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Softening pricing on key set-top box components could goose device margins and put a bit more financial luster on the proposed merger, analyst says.
March 28, 2019
Pricing on memory components appears to be softening, a trend that could boost the economics of CommScope's proposed $7.4B acquisition of Arris, an industry analyst says.
"Memory prices have declined more rapidly than we expected, and the reversal of this prior overhang to Arris bodes favorably for its earnings," Simon Leopold, an analyst with Raymond James, explained in a fresh research note. By way of example, he said Micron Technology's recent fiscal Q2 2019 results indicate improvements and stabilization in memory pricing are coming this year.
Softening memory pricing would spell welcome relief for Arris, which has seen margins on its consumer premises equipment (CPE) business come under pressure during a components shortage spanning memory and multilayer ceramic capacitors. That shortage and the resulting pricing issue have amplified Arris's decision to focus on the most profitable set-top deals, rather than on top-line sales.
Leopold says improvements here will beef up Arris margins and that this is also good news for CommScope as it looks to wrap up its acquisition of Arris by mid-2019. The analyst, who has maintained an "Outperform" rating on CommScope, said CommScope investors might not appreciate how memory costs affect Arris results.
Though Arris has issued preliminary guidance for 2019 sales of $7.1 billion and 2020 sales of $7.3 billion, Leopold said he's still skeptical of those targets, as they are above his -- $6.68 billion and $6.67 billion, respectively.
The other big question as CommScope and Arris head toward the finish line is the fate of Arris's video set-top box business. While CommScope has touted Arris's positioning in broadband CPE, it has not been as complementary about Arris's declining video box business, leading to speculation that CommScope will attempt to sell it.
And pressure in the video set-top box biz could be on the way from other areas. According to an industry source, original equipment manufacturers such as Taiwan's Sercomm are considering plans to go direct to cable operators and other video service providers.
Nearly a decade ago, a startup comprised of cable industry vets called iNovo Broadband had similar thoughts. A novel idea that ultimately did not pan out, iNovo believed it could provide MSO partners with better economics on consumer premises devices than traditional suppliers by working directly with OEMs in Asia. (See iNovo Starts Its Run at Cisco & Motorola.)
— Jeff Baumgartner, Senior Editor, Light Reading
Senior Editor, Light Reading
Baumgartner also served as Site Editor for Light Reading Cable from 2007-2013. In between his two stints at Light Reading, he led tech coverage for Multichannel News and was a regular contributor to Broadcasting + Cable. Baumgartner was named to the 2018 class of the Cable TV Pioneers.
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