Rough Arris Q4 Buoyed a Bit by Software

News Analysis Mari Silbey, Senior Editor, Cable/Video 2/18/2016

Merger uncertainty, declining telco sales and currency exchange rates all put pressure on the set-top and network vendor, leading to fourth-quarter revenues of only $1.1 billion, a nearly 13% drop compared to the final months of 2014. The set-top business was hit the hardest, with sales falling to $665 million in Q4, down from $812 million in Q3 and $829 million in the year-earlier quarter.

Worse, Arris Group Inc. (Nasdaq: ARRS) offered a lackluster projection for the first quarter of 2016, with CEO Bob Stanzione acknowledging that "the year is starting out more weakly than we thought it was."

If there was a bright spot for Arris, however, it was the improving performance of the Network and Cloud division. That business had its best quarter at the end of 2015, bringing in $436 million in revenue in Q4. In particular, sales were strong for Arris's E6000 CCAP platform, with early deployments now giving way to capacity upgrades through new software deals. According to Arris, cable companies are finally starting to add video to their CCAP devices, which requires new licensing contracts.

Arris has been trying to counteract declines in the customer premises equipment (CPE) market through growth in Network & Cloud sales. That strategy appears to be working, while Arris has also strengthened its CPE market share through acquisition. The hope is that greater CPE scale will keep margins from falling to untenable levels. Arris closed on the acquisition of top set-top rival Pace in January. (See Arris Consummates Pace Deal and Arris Wins UK Approval, Sets Closing Date on Deal for Pace.)

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Other promising signs for 2016 include the early rollout of DOCSIS 3.1 gear and growing demand for gigabit broadband services. Arris also highlighted the early success of its Service Provider WiFi initiative in 2015, and upcoming customer deployments planned with Suddenlink Communications for this year.

However, in the near term, challenges remain. Many of the same pressures from the last quarter are still in play, and Arris cautioned that demand may outpace supply in the Network & Cloud business where sales have been most encouraging. Until those pressures ease, Arris will continue to have a rough road ahead.

Arris shares were down more than 9% in after-hours trading.

— Mari Silbey, Senior Editor, Cable/Video, Light Reading