Slumping Video Sales Hurt Arris Results

In yet another sign that the traditional pay-TV business is eroding, Arris reported slumping sales for set-top boxes, video gateways and other video equipment in the second quarter.

Arris Group Inc. (Nasdaq: ARRS) said video customer premises equipment (CPE) shipments to both cable operators and telcos dropped markedly in the quarter that ended June 30, both on a sequential basis and a year-over-year basis. Telco unit shipments fell 17% from the first quarter and 9% from the year-ago period as Arris's two biggest phone customers, AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), endured marked slowdowns in pay-TV subscriber growth. Similarly, cable unit shipments slid 7% from first-quarter levels and 17% from record highs a year earlier as several of Arris's largest cable customers pulled back for various reasons.

Arris did make progress on the video front in other ways, successfully qualifying its new XG1v3 IP video gateway for Comcast Corp. (Nasdaq: CMCSA, CMCSK) and starting volume shipments of the box. The vendor also teamed with a former rival, TiVo Inc. (Nasdaq: TIVO), on another new video gateway and secured a new Tier I customer in the EMEA region for its growing IPTV set-top business.

But video was mainly a downer for Arris in the spring quarter. On the company's earnings call late Wednesday, Arris executives said they expect video equipment shipments and revenues to continue slumping through the rest of the year. That's especially true on the telco side of the business as both AT&T, pre-occupied with its fresh purchase of DirecTV Group Inc. (NYSE: DTV), and Verizon, distracted by a potential workers' strike, pour less money into video services on their U-verse and FiOS fiber networks.

"It's kind of mixed," said Arris Chairman and CEO Bob Stanzione, noting that he does anticipate increased spending by such other major telcos as CenturyLink Inc. (NYSE: CTL) and Frontier Communications Corp. (NYSE: FTR) over the next couple of years. "But, of course, the two big guys are the ones affecting the outcome in the short term."

Reflecting industry trends, the outlook was much more upbeat on the broadband side of the business. In the second quarter, Arris reported that broadband CPE unit shipments rose 10% from first-quarter levels, while sliding 10% from last spring's totals, as both cable and telco providers continued scrambling to upgrade their networks and equipment for faster, more enhanced services.

Among the highlights here, Arris said it's entering the initial field trials for devices based on G.fast, the emerging telco DSL-network standard for delivering gigabit-like speeds. On a parallel track, the company also said it's moving forward with development and testing of devices based on cable's next-gen DOCSIS 3.1 standard, with the initial field trials seeded for the fall. In addition, Arris is continuing its expansion of the data gateway segment, with the launch of more powerful dual-band WiFi devices for in-home networking.

"We're in the midst of that upgrade cycle," said Larry Robinson, president of the CPE division at Arris. "We expect it to continue well into 2016 and then potentially regenerate around DOCSIS 3.1." (See DOCSIS 3.1 Seen Taking Off.)

Want to know more about pay-TV subscriber trends? Check out our dedicated video services content channel here on Light Reading.

On the network and cloud end of Arris's business, broadband activity also led the way in the second quarter. Most notably, the company said shipments of the E6000, its flagship chassis in the quickly emerging Converged Cable Access Platform (CCAP) market, reached record levels as it sent out more than 750 boxes to cable operators around the world. Further, E6000 downstream shipments rose from first-quarter levels as customers upgraded their channel licenses for software upgrades.

Arris also notched a key customer win on the broadband front in the second quarter, picking up US MSO Suddenlink Communications for the E6000 CCAP chassis. In addition, it began deploying its Hybrid PON AgileMax solution for DOCSIS and fiber-to-the-premise (FTTP) networks.

"A lot of the discussions with our customers are around gigabit services," said Bruce McClelland, president of the network and cloud unit for Arris. "We're at the front end of another technology upgrade cycle."

Given this mix of video and broadband results, Arris posted overall revenues of $1.26 billion in the second quarter, up 3.7% from the first quarter but down 11.8% from last year. It reported non-GAAP earnings of 53 cents per share, up 20.5% sequentially but down 24.3% year-over-year. Both results were in line with the company's recently downgraded projections for the quarter as it continued to battle "headwinds" from the planned mergers of key customers and the stronger US dollar. (See Arris Hits Still More Headwinds .)

Arris executives, who had previously been counting on a rebound in the second half of the year, are apparently no longer doing so. In its third quarter guidance, the company expects revenues to range between $1.21 billion and $1.26 billion and non-GAAP earnings to come in between 17 cents and 23 cents per share, both down from the second quarter and lower than analysts had been expecting.

But they still see an upturn coming next year as AT&T integrates DirecTV into its systems and Charter Communications Inc. moves forward with its proposed buyouts of Time Warner Cable Inc. (NYSE: TWC) and Bright House Networks , which are both now pending federal regulatory approval. Arris officials are also optimistic about 2016 and beyond because of the race by service providers to roll out gigabit services and the ever-soaring popularity of over-the-top (OTT) video services, among other things.

"Service providers are continuing to deploy new and faster services and they're running out of capacity on their networks," Stanzione said. "That's good news for us."

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

MikeP688 8/9/2015 | 8:00:46 AM
Re: Is their Optimisim Warranted? I am falling out of my chair in laughter especailly as that "massive glass" is playing in the background--but nothing beats live coverage as I was earlier watching the live coverage of the Nagasaki 70th Anniversary on BBC as I finalized curating a Notation for @DailyOutsider on Nagaksi.     

Fun to be witness to history...


thebulk 8/5/2015 | 1:53:40 PM
Re: Is their Optimisim Warranted? @MikeP688, as long as I still have a massive glass covered slab in my home I am going to disagree... but likely not for much longer. 
MikeP688 8/5/2015 | 3:14:47 AM
Re: Is their Optimisim Warranted? I would humbly suggest that we are there now.    One snippet of it was the latest guidance by Disney when it lowered its' guidance on earnings.     
thebulk 8/3/2015 | 10:05:41 AM
Re: Is their Optimisim Warranted? Wow, ok, that is a long time. Yes time flys. in 20 years we could be saying "Remember when we used to watch video on stationary video screens we called 'TVs'"
MikeP688 7/31/2015 | 3:52:24 PM
Re: Is their Optimisim Warranted? @thebulk:  It is ever so true that hinesight is 20/20--what is so amazing how far we've come.  I was reflecting upon this as I saw the story on the Syndey Morning Herald during my "AM Round up" on how the "AMIGA" is 30-years old--how times flies.

thebulk 7/31/2015 | 1:56:06 AM
Re: Is their Optimisim Warranted? @MikeP688, Video is hard spot ot be in right now. It will be interesting to see how these companies addapt to the new normal and if they can figure a way through it. 
MikeP688 7/30/2015 | 8:12:16 PM
Is their Optimisim Warranted? Running out of Capacity is a challenge being faced by all.  The question is whether they have the capaiblity to adapt to the "new normal" that you've noted @Allan.   From all that is going on right now, it seems as if the jury is still out on it.

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