Arris Falls on Mixed Q2

Arris Group Inc. (Nasdaq: ARRS) shares dropped almost 10 percent Wednesday in after-hours trading when the Docsis gear supplier fell short of second-quarter expectations and teed up what's likely to be a weak third quarter marked by slower cable modem termination system (CMTS) shipments.

Second-quarter revenues of $280.4 million were flat, missing the $288.3 million expected by analysts, according to Thomson Reuters. Earnings dipped 14 percent, to $19.8 million, or 24 cents per share, a penny off Wall Street projections. (See Arris Issues Prelim Q2.)

The quarter and the company's near-term outlook offered a mixed bag.

On one hand, sales to Arris's largest customers -- Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC) -- rebounded in the quarter on a sequential basis, with the vendor getting a major share of TWC's Docsis 3.0 upgrade business for the year, according to Arris chairman and CEO Bob Stanzione.

The company's shipments of 41,000 CMTS downstream ports were the second highest in the company's history. But don't get too used to those numbers. Stanzione warned on Wednesday's earnings call that the company will see a short-term slowdown with D3 CMTS shipments as demand fails to keep up with historic levels. Stanzione is hopeful the deceleration will be a "temporary phenomenon."

But where CMTS shipments are getting lumpy and still strictly project-based, shipments of D3 consumer premises equipment (CPE) are starting to take off now that operators such as Comcast have a sizable portion of their network upgrades completed and are beginning to ratchet up the marketing of wideband services.

Arris said wideband devices made up 24.5 percent of the 1.4 million Docsis CPE units it shipped in the second quarter, up from 14 percent compared to the prior quarter. The math suggests that Arris shipped about 336,000 D3 CPE units in the second quarter. The company didn't break those down by type, but did note that embedded multimedia terminal adapters (EMTAs, or voice modems) are currently its fastest-growing type of wideband CPE.

"We see this trend continuing throughout the year," Stanzione said of the expected stronger demand for D3 CPE, a trend that's following the cable industry's initial wave of network rollouts.

Arris also shed some light on product plans in the long term. Stanzione said the company's first multimedia video gateway, based on technology originated from its Digeo acquisition, will be ready for field trials by the fourth quarter. (See Arris Crafting Its Own Video Sling and Digeo Gives Arris Multimedia Gateway Potential .)

And the vendor has apparently given a name to a product that fits within the specs Comcast has in mind for a super-dense, power-conscious box called Converged Multiservice Access Platform (CMAP) that will help it (and other MSOs) bridge the gap to IP.

Stanzione said Arris is developing a "converged edge router platform" called the E6 that offers a "leapfrog on capacity" that combines edge QAM and CMTS functionality -- exactly the kind of features Comcast has described for the CMAP. He didn't say when he expects the E6 to reach production. Comcast doesn't expect to start deploying CMAP gear until 2011 or 2012. (See Vendors Plan for Comcast's 'God' Box and More MSOs Back Comcast's Big Box Project .)

Looking ahead to the third quarter, Arris expects revenues in the range of $270 million to $290 million, lower than analyst expectations of $300.5 million.

— Jeff Baumgartner, Site Editor, Light Reading Cable

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