Subdued Cable Spending Hits Arris
First-quarter results at Arris had some surprises: sales of video set-tops were (gasp!) actually up in the period, but there was a bigger-than-expected drop in cable operator spending in other areas, such as network capacity, as MSOs mull their distributed access architecture and network virtualization migration strategies.
Overall customer premises equipment (CPE) sales at Arris, which was acquired by CommScope last month, was down 6%, to $824 million in results reported Thursday. Though video CPE sales rose 7% in the quarter, broadband CPE fell a shocking 35%. That drop was largely due to a decline in volume shipments as Arris continued to shift production out of China to sidestep the financial impact of the US tariffs. Lower spending among North American cable operators also contributed to the drop in broadband CPE sales in the period.
Speaking on Thursday's Q1 call, CommScope President and CEO Eddie Edwards said Arris is on track to complete the move out of China and eliminate its exposure to US tariffs by mid-year. Prior to the Arris acquisition, CommScope already mitigated most of its exposure to the tariffs, which ballooned from 10% to 25%.
Edwards said Arris is confident of a better second half of 2019 as the company completes the qualification of new production lines for CPE and sees expected improvements in product component and manufacturing costs.
Arris's Network and Cloud business also absorbed an 18% drop in sales, to $440 million, with shipments of the company's flagship integrated converged cable access platform (I-CCAP) down significantly.
"While we're disappointed with these results, we believe we have maintained share and the decline is directly related to generally lower MSO spend," Edwards said, hopeful that the trend will reverse this year as operators deploy more DOCSIS 3.1 capacity and CPE.
Edwards noted Arris is developing a fully virtualized version of its CCAP platform, an area that is being focused on by other vendors, including Harmonic, which is trying to make some noise with its CableOS platform and a virtual CCAP-related agreement with Comcast, a top customer of Arris's.
Bruce McClelland, the former CEO of Arris and current COO of CommScope, said the company is testing the virtual version of the CCAP product, which will put the existing platform into a cloud-native software architecture.
"We've got a variety of different options that meet the needs of our global base of customers to allow them to evolve, and not feel pressured to rip and replace and completely disrupt the network, which … is a really big priority for them right now," McClelland said.
Enterprise sales at Arris, which includes Ruckus Networks, dropped 30%, to $118 million, and was also driven by slower sales to cable operators and caused by an inventory buildup in the second half of 2018, Edwards said.
Though Arris's business is off to a "challenging start of the year," Edwards said the overall company is off to a better start in Q2. CommScope expects Q2 revenues of $2.49 billion to $2.65 billion, a range that still trails the $2.82 billion analysts were expecting.
Analysts still bullish despite sluggish start
Despite the rough start to 2019, Jefferies analyst George Notter says this is a buying opportunity for investors with respect to the longer-term potential of the company.
"We expect that the near-term capital spending pressures impacting that business are temporary," he said in a research note. "As such, we remain very enthusiastic about the risk/reward here -- particularly in the face of current share price weakness."
Notter, who still rates CommScope as a "Buy," said it's important that Arris doesn't see a slowdown in MSO spending as being reflective of share loss -- a view that was also expressed by Casa Systems, an Arris competitor, when it posted poor Q1 results last week.
Simon Leopold with Raymond James also maintained his "Strong Buy" on CommScope. "We believe initiatives such as fiber deep and broadband upgrades could contribute to a recovery," he wrote in a research note.
- CommScope Q1 Sales Drop 1.9%, Arris Sales Dip 12.4%
- CommScope Wraps $7.4B Deal for Arris
- Arris: Tariffs Add $200M in Broadband Gear Costs, Threaten US 5G Plans
- Arris: We're Tackling the Tariffs
- Casa Systems Sees Bottom Fall Out in Q1
- Harmonic CEO: We Want to Be No. 1 in Cable Virtualization, DAA
— Jeff Baumgartner, Senior Editor, Light Reading