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