Did Arris Just Upend Cisco for Major Oz Deal?

Australia's NBN Co has taken a big step forward in its development of a nationwide high-speed network by concluding a deal with Arris for the rollout of hybrid fiber-coaxial (HFC) infrastructure. (See Arris Wins Major DOCSIS Deal at NBN Co.)

The agreement is hugely significant because of the vital role that HFC technology plays in NBN Co Ltd. 's plans. It also appears to represent a small but important victory for Arris Group Inc. (Nasdaq: ARRS) over networks giant Cisco Systems Inc. (Nasdaq: CSCO), which had been touted as the favorite during bidding for the work.

Under contracts finalized last year, state-backed NBN is taking control of broadband networks that are currently owned by Telstra Corp. Ltd. (ASX: TLS; NZK: TLS) and Optus Administration Pty. Ltd. , Australia's two biggest broadband operators. It will use these to support its development of a nationwide wholesale network on which Australia's broadband retailers -- including both Telstra and Optus -- will be able to rent capacity.

According to the business plan that NBN published in November last year, around 15% of Australian broadband customers rely on HFC technology, with 82% using copper-based DSL and the remaining 3% taking advantage of fiber services.

However, HFC figures prominently in NBN's rollout plans. By the time the operator has completed its network deployment, around 3.3 million Australian premises, or 27% of the total, will have been hooked up to HFC lines.

Table 1: Multi-Technology Mix

Technology Premises (M) Percentage of premises
FTTP 3.1 25%
FTTN 3.6 29%
FTTdp/B 1.4 11%
HFC 3.3 27%
FTTN (remote footprint) <0.1 <0.1%
Fixed wireless 0.6 5%
Satellite 0.4 3%
Total 12.4 100%
Source: NBN Co

News of the NBN contract win came several days after Arris promised investors that it would soon unveil details of a "significant" cable deal with an Asia-Pacific operator. (See Arris Running Into Headwinds.)

Besides rolling out new infrastructure, Arris will work on upgrading the legacy HFC networks to the latest DOCSIS 3.0 standard. It will also ensure that NBN can upgrade its HFC networks to DOCSIS 3.1 -- an even higher-speed technology -- as and when it becomes available later this year.

A number of international cable operators have indicated they expect to begin rolling out DOCSIS 3.1 services later this year.

Refusing to divulge the financial terms of the deal, Arris said in a company statement that building on existing networks would lead to major cost-savings for Australian taxpayers compared with using alternative broadband technologies.

A company spokesperson indicated that deployment was scheduled for late 2015 and would primarily target metro areas, including Sydney, Melbourne, Brisbane, Adelaide, Perth and parts of the Gold Coast.

The rollout of Gigabit broadband access networks is spreading. Find out what's happening where in our dedicated Gigabit Cities content channel here on Light Reading.

Arris appears to have beaten off competition for the NBN contract from Cisco, which had been regarded as the leading contender for the HFC business, according to reports in the Australian press.

Commenting on the deal, Raymond James Equity Research estimated its value in US dollars was "double digit millions," noting that Arris has been looking to international markets for growth. "We could see this playing into its acquisition strategy," said Simon Leopold, an analyst with Raymond James, in a research note.

Speaking to analysts during the company's recent earnings call for the fourth (October-to-December) quarter, Arris CEO Bob Stanzione said he was on the lookout for M&A opportunities "across the board."

Arris saw revenues in the fourth quarter grow by 5.4%, to $1.26 billion, compared with the same period of 2013, although it has admitted that price reductions will probably reduce sales -- on a sequential basis -- to between $1.2 billion and $1.24 billion in the first quarter of 2015.

Stanzione has emphasized that Arris is determined to build market share by slashing prices. "We see a lot of business up for grabs right now and we're out there looking to win it," he said during the fourth-quarter earnings call (see this Seeking Alpha transcript). "We think we can be more cost competitive than anyone else and so we'll work very hard to reduce the cost and improve the margins in these products. Right now we're being aggressive out there in the marketplace."

The NBN was conceived as a way of equipping Australia with a state-of-the-art broadband network while ensuring competition would not suffer.

Australia's current government aims to provide services of at least 50 Mbit/s to 90% of premises in the country and to guarantee the remainder connection speeds of at least 25 Mbit/s.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

R Clark 2/24/2015 | 12:47:15 AM
Re: Valuation NBN numbers are notoriously rubbery but <$100 million seems a little low for an upgrade covering 3m homes.
iainmorris 2/23/2015 | 1:20:32 PM
Valuation There is clearly a huge gap between the valuation figure cited in some press reports (A$400 million) and the "double digit millions" from Raymond James. Thoughts?
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