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CommScope Eliminates COO Slot as Arris Biz Struggles

Jeff Baumgartner
8/8/2019
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Amid struggles at the Arris business acquired just four months ago, CommScope announced a major executive change Thursday as it eliminated the chief operating officer role and moved to disseminate those duties to company President and CEO Eddie Edwards and other top execs.

As a result, Bruce McClelland, who took the COO slot at CommScope when the deal closed in April, has left the company. A long-time Arris exec, McClelland was CEO of Arris prior to the merger with CommScope. The move is somewhat of a surprise, considering that some analysts and industry observers viewed McClelland as a potential successor to Edwards back when the merger was announced last November.

Update: The unexpected elimination of the COO job and the exit of McClelland adds risk and "raises a cautionary flag," Simon Leopold, analyst at Raymond James, said in an emailed research note following CommScope's Q2 results.

"The Arris acquisition appears worse than we previously thought, with the vCCAP [virtual converged cable access platform] transition as the unexpected headwind," Leopold wrote. "We can appreciate the possible frustration CommScope management might feel, but we do not understand how this action helps."

"This decision to flatten our leadership structure expands accountability," Edwards said on CommScope's Q2 call Thursday morning. "With the board's full support, I'm taking a more active day-to-day operational role in leading our company through these challenging times."

Tough times at Arris
A sizable portion of those challenging times have fallen on Arris, which has seen its consumer premises equipment (CPE) and network and cloud divisions ride rough seas so far in 2019.

Arris Q2 CPE segment sales declined 9%, to $890 million, driven by a broadband product shipment decline of 36% as the company continued to recover from the shift of production out of China to sidestep the financial impact of US-China tariffs.

"Now that non-China production has ramped, we anticipate our broadband device volumes to return to more typical levels in the third quarter," Alex Pease, CommScope EVP and CFO, said.

Those struggles also extend to Arris's Network & Cloud unit, which saw Q2 sales decline 37% year-over-year to $344 million. That part of the business is wrestling with an expected temporary slowdown in cable operator spending as MSOs continue to mull new virtualized and distributed forms of their access architectures. Of note, a key rival, Harmonic, has been making waves with CableOS, its virialized converged cable access platform (CCAP), with Comcast, one of Arris's top customers, and with other cable operators around the globe.

The Ruckus Networks unit, focused on areas such as WiFi and IoT tech and emerging CBRS-related opportunities, also didn't come out of the quarter unscathed, as year-over-year sales dropped 10% to $151 million.

Pease said CommScope expects the Arris segment to fight more headwinds in the second half of 2019. He said CommScope officials now believe it will be "very challenging" for the company to meet its first-year financial targets for the Arris transaction.

But Pease stressed that a rebound for the Arris segment is in store for 2020, believing that the company will play a major role as cable pivots to distributed access architectures and as network spending shifts to the node, where Arris remains strong.

"We believe we are very well positioned to take advantage of the structural shift that's going on in the market," Pease said, calling the situation a "transitory pause" for Arris driven by multiple factors, including M&A activity in Europe and slower capital spending by MSOs, particularly in North America. "The fundamental drivers are unchanged -- subscriber growth, bandwidth demand growth and the need for lower latency and the importance of the consumer and the Internet of Things in the home."

CommScope/Arris expects to be in the market with a virtual CCAP of its own by the end of 2019, company EVP and CTO Morgan Kurk said.

'Bench strength' questioned
Still, the recent departure of seasoned vets such as McClelland and Dan Whalen, the former head of Arris's Network & Cloud unit, prompted an analyst to ask if CommScope believes it has the "bench strength" to move forward and be successful with the recently acquired Arris assets.

Predictably, CommScope believes it will be just fine. "We have very competent people in both sides of the company that have the ability to move up," Edwards said, noting that the aim is to get "some back and forth between the two."

Kevin Keefe, who joined Arris in 2013 following the acquisition of Motorola Home, succeeded Whalen in May. Keefe is a "highly capable person," Edwards said.

Dish 5G hopes
Edwards said CommScope is hopeful that it will play a significant role at Dish Network as it moves ahead with plans to build out a 5G network and other actions that will enter play based on agreements and commitments tied to the still-pending T-Mobile/Sprint deal.

"We assume it's going to happen," Edwards said of the deal and the associated tie-ins with Dish. CommScope, he said, has a decades-long relationship with Dish and hopes the vendor can be a "meaningful provider" to Dish as it pursues a new virtualized wireless/mobile network that could open the door to a wide range of suppliers.

More numbers
Overall, Q2 net sales at CommScope, which include Arris's contribution, rose 107% to $2.57 billion, in line with company expectations. CommScope also swung to a net loss of $334 million ($1.81 per basic) share, compared to year-ago net income of $65.9 million (34 cents per diluted share).

CommScope's mobility-focused sales rose 6%, to $529.4 million, thanks to higher sales volume and greater demand in North America.

Looking ahead, CommScope expects Q3 revenues of $2.3 billion to $2.5 billion, with a loss per share of 81 cents to 85 cents.

Shares in CommScope were up 65 cents (5.04%) to $13.55 in Thursday morning trading.

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— Jeff Baumgartner, Senior Editor, Light Reading

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