Shares in Arris were up more than 7% in after-hours trading Wednesday after the company turned in a solid Q2 and announced revised guidance that comes in at the higher end of previous revenues expectations and net income that’s trending above earlier guidance.

Q2 was Arris’s “best quarter ever,” company chairman and CEO Bob Stanzione declared on the company’s earnings call.

Q2 results, which include Arris’s acquisition of Pace plc in January, saw revenues climb to $1.73 billion, from $1.26 billion a year ago, and GAAP net income of 44 cents per diluted share, up from 11 cents. For Q3, Arris expects revenues of $1.7 billion to $1.75 billion, and GAAP net income of 28 cents to 33 cents.

“I'd say that the macro environment for our business is looking good and holding steady,” Stanzione said, holding that U.S. cable consolation “seems to be done” for the time being.

He also sees U.S. telco and satellite markets improving as AT&T/DirecTV look to regain momentum, Verizon gets past the disruption of its wireline workers strike, and Frontier digests its acquisitions of FiOS properties and looks to accelerate marketing programs.

Long  Live The Set-Top Box

Arris saw a 40% surge in customer premises equipment sales in Q2 versus the prior year period, driven by the Pace acquisition.

Broadband CPE slumped 8%, but video CPE revenues soared 85% year-on-year amid solid demand across telcos, cable operators and satellite TV operators.

Stanzione said the debate centered on the FCC’s pursuit of new set-top rules have cast a cloud on the set-top market that isn’t warranted.

“I think the evidence right here [in the financial results] is that set-top boxes are not going away,” Stanzione said. “We are designing new, next-generation set-tops for major cable operators around the world as we speak. We believe that video set-tops will remain a significant component of our business for quite some time into the future." 

On the network side, sales of Converged Cable Access Platform (CCAP) and PON products were up year-on-year, but down from record levels in Q1. Notably, shipments of downstream software licenses down significantly  as capacity previously purchased was being deployed and utilized across our customer networks, according to Bruce McClelland, president of Arris’s Network and Cloud division.

He said Arris has begun lab and certification testing on a new “Gen2” upstream linecard that is on track for full field trails later this quarter.

McClelland also said Arris has made “great progress” on remote PHY products that place the physical access layer of the DOCSIS CMTS into the fiber node.

That module can either go into an existing Arris fiber node and connect via the E6000 chassis, or ultimately to a “virtual DOCSIS core” that is under development, and will likely compete with a virtual CCAP that Nokia will be offering following its acquisition of Gainspeed.

Arris-Comcast Warrants Agreement 

Arris also shed some light on a warrant agreement with Comcast announced earlier this month that spans the supply of products for the MSO’s video (including X1), high-speed data and voice services, including wireless gateways.

Dave Potts, Arris’s CFO, said the warrants are for up to 8 million shares over 2016 (up to 3 million shares) and 2017 (up to 5 million shares) based on sales and product mix targets. It has some accounting impacts, as Arris must record a fair value as a reduction to revenue. In Q2, Arris recorded $4.3 million related to the first six months of sales. 

Even if Comcast were to earn the full lot of shares, its "ownership postion would still be below 5%," Arris told Light Reading when the warrants agreement was announced. 

Warrants agreements are becoming more common between Comcast and its key vendors.

In March, Universal Electronics struck a warrants agreement with Comcast as an extension of the vendor’s arrangement to develop new products in partnership with the MSO. That followed a development and supply collaboration renewed earlier in the year in which UEI supplies the voice remote for Comcast’s X1 platform (Comcast announced today that it has deployed about 8 million of those), and positions it to provide products for Xfinity Home, the MSO’s home security and automation service, as well.

Arris and Pace wrapped up their $2.1 billion merger yesterday. The deal encountered some bumps during the vetting process, but now comes the hard (or harder) part – integrating the two companies and achieving the merger’s anticipated financial synergies.

However, Bob Stanzione, Arris’s chairman and CEO, believes that integration will be easier to achieve than the one Arris went through after it acquired Motorola Home in April 2014 for $2.35 billion.

“I think we’ll be able to move faster on this one than we did with Motorola Home,” Stanzione said in an interview. In the case of Motorola Home, Arris was not assuming the IT or the financial infrastructure, and had to build it all from scratch. Plus, there were some complicated transition service agreements in the Motorola deal that are not needed with the Pace merger.

Stanzione isn’t predicting when the Pace integration will be completed, but he does expect the “big milestones” to occur in the first half of 2016.

One area of early focus will be the combination of the sales teams. That’s already happening under the establishment of the company’s new executive team, with former Pace exec Tim O’Loughlin now in charge of North American sales, and Ron Coppock now running a new dedicated international sales organization.

“The first thing we’ll do…is combine the sales organizations,” Stanzione said. “We don't want there to be any confusion in front of the customers; we'll move most quickly on that." 

The longer-term focus will include backoffice integrations and the merging of product roadmaps where there are overlaps. Comcast, for example, sources X1 boxes from both Arris and Pace. Arris and Pace have also been supplying similar set-top products to AT&T.

“We will combine [set-top product lines,” Stanzione said. “But it will take time because we have to collaborate with customers…If they want us to manufacture two products for the next year, we'll manufacture two products for the next year." 

Those conversations just recently got underway due to gun-jumping restrictions that were preventing them before the deal was consummated.

Stanzione also acknowledged that overlaps in other areas will also force Arris to make some moves with respect to its employee base, which is now at about 8,000.

 “We have nothing to announce at this point,” Stanzione said in regard to that, but said Arris will update the market on those activities in February during its normal quarterly earnings call while also keeping employees up to speed.

“There are some overlaps and we're going to work through them as quickly as we can and keep everyone in the loop as to what our thinking is,” he said.

Though the mergers with Motorola Home and Pace aren’t apples-to-apples comparisons, Arris reduced its workforce by about 500 employees about two months after closing the Motorola Home deal.

As for the grander strategy behind the deal, Stanzione still believe it “gives us an incredible boost in scale” and the opportunity to grow internationally, particularly in markets like Australia, where Arris and Pace were working with different customers and can now combine those efforts.

“We’ll want to see both [the U.S. and international markets] grow,” he said. “But I think the opportunities for us to grow internationally are greater." 

And even though Arris has its hands full integrating Pace, don’t count out more M&A moves.

“We want to be prepared for that, we need to be prepared for that,” Stanzione said, noting that Arris closed the Pace deal with a strong balance sheet intact. “Any company that kinds of gets itself painted into a corner in this world and this environment that is fast moving will regret it." 

Arris took to the company blog Tuesday to announce the exec team that will lead the company following the completion of its $2.1 billion merger with U.K.-based Pace plc.

Arris confirmed that Bob Stanzione will continue as chairman and CEO of the combined company, along with executive vice president and CFO Dave Potts.

Larry Margolis has been tapped to lead the integeration of Arris and Pace as EVP of corporate and strategy and administration. Larry Robinson and Bruce McClelland, meanwhile, will remain as presidents of their respective business units (McClelland runs the company's networking and cloud unit, and Robinson heads up customer premises equipment). 

Here’s a rundown of other execs and their roles at the newly merged tech giant:

-Ron Coppock will head up a new, dedicated international sales organization and continue to lead marketing, as president of International Sales and Global Marketing.

-Tim O’Loughlin, an exec late of Pace, has been named president, North American sales.

-Jim Brennan will continue as SVP of Supply Chain and Quality; Patrick Macken as SVP, General Counsel and Secretary; and Vicki Brewster as SVP of Human Resources.

-Former Pace exec Phil Baldockwill serve as Arris’s new SVP, chief information officer.

Arris said it expects “many members of the Pace senior management team to take on leadership positions” at the new company, calling it a “testament to Pace CEO Mike Pulli’s work in creating one of the industry’s leading talent organizations and one that matches ARRIS’s culture of success.”

Arris confirmed that Pull is leaving to pursue other opportunities.

“The people of ARRIS represent the future of our company,” Stanzione said in a statement. “Today, we have the industry’s leading talent under one roof. And in the coming months, we’ll begin to leverage the full potential of our combined expertise—broadening our global footprint, tapping into new markets, catalyzing innovation, and transforming entertainment and communications for millions of people around the world.”

Following the closure of the deal, Raymond James analyst Simon Leopold maintained his “Strong Buy” rating on Arris and a $38 price target (Arris shares closed at $30.40 Monday), noting that the company assumed an additional $700 million in debt via the transaction, and issued an additional 48.2 million shares.

“Even with the lower growth outlook provided by Pace, and conservative assumptions for Pace's top-line growth in 2016, our updated model continues to reflect material accretion, and we envision combined EPS reaching $3.13 in 2016, up from $2.45 previously for stand-alone ARRIS,” Leopold wrote in research note issued Tuesday. “We also model a combined adjusted 2016 EBITDA of $1.04 billion, up from $675 million previously for stand-alone ARRIS.”

Citing data from Infonetics, Leopold noted that Arris will lead the worldwide set-top market with a 27% share, and that STBs will now make up about 60% of the combined company’s total sales. 

Arris and Pace are expected to ring in the New Year by consummating their marriage.

Arris announced Thursday that its proposed $2.1 billion merger with U.K.-based set-top and video tech company Pace plc is expected to close on Monday, Jan. 4, 2016, noting that the High Court of Justice in England and Wales conditionally approved the Pace share scheme tied to the agreement.

Multichannel News has asked Arris and the Court for more information on those conditions and will update the story as those details become available.

Update: Regarding that condition, it's considered a mere formality. The U.K. court is awaiting preliminary approval from  Brazil’s competition authority, CADE, to become final. CADE was operating under a mandatory waiting period that's expected to end on December 22. 

If the closing occurs as anticipated, Arris said ordinary shares of Arris International, the new parent company of Arris, will begin trading on Monday, Jan. 4, 2016, on NASDAQ under the company’s current ticker symbol – “ARRS.”

Per the original deal announced in April, the newly combined company will be incorporated in the U.K., but operate its worldwide headquarters in Suwanee, Ga. Current Arris shareholders will own about 76% of the new company, while Pace shareholders will hold roughly 24%.

Word of the expected close comes soon after CADE provided preliminary approval of the deal without restrictions. That followed the closing of the U.S. Department of Justice’s investigation, which also did not apply any conditions.

Arris and Pace shareholders have already approved the deal, which was announced April , and has also been cleared by regulators in Colombia, Germany, Portugal and South Africa. 

Arris said Tuesday that the U.S. Department of Justice has closed its investigation into the vendor’s proposed $2.1 billion acquisition of U.K.-based set-top and access network supplier Pace plc. “without condition,” under the Hart-Scott Rodino Antitrust Improvement Act of 1976.

In June, Arris and Pace said they had each received requests for additional info from the DoJ in connection with the proposed deal. There were concerns that the DoJ could pin conditions on the deal that would call on Arris to divest part of the optical transmission business of the combined company.

Arris and Pace shareholders have already approved the deal, which was announced April and has also been cleared by regulators in Colombia, Germany, Portugal and South Africa. The transaction remains subject to approval in Brazil and other “customary closing conditions,” Arris noted.

Arris has been steadfast in its expectation that it will close the Pace deal in late December or the first quarter of 2016.

Once completed, the deal will result in the formation of  “New Arris,”  a holding company that will be incorporated in the U.K., and have its operational and worldwide headquarters based in Suwanee, Ga. Arris shareholders are to hold about 76% of New Arris, compared to 24% of Pace shareholders.

The proposed $2.1 billion merger of Arris and Pace Plc took a step forward after receiving unconditional clearance from The Superintendence of Industry and Commerce in Colombia.

Arris said that approval follows pre-conditional clearance in Germany, South Africa, and Portugal. Arris and Pace shareholders have already approved the deal.

Arris said completion of the deal remains subject to the expiration or termination of the waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the satisfaction of similar merger control requirements in Brazil, along with the satisfaction of other customary closing conditions.

Arris expects the deal to close in late December or or the first quarter of 2016 amid additional requests from the U.S. Department of Justicethat could pin conditions on the deal that call on Arris to divest part of the optical transmission business of the combined company. 

Arris, like many suppliers, has hit a rough patch amid M&A uncertainty, spending slowdowns and the impact of a strong U.S. dollar, but a top sector analyst is still bullish about Arris’s future.

Raymond James analyst Simon Leopold maintained a “Strong Buy” rating on Arris  in research note issued the day after Arris posted a relatively in-line Q3 but a softer Q4 outlook.  But he also altered the target price on the stock from $41 to $38.

While the lowered outlook “will likely pressure the stock” (Arris shared dropped about 10% yesterday in after-hours trading)  but “[w]e  think the possibility that this is the ‘last cut’ could provide support for the shares.”

Leopold said he anticipated a slowdown from AT&T, but didn’t fully “appreciate the strain on international carriers' budgets.”

“We expect the Pace deal to be materially accretive, and with the fundamental demand from cable operators unchanged, we remain buyers of the shares,” he wrote.

On that note, AT&T’s decision to evolve its video platform around DirecTV’s Genie system could still work in Arris’s favor, as Pace is a primary box supplier to DirecTV, he said, but acknowledged that the timing of that transition remains uncertain.

Arris shares were down $1.56 (5.25%) to $28.18 in Thursday morning trading.

Arris shares were down more than 10% in after-hours trading Wednesday after the tech giant said Q3 revenues dropped 13.1% due in part to sluggish set-top and gateway sales to Verizon Communications and AT&T, which just combined with  DirecTV.

Arris chairman and CEO Bob Stanzione cited “shifting” strategies at those telcos. AT&T, for example, saw a decline in U-verse TV subs in Q3 as it applied more focus on selling DirecTV service.

That shift in focus “hurt our business pretty dramatically,” Stanzione said.

Arris, which is also dealing with declines outside the U.S., posted Q3 revenues of $1.22 billion, off from the $1.24 billion expected by analysts, and posted earnings of 56 cents per share, down from 81 cents in the prior year- period. Looking ahead, Arris anticipates revenues to decline to $1.1 billion to $1.15 billion, alongside adjusted net income per diluted share of 40 cents to 45 cents, citing lower expected U.S. revenue, near-term M&A uncertainty and international growth tempered by the strong U.S. dollar.

Driven by the aforementioned telco issues, CPE segment sales dropped 14% versus the year-ago quarter, despite improved cable CPE sales and a record sales of broadband gateways and modems via retail channels.

Arris also talked up its role in supplying an advanced DOCSIS gateway to Comcast – the DOCSIS 3.0-powred XB3 will bond up to 24 downstream channels and integrate MoCA 2.0 and 802.11ac WiFi.

On the video CPE end, unit volumes dropped 11% year-on-year. A bright spot was the launch of a next-gen video gateway (the DCX3635) for Canada’s Shaw Communications that supports both Arris’s own Moxi platform and Comcast’s X1 platform. Shaw is trialing X1 after ditching its original IPTV migration strategy. 

On its fiscal Q4 call earlier this month, Shaw CEO Bradley Shaw said the MSO had launched the whole-home DVR platform with the Moxi UI, noting that it’s “forward compatible with the X1 service.” He said Shaw’s anticipates that the commercial launch of X1, which will be powered directly by Comcast infrastructure, will occur during Shaw’s 2016 fiscal year.

On the network side of the business, Arris saw sales of its flagship E6000  CCAP drop from the first half of the year (Shaw is a new customer for it), but remains on track for Q4 customer field trials of DOCSIS 3.1, according to Bruce McClelland, president of the company’s’ network and cloud unit. Arris also expects formal CableLabs D3.1 testing to start during the current quarter.

Regarding Arris’s pending $2.1 billion acquisition of U.K.-based Pace, Stanzione said he’s still enthusiastic about the benefits of the merger, and remains committed to getting the deal done. Amid additional requests from the U.S. Department of Justice and other regulatory entities, Arris now believes it will wrap up the merger by late December or the first quarter of 2016. Arris has also indicated that regulators might apply a condition to the deal that Arris divest part of its optical transmission business.

Arris and Pace shareholders have approved the deal.

U.K.-based Pace has received the required shareholder approvals at the court and general shareholder meetings held Thursday in connection to its proposed $2.1 billion merger with Arris.

Arris stockholders holding 129,714,934 shares, representing approximately 88% of outstanding Arris shares as of the record date (September 10, 2015), approved the deal on Wednesday.

Arris sees the deal closing in “late December or the first quarter of 2016” amid additional requests from the U.S. Department of Justiceand regulators in Brazil and Colombia that could pave the way for conditions that Arris divest part of the optical transmission business of the combined company. 

Arris’s pending $2.1 billion acquisition of U.K.-based Pace plc took a step forward Wednesday as shareholders stamped the deal. 

At a special meeting of stockholders held  today, the proposal was approved by stockholders holding 129,714,934 shares, representing approximately 88% of outstanding Arris shares as of the record date (September 10, 2015), with more than 99% of the shares voted at the meeting, Arris said. 

Per English law, Pace is required to hold two special meetings to approve the scheme of arrangement -- a court-ordered meeting and a general meeting,  both of which are scheduled to be held on October 22. 

Arris now believes it won’t be able to close the deal until “late December or the first quarter of 2016” amid additional requests from the U.S. Department of Justice and regulators in Brazil and Colombia that could pave the way for conditions that Arris divest part of the optical transmission business of the combined company. 

“We see the sale of the Pace transmission unit as the most logical scenario,” Raymond James analyst Simon Leopold said in a research note this week, noting that it would not represent a “show stopper.” 

"We are pleased to complete another condition to the closing of the combination,” Arris chairmand and CEO Bob Stanzione said, in a statement. “ We continue to believe that our strong, complementary businesses provide expanded opportunities to support our customers and increase our speed of innovation as we collaborate to invent the future."

A delay in Arris’s proposed $2.1 billion merger with Pace plc isn’t a “show stopper,” as Arris has “viable options to modify the deal” that could alleviate concerns raised by the U.S. Department of Justice, Raymond James analyst Simon Leopold said in a research note released Monday.

Arris announced on Friday (October 17) that the deal might not close until late December or the first quarter of 2016 amid additional requests from the Antitrust Division of the DoJ and regulators in Brazil and Colombia. Arris said the Antitrust Division’s focus appears to be on their optical transmission products, which include node equipment. Pace strengthened its position in this area in 2013 when it acquired Aurora Networks for $310 million.

“We do not consider the optical transmission products as the primary focus for ARRIS' Pace acquisition and believe options exist to consummate a transaction,” Leopold wrote. “We see the sale of the Pace transmission unit as the most logical scenario.”

He said possible buyers could include CommScope, Harmonic and Casa Systems, with Emore and Applied Optoelectronics and Ericsson to be among those “less likely” to make a play for the Pace unit.

“Although we are uncertain if the unit would be divested in its entirety, we imagine it might be valued near 1x sales or $300-$350 million,” Leopold added.

The divestiture of the networks business of Pace, he said, would bring the combined CY16 sales estimate to $7.48 billion, down from $7.80 billion, and earnings per share to $3.27, versus $3.41, with accretion of $0.51, down from the analyst’s prior $0.66 estimate.

Leopold maintained a “strong buy” rating on Arris as well as his $41 target price on the stock.

Regulators in Portugal, Germany and South Africa have already cleared the Arris-Pace  agreement.

Arris is confident that it will close its proposed $2.1 billion merger with U.K.-based Pace plc, but now believes it won’t be able to seal the deal until “late December or the first quarter of 2016” amid additional requests from the U.S. Department of Justice and other regulatory bodies that might create conditions that would require the companies to divest part of their business.

Arris and Pace have long expected to wrap up the deal by year end, but Arris said Friday (October 16) that the companies have received requests for additional information from the Antitrust Division of the U.S. DoJ as well as regulators in Brazil and Colombia. The DoJ put in its original request for more data from Arris and Pace in June. 

Arris said the Antitrust Division’s current focus “appears to be on certain optical transmission products of Arris and Pace,” adding that it it’s possible, as a condition to the approvals, that “the governmental agencies may impose requirements, conditions or limitations on ARRIS business after the completion of the transaction which may include a divestiture.”

Such a condition or requirement, Arris said, “could further delay the completion of the transaction could further delay the completion of the transaction or reduce the anticipated benefits of the combination.”

While the proposed merger would create a set-top behemoth that would enable Arris to expand much deeper into the satellite TV market and into new international arenas, the deal would also create a larger provider of access network gear.

Pace secured a stronger play in the optical transmission and cable access network market in 2013 when it acquired Aurora Networks, which had earlier picked up a cable access unit of Harmonic Inc. that made optical transmitters, amplifiers, receivers and nodes.

Arris was not overly concerned that the current focus on the pending transaction, which intends to create a “New Arris” to be incorporated in the U.K. but operate its worldwide headquarters in Suwanee, Ga.  The merged company would have pro forma revenue of roughly  $8 billion and 8,500 employees. According to an 8-K filing with the SEC, Arris is subject to a break-up fee of up to $20 million.

"While we are disappointed in the potential delay in the timing for completion, we believe that even if conditions are imposed, the transaction remains in the best interests of the shareholders," Bob Stanzione, Arris chairman and CEO, said in a statement. “Based on our current understanding of the Antitrust Division's areas of continued focus and given the opportunities for the combined business and the potential synergies, we believe that the non-GAAP EPS accretion ranges for the first 12 months following the combination, previously estimated and disclosed by ARRIS, continue to remain possible."

Regulators in Portugal, Germany and South Africa have already cleared the agreement.

The proposed $2.1 billion merger of Arris and Pace plc took another step forward following unconditional clearance from the Portuguese Competition Authority, Arris announced Tuesday. 

That follows earlier pre-conditional clearance in Germany and South Africa. Arris said it has obtained clearance in response to three of its six antitrust-related filings in connection with the proposed combination.

Of recent note, Arris and Pace each received requests for additional info from the U.S. Department of Justice in connection to the deal, which aims to create a larger scale provider of set-tops and gateways, broadband access network gear and software products.

Pace and Arris hope to close the deal by year-end.

Upcoming milestones include an Arris vote on October 21 and a Pace vote on October 22, Raymond James analyst Simon Leopold said in a recent research note.

Earlier this month, Leopold maintained his “Strong Buy” rating on shares of Arris even as Pace provided 2015 revenue guidance of $2.55 billion, down from an earlier forecast of $2.65 billion to $2.72 billion due to spending delays driven in part by cable operator consolidation.

“Despite the lower sales forecast from Pace, we believe the acquisition still holds significant upside, highlighted by ARRIS' recent update that raised the guidance for EPS accretion to $0.65-0.75, an increase of $0.20 from its initial forecast ,” he wrote. 

Arris revenues and earnings took an expected hit in the second quarter as the supplier announced results Wednesday a few weeks after lowering guidance for the period amid “headwinds” caused by ongoing industry consolidation and the strengthening U.S. dollar.

Arris posted non-GAAP  earnings of 53 cents per share, down 24.3% year-over-year, on revenues of $1.26 billion, down 11.8% -- all in-line with analyst expectations.

Arris said three customers represented 10% or more of revenues in Q2. That trio represented $561 million, or 45% of total sales, in Q2. 

On the CPE side, sales and direct operating profit dropped by 18% and 33%, respectively.

Telco-based video CPE unit volumes dropped 9% versus the year-ago quarter, and cable units dropped 17% from last year’s record levels. Arris noted that it successfully qualified the XG1v3 (for Comcast) and initiated volume shipments.

Broadband CPE volumes were also down 10%, though 80% of those shipped are now WiFi enabled. Arris has also entered field trials with devices based on G.fast, a standard that aims to bring gigabit capabilities to DSL networks.

On the network, shipments of Arris’s flagship CCAP chassis, the E6000, hit a new record as more than 750 units were shipped, and downstream shipments exceeded Q2 levels. Arris said Suddenlink Communications tapped the E6000 for its 1-Gig residential rollout, which is initially being powered by DOCSIS 3.0.

Arris said development and interop testing for DOCSIS 3.1, the emerging multi-gigabit platform for HFC networks are moving forward in anticipation of initial field trials slated for Q4 2015.

Arris still expects to close its proposed $2.1 billion merger with U.K.-based Pace plc in Q4, noting that it has applied for regulatory approval in six jurisdictions, and has received approval in Germany and South Africa. Arris received a second request from the U.S. Department of Justice on June 29.

Looking ahead, Arris expects Q3 revenues of $1,210 million to $1,260 million, with adjusted net income per diluted share in the range of $0.52 to $0.58 and GAAP net income per diluted share in the range of $0.17 to $0.23. That's down from analyst expectations of $0.64 per share on revenues of $1.30 billion.

"Sales, margins, and Non-GAAP earnings were all up quarter over quarter, although not as much as we originally thought,” Arris chairman and CEO Bob Stanzione said in a statement summing up the period. “These results, as expected, are down compared with the second quarter of last year when we were launching an unprecedented number of new products.  As we have highlighted, we are encountering headwinds which we expect to continue through 2015, in particular those related to industry consolidations and the strong US dollar.”

Technicolor’s $600 million play for Cisco Systems’ consumer premises equipment business represents quite the bargain, as it will help Technicolor shore up share in a shrinking yet still-substantial set-top box market, reckons Futuresource Consulting.

“At $600 million, Technicolor seems to be getting a good deal – an incremental $1.2 billion in STB sales and access to key North American cable and IPTV accounts, bringing its worldwide share up to 13% (15% of Pay-TV),” Jack Wetherill, Futuresource’s senior market analyst, home electronics, said in a statement. “It also gets Cisco’s Cable Modem business to complement its own Broadband CPE unit, lifting its worldwide share up to about 15%.”

Cisco got into the set-top game almost a decade ago when it put up $6.9 billion for Scientific-Atlanta.

Futuresource said the global set-top market today is worth about $20 billion, and the deal will enable Technicolor to grab at least a 13% claim of it, along with a combined share of about 30% in the North American market.

Cisco’s total connected device sales are expected to total $1.6 billion for fiscal 2015, effectively doubling Technicolor’s Connected Home business in a full year.

That will help Technicolor achieve more scale as it braces for the pending Arris-Pace deal, which will potentially create a company with a 23% of the set-top market and apply more pressure on the smaller players, Futuresource pointed out.

On Tuesday, Pace posted first-half 2015  EBITA of $118 million, up 11% on revenues of $1.07 billion, down 5.3%. Non-CPE equipment revenues rose 34%, to $225 million. It expects full-year revenues to be in the range of $2.65 billion to $2.72 billion. Arris posts Q2 results later today.

Scale is clearly the name of the game in the eroding set-top box market. Per Futuresource, global STB shipments dropped 2%, to 274 million units in 2014, due in part to cut backs in emerging markets like Russia, Brazil, China and India.

But Futuresource’s Wetherill  does not see the bottom falling out of the set-top market, predicting that it will continue to pump out 250 million-plus units per year until 2019, and will still be worth more than $17 million by then. 

Although Arris is still fighting “headwinds” caused by MVPD consolidation paired with a consolidating and shrinking set-top market, one analyst thinks concerns about the supplier's future are a bit overblown, holding that the company remains well-positioned when it comes to the larger IP video transition.

Raymond James analyst Simon Leopold maintained his “Strong Buy” on the stock Monday, and a target price of $40 (at last check Monday, Arris shares were trading at $30.08, down 44 cents (1.44%) for the day). 

“The rapid demise of broadcast video and death of ARRIS's CPE business has been greatly exaggerated and we remain buyers of the stock,” he wrote, referring to Arris’s recently released annual Consumer Entertainment Index survey, which found that the growth/decline of OTT and traditional broadcast TV services, at +1% and -1%, respectively, being almost imperceptible at +1% and -1%.  “This seems to defy the expectations that 2015 would be a key inflection point and the start of a mass ‘cord cutting’ revolution. We see the transition of video from broadcast to IP as a gradual evolution driving product cycles and not a revolution ending the CPE market.”

In the meantime, those who are staying in the CPE business are looking to amass as much scale as possible, whether it’s Arris’s proposed merger with U.K.-based STB rival Pace Plc, Technicolor’s pending purchase of Cisco Systems’ set-top/CPE business, or even Amino’s play for Entone.

That said, he’s still confident with Arris’s long-term strategy, as “the fundamental demand for video equipment remains very healthy, driven by an inevitable structural shift in network architecture toward all IP and CCAP (converged cable access platform) along with telco video distribution.”

Arris, which recently lowered Q2 guidance, is scheduled to post financial results on Wednesday (July 29).

Signaling more vendor consolidation in the sluggish set-top box market, U.K.-based Amino Technologies has inked a deal to acquire Entone Inc. for $73 million ($65 million in cash).

Both suppliers make and sell IP-only and hybrid set-tops and gateways.

Cupertino, Calif.-based Entone, which also sells WiFi adapters and other types of accessories, has been particularly successful in the independent tier 2/3 service provider market using a platform that mixes traditional pay TV and over-the-top video, but has also secured footholds with majors.  Entone, which has also promoting an “legal” Aereo-alternative under which its FusionTV service combines over-the-air and over-the-top video services, has notched recent wins with Vodafone Netherlands, Three River Communications, mobile operator TIM Brasil, and Volia, a Ukrainian cable operator. In 2013, Entone and TiVo announced an agreement to jointly pursue IPTV deals that would also clear the way for Entone to combine TiVo with boxes with or without local DVR storage and focus on the delivery of cloud-based apps and services. 

Privately-held Entone, which has more than 150 customers globally, pulled in revenues of $43.4 million in the fiscal year ended June 30, 2014, and EBITDA of $3.9 million. In the 11 month period from May 31, 2015, Entone generated revenues of $46.7 million and EBITDA of $5.1 million. Entone had net cash of $12 million and net assets of $15.9 million as of May 31, 2015.

Amino said the deal will help it boost its global footprint and scale while also removing a direct competitor from the market. It expects financial synergies of about £1.0 million (US$1.5 billion) in the full year after the deal is closed. They expect to close the deal in the third quarter.

Scale is also a driving reason behind Arris’s proposed $2.1 billion acquisition of Pace Plc, the U.K.-based maker of set-tops, video software and broadband access gear.

"The proposed acquisition of Entone has the potential to transform our business and broaden our capabilities and market reach globally across IPTV, hybrid broadcast and a range of connected home solutions,” Amino CEO Donald McGarva said in a statement, claiming the deal also aligns with Amino’s recent buy of cloud-TV platform provider Booxmedia.

"Bringing together Amino and Entone would create a significant new presence in the pay-TV market with solutions and skillsets that are highly complementary,” added Entone CEO Steve McKay. “We share a very similar vision as to how our industry is changing and the kinds of solutions that are required to address both existing and new customers."

Canaccord Genuity has been appointed as financial adviser and joint bookrunner in connection with the acquisition.

EARLIER:Arris Stock Drops on Q2 Warning

Raymond James analyst Simon Leopold kept his “Strong Buy” rating on Arris but tweaked his revenue estimates and stock price target after the supplier of broadband and video gear lowered second quarter guidance due to greater than anticipated "headwinds” caused by industry consolidation and the strengthening U.S. dollar.

“Although we would have preferred better news, we continue to be confident that cable spending remains healthy over the long term, driven by a number of factors including a structural shift in the architecture towards IP and continued traffic growth,” Leopold wrote. “Faster adoption of IP networks would alter ARRIS' mix, driving faster growth of high margin CMTS [cable modem termination system[ offset by slowing low margin STB [set-top box] sales. We see long-term sales growth of 3-6% and expect the company to provide strong cash flow and likely delever and buy back shares.

Leopold recently trimmed his estimates on Arris due to expected lumpiness in customer spending driven by ongoing consolidation (Charter’s proposed acquisitions of Time Warner Cable and Bright House Networks; and the pending AT&T-DirecTV merger), and did so again following the company’s Q2 warning issued late last week. Arris now forecasts sales of $1.25 billion to $1.26 billion, below prior guidance for $1,27 billion to $1.31 billion, with non-GAAP earnings per share of $0.51-0.55, off from prior guidance of $0.53-0.58.

Raymond James is now forecasting 2015 sales of $5.13 billion to $5.22 billion, with EPS of $2.40, from $2.52. The firm also lowered its price target from $43, to $42, “which still offers significant upside potential.”

Leopold also noted that Arris shares still reflect uncertainty with respect to the proposed merger of Arris and Pace plc. “The market values Pace shares about 8% below the implied offer,” he wrote. “We believe the deal gains approval and provides at least $0.45 of EPS accretion.”

Arris posted lower first quarter numbers as the company continued to face uncertainty and “headwinds” amid M&A activity involving some of its biggest customers.

Of note, Comcast and Time Warner Cable broke up their proposed merger, while AT&T and DirecTV are still in the process of tying the knot.

“As we indicated on our previous earnings call, we've seen overall spending levels down from prior periods primarily due to the distractions and uncertainties associated with industry dynamics,” Bob Stanzione, Arris chairman, president and CEO, said on Wednesday's earnings call. "However, we feel great about our position in the market. We're going through a period of change that is having what we feel is a temporary effect on our business." 

Stanzione said it will “take us a while” to determine how the Comcast/TWC news will affect Arris later in the year, but believes Arris is “very well positioned in both Comcast and Time Warner with their next generation projects, and I think that we'll see business begin to improve as the year goes on.”

Arris posted Q1 revenues of $1.21 billion, down $9.8 million (1%) from the year-ago quarter, and down $48.2 million (4%) from the previous period. Adjusted net income was 44 cents per diluted share, versus 47 cents in the year-ago quarter. Those results were in-line, as analysts were expecting revenues of $1.22 billion, and a profit of 44 cents per share. 

Product Update

Arris saw decreased demand from some customers deploying stand-alone HD digital set-tops coupled with progress made with more capable video gateways with customers such as Comcast, Verizon Communications and TWC, Larry Robinson, president, customer premises equipment at Arris, said. Arris said it surpassed 4 million video gateway unit shipments in Q1.

On the network end, quarter-over-quarter CMTS revenues dropped 10% and were down moderately from record level shipments in the previous quarter, Bruce McClelland, president of network & cloud and global services, said.

Sales of E6000, Arris’s new flagship converged cable access platform (CCAP) that will factor heavily into the vendor’s DOCSIS 3.1 strategy, rose 41% year-on-year, but were down slightly from Q4 2014.

McClelland said Arris successfully completed several DOCSIS 3.1 interop events at CableLabs and expects lab and field trails to start later this year.

M&A Action

Arris also addressed two recent acquisition deals – the $135 million purchase of ActiveVideo Networks (through a joint venture with Charter Communications), and the proposed $2.1 billion play for U.K.-based Pace plc.

Stanzione said the ActiveVideo deal is expected to close “in the next few days,” and reiterated that the Pace merger, expected to close in the second half of the year, will increase Arris’s scale, international presence and give it a larger entry into the satellite video segment. The combo of Arris and Pace into the “New Arris,” to be incorporated in the U.K., is poised to have revenues of about $8 billion.

Arris was again asked about the antitrust risk posed by the Pace deal, which will combine the world’s top two set-top box makers.

“We're fairly confident based on the advance we've gotten from the experts in the area that will be able to clear that hurdle,” Stanzione said.

Stanzione also downplayed fears that the set-top will fade from existence.

“I would ask the question, what's going to replace them?  I think the answer to that question is… that there is a transition going on from video set-top boxes to advanced gateways,” Stanzione said. “We don't think it [the set-top box] goes away.”

Looking ahead, Arris expects Q2 revenues of $1.27 billion to $1.31 billion, and non-GAAP earnings of 53 cents to 58 cents per share.