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Arris Pushes Through M&A-Induced ‘Headwinds’

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.