Arris: Media M&A Will Mar Q4 Results

Despite another blowout quarter for its business, Arris is not looking forward to a very bountiful fall.

In its third-quarter earnings release last week, Arris reported robust results as cable and telco equipment and software sales soared across the board, including set-top boxes, wireless data gateways, cable modems and cable modem termination systems (CMTSs). The company's quarterly revenue climbed to a record high of $1.4 billion, up 32% from a year earlier, and its adjusted net income rose to 81 cents per share, easily exceeding the forecast consensus of Wall Street analysts.

But, even with such rosy results, most of the earnings call focused on Arris' much gloomier outlook for the fourth quarter. Although the company previously warned that the fall quarter could be dicey, it still startled analysts with its weaker-than-expected financial guidance for the quarter as it anticipates slower capital spending by at least some of its major customers. Due to these restraints, Arris now envisions revenues in the fourth quarter declining to between $1.23 billion and $1.27 billion and earnings falling to a range of 58 cents to 63 cents per share, both below earlier projections.

Speaking on the call, Arris executives said they expect both revenues and earnings to slump in the fourth quarter because of the pending merger activity involving four of their largest customers -- Comcast Corp. (Nasdaq: CMCSA, CMCSK), Time Warner Cable Inc. (NYSE: TWC), AT&T Inc. (NYSE: T) and Charter Communications Inc. They also expect the telco sector in general to reduce spending in the fourth quarter, which is traditionally one of the weakest for suppliers like Arris. (See Arris Rides Capex Wave Again.)

"There is a major change coming in the business," said Arris Chairman & CEO Bob Stanzione. "I believe it will affect business. It's affecting business starting now."

Seeking to soften the unexpected blow, Stanzione asserted that the fourth quarter won't be a disaster for Arris and other suppliers. "It's not as if things are so terrible," he said. "It will be a down quarter but a healthy quarter."

Nevertheless, analysts, who have grown accustomed to cheering on Arris' strong results, peppered Stanzione and his chief lieutenants with questions about how long the capital spending slump would last and how the company might be affected. In response, Stanzione and his team sought to reassure analysts that the spending dip should be a temporary blip, lasting no more than a quarter or two. They acknowledged, though, that much depends on the unpredictable length of the regulatory reviews of the Comcast-Time Warner Cable deal and the AT&T-DirecTV deal.

"I don't think it'll extend past May," said Stanzione, noting that both deals are still expected to be approved and consummated by sometime next spring. But, he added, "it's a question of when those deals get done."

Arris executives also painted a bright picture of the post-merger world. They said they expect capital spending by the major telcos and MSOs to rebound sharply after all the dust has settled on the deals because of a new wave of network and technology upgrades for both industries and competitive pressures to roll out gigabit broadband service.

"Once we get past the capital restraints and M&A activity at the end of the year, I think we'll have a wonderful 2015," said Stanzione. He predicted "robust growth" beyond then.

For more of Light Reading's coverage of cable and video capital spending trends, visit our video hardware content channel.

Arris officials are particularly optimistic about the cable industry, their biggest customer sector. With cable operators across the globe now starting to roll out Converged Cable Access Platform (CCAP) technology en masse and preparing to deploy even newer DOCSIS 3.1 technology as early as next summer, they see a major new multi-year upgrade cycle getting underway for their main MSO customers.

"There will be a lot of [DOCSIS 3.1] activity in 2015," including product testing and infrastructure upgrades, said Bruce McClelland, president of Arris' Network & Cloud and Global Services division. "But we think 2016 is where we really see the volume."

Despite their anxieties over the projected fourth quarter decline, analysts appeared to buy the Arris argument in the end. For instance, once the call was over, both Raymond James and Network Alliance Securities maintained their favorable ratings of the company's stock

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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