Arris Rides Capex Wave Again
With most of its major customers now shelling out more on network and equipment upgrades, Arris is happily riding a big capex wave with no end apparently in sight.
In another upbeat earnings call with financial analysts late Thursday, Arris Group Inc. (Nasdaq: ARRS) reported strong gains in revenue and net income on both a sequential and year-over-year basis in the second quarter. The company also projected strong financial gains for the current third quarter and said the outlook for next year looks bright as well.
"2014 is shaping up to be a very good year and so is 2015," Arris Chairman & CEO Bob Stanzione declared on the call. "There's a lot of evidence to support increased capex next year."
Despite such overall optimism, Attis executives are somewhat on edge about the company's fourth-quarter prospects. Noting that the fall quarter can be "dicey" even under the best of circumstances because of unpredictable year-end fluctuations in spending by service providers, Stanzione said this fall could be particularly irksome because of the pending merger deals between Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC) and between AT&T Inc. (NYSE: T) and DirecTV, both of which are slated to close around the end of the year if approved by regulators. Of Arris' five largest customers, only Verizon Communications Inc. (NYSE: VZ) is not involved in a major deal right now.
"This year could be even more unpredictable," said Stanzione, noting that "four of our top five customers are involved in major transactions." He warned analysts that the deal closures could create "disturbances in the business" this fall before capital spending perks up again next year after the mergers are consummated. Although Arris officials have no visibility into the fourth quarter yet, he said, "I just think you have to be somewhat cautious."
The second quarter was quite a different story. Looking at the numbers, Arris posted $1.43 billion in revenue, up 17% from its first quarter total of $1.23 billion and up more than 40% from $1 billion in the year-ago period, when the company took over Motorola Home. Adjusted net income climbed to $104.3 million, or 70 cents per diluted share, up from $68.7 million, or 47 cents per share, in the preceding quarter and $61.8 million, or 45 cents per share, in the year-ago period.
As usual, Arris's huge customer premises equipment (CPE) segment led the way, generating nearly $1.1 billion in sales, up 14% from the previous quarter. Strong sales of cable and IPTV set-tops, video gateways, and wireless data gateways accounted for the bulk of the gain.
Arris's smaller but rapidly growing network and cloud segment enjoyed a strong quarter as well, producing $410 million in revenue, up 23% from the first quarter. Arris officials credited at least part of the gain to the early success of the vendor's E6000 router, the initial version of a Converged Cable Access Platform (CCAP) device that will combine the functions of the cable modem termination system (CMTS) and edgeQAM modulator in the cable headend.
With nearly $800 million worth of backlogged equipment and software orders, Arris officials said the third quarter looks promising too, even though they expect overall revenues to slip in the summer period from this spring's highs. In its financial guidance for the quarter, the company projects third-quarter sales of $1.37 billion to $1.41 billion, but profits are expected to rise because of a more favorable mix of higher-margin products. "The top line is coming down but the bottom line is going up," Stanzione said.
Even with the potential hiccup in the fall, Arris executives said they expect the cable and telco capex wave to continue cresting into 2016 and beyond, because of the competitive push by broadband providers of all stripes to upgrade their networks for gigabit speeds. Pointing to recent high-speed rollouts, network upgrades and advanced set-top box deployments by Google Fiber Inc. , AT&T, Verizon, Comcast, Time Warner Cable and others, Stanzione predicted that the capital spending will keep flowing for a while.
"Gigabit services are coming -- they're coming as fast as these operators can deploy them," he said. "That will require substantial investments in their networks."
— Alan Breznick, Cable/Video Practice Leader, Light Reading