Video hardware

Arris Running Into Headwinds

After enjoying a blowout year of record sales and strong market share gains in 2014, Arris is bracing for a much more problematic year in 2015.

In its fourth-quarter earnings report late Wednesday, Arris Group Inc. (Nasdaq: ARRS) said it is running into "near-term headwinds" in the first half of 2015 due to a number of key factors. These key factors include capital spending cuts by its two main telco customers, AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), the regulatory uncertainty surrounding the pending deals between Comcast Corp. (Nasdaq: CMCSA, CMCSK), Time Warner Cable Inc. (NYSE: TWC), AT&T Inc. (NYSE: T) and Charter Communications Inc. , the strengthening US dollar crimping spending by international service providers and labor problems at US West Coast port delaying product shipments and driving up shipping costs. (See Arris: Don't Worry, Be Happy.)

"This is just not a normal year," said Arris Chairman & CEO Bob Stanzione, speaking on the company's call with financial analysts yesterday evening. "I don't expect the business to just pop up by June."

As a result, Arris is projecting that its first-quarter revenue and earnings results will come in lower than Wall Street's consensus forecast for the big equipment and software vendor and possibly below its year-earlier results. The company said it expects to post earnings of 40 cents to 45 cents per share in the first quarter on sales of $1.20 billion to $1.24 billion, which would also be down from its fourth-quarter results.

However, Arris executives emphasized on the earnings call that they're confident that their network and home equipment business will surge anew in the second half of the year once the Comcast/TWC deal and the closely related Comcast/Charter cable system swaps gain regulatory approval, as they still expect. They also expressed confidence that international sales will climb in the second half of the year as they close some major pending deals in Europe, Asia and South America.

"Frankly, our customers are telling us they expect to spend more once these deals are done," said Stanzione, citing such favorable industry trends as the impending rollout of DOCSIS 3.1 by cable operators, the embrace of gigabit speeds by broadband providers, the continuing set-top box and gateway upgrades by both telcos and MSOs, the integration of over-the-top (OTT) video services by providers and the expected cable system upgrades by both Comcast and Charter. "This year is going to be very backend-loaded."

Hoping to whet analysts' appetite for more, Stanzione said Arris will announce a "significant" infrastructure deal next Monday with a major Asia-Pacific MSO serving millions of cable subscribers. He declined to name the MSO.

Stanzione also said Arris has landed a major contract with Liberty Global Inc. (Nasdaq: LBTY) to supply the huge international MSO with a new 4K-capable video gateway. The next-gen gateway device will also be compatible with the cable industry's emerging Reference Design Kit (RDK) standard for a pre-integrated IP video software stack that can be installed in a variety of cable set-tops and video gateways.

For more of Light Reading's coverage of cable and video capital spending trends, visit our video hardware content channel.

The sobering financial guidance for the first half of 2015 came after Arris closed out 2014 on a high note, racking up another strong quarter. The company reported earnings of 78 cents per share on $1.26 billion in revenues, down from its third-quarter results but up from a year ago and meeting or beating Wall Street's expectations.

Although set-top box sales slipped from their record levels in the third quarter, Arris's thriving broadband equipment business and higher video gateway sales offset some of that decline. In particular, the company saw strong sales for its advanced WiFi-enabled broadband gateways, DOCSIS products and Converged Cable Access Platform (CCAP) chassis. In addition, company executives said they remain on track for lab and field trials of new DOCSIS 3.1 devices in the second half of the year.

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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