Arris Reports Ruckus-Raising Results

Just as Arris executives had hoped, Ruckus is raising quite a ruckus for their company so far. But their consumer premises equipment business is unexpectedly flagging, raising some concerns.

Capping off another three months of healthy growth, Arris Group Inc. (Nasdaq: ARRS) posted higher revenues and adjusted net income on a year-over-year basis in the first quarter, thanks in large part to surging sales for its new line of Ruckus enterprise networking products. The company's E-6000 CCAP platform, other cloud and networking products and international business also contributed to the improved figures, more than offsetting the markedly lower CPE sales.

Riding these unit sales gains, Arris reported that overall revenues rose to nearly $1.58 billion, up from $1.48 billion in the year-ago period. At the same time, adjusted net income climbed to $136.9 million, or 73 cents per diluted share, up from $78.1 million, or 40 cents per diluted share, a year earlier.

Although the company's relatively new enterprise division accounted for far less money than its older CPE and network & cloud units, it came in stronger than expected in the first quarter, which was the first full quarter since Arris closed its purchase of Ruckus Networks in December. The enterprise unit, which consists mainly of Ruckus networking products, generated nearly $170 million in sales, up from about $46 million in the previous quarter. (See Ruckus Gives Arris a Boost in Q4.)

Speaking on the company's earnings call late Tuesday, Arris executives credited the enterprise unit's strong performance to "better than expected results from both wired and wireless product lines." Among other things, they also cited the vendor's launch of a portfolio of Citizens Broadband Radio Service (CBRS) products in the winter quarter. Arris CEO Bruce McClelland noted that the unit is now conducting more than 20 technology and operational trials using the CBRS 3.5GHz band, a slice of shared spectrum that not only holds promise in the enterprise market, but that cable operators will likely tap for their mobile plans.

The Arris Network & Cloud division generated $538 million in sales, up 25% from $430 million a year ago. Company officials attributed much of the gain to surging sales for their E6000 converged cable access platform (CCAP), as cable operators rolling out DOCSIS 3.1 snapped up next-gen line cards that more than double the capacity of the chassis.

“We were a little surprised by the strength of the DOCSIS 3.1 capacity purchases this quarter as we'd expected some of this demand later in the year,” McClelland said.

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Even with the higher customer demand for D3.1 products, however, Arris saw its CPE revenues unexpectedly plunge in the quarter. The CPE unit, the largest of the company's three units, posted $875 million in sales, down about 15% from $1.05 billion a year ago as both broadband and video device sales fell.

Arris executives blamed the disappointing video CPE results on the general softness of the US pay-TV market, which has been contracting for several years now. They also blamed the unit's lower profit margins on continuing increases in memory costs for TV set-tops.

McClelland noted that "pressure on product cost has not abated, with memory prices continuing to increase and lead times and availability of other components becoming more challenging." He said Arris is now talking to customers about adjusting set-top prices to reflect the increased memory costs.

As for the decline in broadband CPE sales, Arris executives blamed that on typical "seasonality" in the business, as well as lower purchases of DOCSIS 3.0 modems and gateways as cable operators gear up for DOCSIS 3.1 upgrades. Terming that drop a "short-term blip," McClelland predicted that D3.1 devices will likely make up 30% to 40% of the company's cable broadband CPE sales by year's end, up from roughly 10% at the end of last year. He said company officials expect "momentum to return again this quarter as several new DOCSIS 3.1 products ramp up volume." As a result, he thinks that CPE revenues will reach the "billion dollar range" again this spring.

Arris said it expects second-quarter revenues to hit between $1.76 billion and $1.81 billion, reflecting the anticipated increase in CPE sales. For the full year, it sees revenues reaching $7.1 billion to $7.3 billion.

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

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