Cable modem/CMTS

The Challenges for Arris

In the interests of full disclosure, here are my biases: When Google first announced its acquisition of Motorola Mobility, I was mostly negative from a strategic standpoint. Other than the patents, I did not see much value or a fit with culture, expertise, or products. I also assumed that Motorola Home Division customers were probably uncomfortable making long-term architectural commitments to Google.

If the acquisition were just about patents, then Google (Nasdaq: GOOG) clearly paid a premium for Motorola Mobility LLC . During the short tenure, there was little hard information. But, anecdotally, it seemed that my assessment was correct and that Motorola Home was losing momentum.

When Google then announced that it was selling the Moto Home division to Arris Group Inc. (Nasdaq: ARRS), I was mostly bullish. There was a much better fit with Arris's culture, management expertise, and products. This purchase gave Arris a more diverse customer base.

As with any large acquisition, assessing the long-term success is tricky, especially with a dearth of information. Now, with Arris's first earnings post acquisition, we have some more insights.

Revenues grew a huge (and expected) 186 percent, roundly beating earnings expectations. Arris is moving quickly to integrate Moto, and the company is already starting to see cost savings from supply-chain efficiencies.

On the product side, Arris is seeing significant shipments of the E6000 (mostly to Comcast Corp. (Nasdaq: CMCSA, CMCSK)), with deployments and trials in multiple geographies. The company can boast wins in infrastructure and CPE, such as Comcast's XG1 hybrid QAM IP gateway.

The negative news came primarily from Moto, which lost momentum because of Google ownership. Gross margins slid to 23 percent, down from nearly 34 percent last year, and the traditional STB business is down 8 to 10 percent from last year.

But I am most concerned about the gross margin. A back of the envelope calculation reveals that Moto's gross margins fell to 17 percent (see the delta column in Table 1).

Table 1

The challenges of integrating the two companies and rationalizing products, processes, and organizations are more straightforward because the levers of change are mostly under Arris's control. That allows it to find the duplications/inefficiencies, make tough choices, and address damage control.

Boosting gross margin is a greater challenge, though, because it takes longer and is more nuanced. External factors (such as technological change, competitive pressures, and customers' needs) and internal factors (such as product design/life cycles, and manufacturing processes) limit the degrees of freedom in moving the needle.

While I am still mostly bullish on the Arris/Moto combination, there are significant challenges ahead for its management team. Increasing Moto's gross margins is one that I would put at the top of the list.

— David Dines, Principal Analyst, Video Infrastructure, ACG Research

albreznick 10/10/2013 | 5:38:08 PM
Re: Poor Moto Thanks for the thoughtful reply, David. So then I wonder how many, if any, legacy Moto products will survive the merger. Which ones would Arris decide to keep if they compete with existing Arris products? Interesting that you mentin SDN and NFV. Do you see cable operators and vendors exploring those technologies yet, like their counterparts in the telco world? 
David Dines 10/10/2013 | 11:16:10 AM
Re: Poor Moto Hi Alan, good and tough question and there are no simple or easy answers.  Since I am on the outside I can only make general statements/observations.

First, I would acknowledge that it is going to be difficult for both employees and management.  I have noticed that soft issues are often overlooked and addressing them early often makes things go more smoothly. 

On the product side, competition continues to drive prices down, so they are limited in their ability to influence the revenue side of GM, other than trying to improve the mix.  Also, I would imagine that management will look to rationalize the product line and standardize on a single architecture – and gross margin will likely be an important metric during this evaluation. Though discontinuing products is rarely popular with customers. They probably can gain several points in GM by optimizing/reengineering the supply chain, reevaluating build/buy decisions etc. 

In the longer-term, they will need to manage the transition to the new world of NFV/SDN/Cloud. It will be interesting to see how this turns out.
albreznick 10/9/2013 | 2:43:17 PM
Poor Moto So poor Motorola Home is dragging down Arris' results. The dark final days at Moto must have been pretty dark indeed. What do you think it will take turn around this division, David?