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Arris: We're Tackling the Tariffs

Jeff Baumgartner
10/17/2018
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Arris acknowledged that new US tariffs on China goods are imposing more costs on broadband devices and infrastructure gear, but that it is moving rapidly to mitigate the financial effects.

Those moves by Arris Group Inc. (Nasdaq: ARRS) include deals with customers that will absorb most of the current tariff costs alongside a plan to move more of the company's device production and supply chain out of China.

Arris announced its updated plan a day after Raymond James Financial Inc. (NYSE: RJF) downgraded Arris from "Strong Buy" to "Outperform" over concerns that the company would have to "absorb at least a portion" of new US tariffs that are at 10% today, and slated to rise to 25% in 2019. (See Arris Downgraded on Cable Modem Tariff Worries.)

"The China Tariffs impose additional costs on broadband devices and infrastructure equipment, ultimately taxing US businesses and consumers and increasing the cost of providing competitive internet services," an Arris spokesperson said in a statement to Light Reading. "The only viable long term solution to the issue is to move production and supply chain for these devices and equipment outside of China. ARRIS is working aggressively with our partners and suppliers to make these changes as quickly as possible, and expect to be complete in 1H19."


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Arris didn't elaborate on how it would execute those changes. Earlier this year, Arris sold a manufacturing facility in Taiwan to long-time partner, Pegatron Corp., and, as a result, announced it would transition production of consumer premises equipment to Pegatron's Suzhou site in China by the end of 2018. Arris, however, said it would retain technology and development operations in Taiwan, which included operations that it obtained from its acquisition of Ruckus Wireless. At the time, Arris said the sale tied into a supply chain strategy that would involve "key partners" and "simplify its manufacturing footprint."

In the short term, Arris conceded that it has been forced to implement price adjustments to offset the increased tariff costs, particularly on lower-margin products. Additionally, Arris said it has "reached agreement with customers to address a majority of the current tariff costs in 2018."

Update: According to an 8-K filing, Arris said it has reached agreements with customers to address "in excess of 80%" of the roughly $30 million in tariff costs expected to be incurred in 2018.

That changes the picture a bit, as Raymond James indicated that its checks showed that operators expected to hold Arris to price agreements negotiated prior to the tariff introduction.

Managing those tariffs costs are a big deal to Arris, as about 25% of sales are tied to broadband modems, and the tariffs are expected to be a long-lasting problem. The tariffs apply to broadband modems and gateways and certain networking infrastructure equipment, but not to set-tops and other consumer gear such as smart watches and connected speakers.

Arris added that it is continuing its "education and advocacy meetings" with the US government and coordinating with customers, industry consortiums and other "aligned partners" tied to the tariffs issue.

— Jeff Baumgartner, Senior Editor, Light Reading

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Jeff Baumgartner
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Jeff Baumgartner,
User Rank: Light Sabre
10/17/2018 | 5:14:37 PM
Analyst sees some purchases being deferred to 2H19
With Arris making its new disclosures, Raymond James sent a note out today maintaining the "Outperform" rating on Arris, but moved the target to $34 from $29 on the improved outlook, though it feels "our estimates were conservative."

And while it appears that Arris was successful in negotiating to offset most of the 10% burden of for the current tariffs, it also believes that passing the coming 25% tariff will be hard and expects US customers to defer some broadband purchases to the second half of 2019. 

Arris's announcement "does not address ARRIS' ability to pass tariff costs in 2019, which step up to 25%; we believe customers will resist absorbing this expense."

So the picture has improved, but it's still not great. JB 

 
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