Cisco's loss definitely appears to be Arris's gain.
Riding a wave of increased capital spending by its leading cable and telco customers, Arris Group Inc. (Nasdaq: ARRS) racked up higher than expected sales and earnings for the fourth quarter as its shipments of traditional set-top boxes, next-gen video gateways, and next-gen Converged Cable Access Platform (CCAP) devices all posted strong increases. The company reported nearly $1.2 billion in revenue and adjusted net income of $77.6 million, or 54 cents per share, for the quarter, beating Wall Street's consensus estimates and winning praise from analysts.
Customer premises equipment (CPE) led the way for Arris, particularly on the video side, generating $865.4 million in revenue. Unlike rival Cisco Systems Inc. (Nasdaq: CSCO), which has been slumping badly on the video side, Arris reported that cable set-top box shipments leapt 43% in the quarter as cable operators raced to deploy both low-end digital transport adapters (DTAs) and high-end home video gateways to compete against telcos, satellite TV providers, and over-the-top (OTT) video providers. (See Revenue, Income Slide In Cisco's Q2 2014.)
One standout set-top unit was the XG1, a new, hybrid IP video gateway that Arris is now supplying to Comcast Corp. (Nasdaq: CMCSA, CMCSK) for the MSO's rollout of its next-gen X1 platform. Arris said its deployments of the XG1, its first box to support the cable industry's Reference Design Kit (RDK) IP video software stack, got off to a promising start in the fall after earning product qualification.
"The Comcast XG1 came on very strong at the end of the quarter," noted Arris chairman and CEO Bob Stanziohe on the company's earnings call late Wednesday. "Certainly the XG1 played a nice factor in the quarter," agreed Larry Robinson, president of Arris's CPE division.
Another standout performer was the DVB-based set-top box that Arris introduced in Latin America during the fall quarter. With telcos initially showing healthy demand for the new IP-based set-tops, Stanzione said Arris views the market as another "strong opportunity."
On the access network side of the ledger, Arris reported growing demand for its integrated CCAP device, known as the E6000. The company said the E6000's deployment base doubled to cover cable systems with more than 2 million subscribers in the fourth quarter, as MSOs began installing the more powerful, high-density, space-savings CCAP devices in their cable headends.
Bruce McClelland, president of network and cloud and global services for Arris, said the E6000 accounted for more than half of the company's shipments of broadband infrastructure equipment in the quarter, outstripping its flagship C4 cable modem termination system (CMTS). He said Arris is seeing "strong interest around the world" in its CCAP product.
About the only downside in the earnings report for Arris was a quarterly sales decline in its traditional DOCSIS equipment business, which includes cable modems, data gateways, and CMTS devices. While the company officials declined to specify how much DOCSIS shipments and sales dropped from their record levels in the third quarter, they said they anticipate a strong rebound in the first quarter.
As usual, three of the biggest US MSOs and telcos generated a significant share of Arris's sales in the fourth quarter. Comcast led the way with $227.7 million in order, or 18.6% of Arris's total, followed by Verizon Communications Inc. (NYSE: VZ) with $150 million (12.5%) and Time Warner Cable Inc. (NYSE: TWC) with $82.6 million (6.9%).
On the earnings call, several analysts pressed Arris executives about the impact of Comcast's pending $45.2 billion deal to buy Time Warner Cable. The analysts wondered whether TWC might pull back or change its ambitious capital spending plan because of the deal. (See Comcast to Buy Time Warner Cable for $45.2B .)
But, shrugging off those concerns, Arris officials said they're seeing no evidence of any spending cuts or shifts by either TW Cable or Comcast, which are both planning to boost their capex this year. "So far we're seeing no change and we don't anticipate any change," Stanzione said. "We're going full steam ahead."
— Alan Breznick, Cable/Video Practice Leader, Light Reading