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Arris Braced for Continuing M&A Headwinds

Alan Breznick
4/30/2015

Jolted by the breakup of the planned marriage of Comcast and Time Warner Cable last week, Arris now expects the "near-term headwinds" of early 2015 to go on longer than before.

Speaking on the company's first-quarter earnings call Wednesday evening after a flurry of major deals earlier this month, Arris Group Inc. (Nasdaq: ARRS) Chairman and CEO Bob Stanzione told financial analysts that he still expects business to pick up sometime later this year after a sluggish start. But, sounding more restrained than he did on the last quarterly earnings call two months ago, he noted that the breakup of the deal between Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC), two of Arris's biggest customers, will put a damper on their capital spending plans for longer than he expected.

"The news is just so new that it's hard for us to say what we expect to have happen," he said. "We've not had a chance to sit down with Comcast and Time Warner Cable and work out what we're going to do for the rest of the year."

With Arris's first-quarter revenues down just slightly on a year-over-year basis, Stanzione stressed that the two largest US cable operators continue to spend heavily on new cable modems, set-top boxes, gateways and other equipment and network elements. But what is not happening is the healthy increase in capital spending that Arris officials were counting on once the two companies combined forces.

"They certainly haven't gone to sleep," he said. "It's not so much a depressed level of business, it's that's we expected a boost in spending once the deal was done as they re-aligned their networks."

At the same time, capital spending by another prime Arris customer, AT&T Inc. (NYSE: T), also remains sluggish. Stanzione said AT&T continues to hold back on spending as it seeks to gain federal regulatory approval of its proposed acquisition of DirecTV Group Inc. (NYSE: DTV). "I think AT&T is now waiting for their deal to clear," he said.

Yet, even in the face of these issues and a strong US dollar that's "putting pressure on international customers," Arris executives still expect to see some revenue growth this year. They cite such strong business drivers as the increasing expansion of Gigabit services, the rapid growth of the OTT video market, the rising deployment of next-gen video services and equipment and the promising opportunities in the international market, particularly Latin America.

"As we indicated on our previous earnings call, we've seen overall spending levels down from prior periods, primarily due to the distractions and uncertainties associated with industry dynamics," Stanzione said. "And certainly the news in the last few days may extend that uncertainty. However, we feel great about our position in the market. We're going through a period of change that is having what we feel is a temporary effect on our business and we feel confident that the underlying trends and our strong positioning bode well for the future."

Fresh off their $135 million pact with Charter Communications Inc. to buy ActiveVideo and its much bigger $2.1 billion agreement to acquire Pace Micro Technology , Arris officials said both deals will boost their company's scale and capabilities. In particular, they expect the Pace deal, slated to close in the second half of the year, to pay big dividends by increasing the company's scale, enhancing its international presence, providing a large entry into the satellite TV market, broadening its product portfolio and enabling greater investment in new technologies. (See Arris, Charter Nab ActiveVideo for $135M and Arris to Acquire Pace for $2.1B.)

For the first quarter, Arris reported revenues of slightly over $1.2 billion, down about 1% from a year ago and 4% from the last quarter but in line with Wall Street's expectations. Adjusted net income slipped to 44 cents per diluted share, down from 47 cents per share in the year-earlier quarter, also in line with the market's expectations.

The company's standout products for the quarter included its E6000 Cable Converged Access Platform (CCAP) chassis, which saw sales jump 41% on a year-over-year basis as the company shipped more than 700 devices to customers. It was also a big period for the company's video gateways, which surpassed 4 million unit shipments in the quarter.

In another highlight, Arris said it participated in several DOCSIS 3.1 interop events at CableLabs during the quarter and expects to start lab and field trials of D3.1 equipment later this year.

Looking forward, Arris expects sales to climb to somewhere between $1.27 billion to $1.31 billion in the second quarter as it closes the ActiveVideo deal with Charter. It expects non-GAAP income to reach 53 cents to 58 cents per share.

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

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