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Arris Financials Clipped by Component Shortages

Jeff Baumgartner
8/2/2018
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Component shortages for cable modems, gateways and set-top boxes continue to inflict pain on Arris's consumer premises equipment (CPE) business, causing the company to raise product prices and focus on its most profitable deals.

The shortages have also hit the company's bottom line, as Arris Group Inc. (Nasdaq: ARRS) slightly missed its Q2 2018 expectations and reduced its guidance for the rest of the year. (See Arris Q2 Revenues Climb 4% to $1.72B.)

Overall CPE sales in Q2 came in at about $1 billion ($405 million for broadband devices and $603 million for video devices), versus $1.15 billion ($489 million for broadband CPE, $667 million for video CPE) in the year-ago period. The Q2 result was a bit lower than what Arris originally anticipated.

Still, Arris believes it can maintain a quarterly revenue pace of $1 billion in CPE despite the fluctuations and uncertainty in the market, company CEO Bruce McClelland explained Wednesday on the company's earnings call.

Arris's CPE business is under pressure from cost increases driven primarily by component shortages –- memory and multilayer ceramic capacitor (MLCC) components, in particular. Those shortages are, in turn, requiring Arris to raise product prices and to focus on profitability rather than just top-line sales.

And the rise in pricing goes beyond typical supply-and-demand scenarios, as distribution problems have likewise created an "odd environment" around MLCC components, McClelland said.

"Most companies like us are in an environment where trying to secure supply is on a week-to-week basis, and prices fluctuate pretty significantly," McClelland noted, adding that Arris is trying to work with suppliers in a way that minimizes the premiums Arris has to pay.

"It's a reality of the entire market at this stage," added McClelland, who recently spent a week in Asia to meet with Arris's suppliers.

McClelland said there is hope that the memory issue will start to stabilize in the second half of 2018. However, cost fluctuations for MLCC components, usually a low part of the bill of materials, are playing a big role in why Arris has to increase CPE prices across the board in the second half of the year and into 2019, he said.

The components issue is also being amplified by lower demand for video set-tops in the US.

Arris is also trying to remedy the issue by a recently completed plan to reduce CPE operational expenses by 10% on an annual basis.

The bright spot for Arris is that CPE sales internationally were strong and that the company expects volumes on DOCSIS 3.1 modems and gateways to ramp up now that some newer models have cleared certification.

On the call, analysts were particularly focused on Arris's decision to cut full-year guidance by about $300 million.

Arris didn't separate out all the contributors to that $300 million shortfall, but McClelland said most of the reduction there is due to the CPE issue, including slower D3.1 shipments in the earlier part of 2018. "We felt it was time to adjust the view for the year," he said.

Other key parts of Arris's business -- Network and Cloud and Enterprise Networks -- are performing well.

On the Network and Cloud side, a priority this year is for Arris to expand the footprint of its flagship E6000 Converged Cable Access Platform (CCAP). McClelland said Arris is also making progress with new Remote PHY implementations that will support cable's migration to a distributed access architecture (DAA) that pushes electronics closer to the edge of the network.

He said Arris is also building a software-based video core for its DAA solution that aims to reduce the complexity of delivering broadcast and narrowcast video in remote PHY architectures. That's the "hard part" of that network transformation, McClelland said.

Arris, which is continuing to focus on its integration of Ruckus, is also confident that it will start to see revenues come in the door this year for its new line of products focused on the Citizens Broadband Radio Service (CBRS) band, a chunk of shared spectrum in the range of 3.55GHz to 3.7GHz that will be used to support new unlicensed and licensed use cases alongside incumbent users such as the US Navy. (See New Ruckus Chief Won't Risk a Rumpus, Ruckus Reveals CBRS Home Gateway and Arris Bags Ruckus Assets in $800M Deal.)

And don't expect Arris to make any big M&A moves soon, as it believes stock buy-backs currently represent the better use of company cash, according to McClelland.

— Jeff Baumgartner, Senior Editor, Light Reading

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Jeff Baumgartner
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Jeff Baumgartner,
User Rank: Light Sabre
8/2/2018 | 1:05:25 PM
Could have been worse
Though the CPE results fell short of expectations in Q2, the fact that Arris still hit the $1B mark was 'impressive' in its own right, Equity Research's George Notter said in a note issued this morning.

He said It's impressive in part because Arris was late in getting some products certified for D3.1 for some customers, adding that Technicolor held on its recent earnings call that, in North America, it was the only company delivering so far new D3.1 gateways to Comcast, Cox and Rogers and starting to do the same for Charter.

At the same time, Technicolor has not been immune to components shortages, as they caused €210 million revenue delays, Notter added. JB 
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