Arris’s Business Waxes and Wanes in Q1

Arris’s Q1 results were a mixed bag as solid growth in its Network & Cloud and Enterprise segments arrived alongside a sales slowdown for both video and broadband consumer premises equipment (CPE).

Arris Q1 CPE sales were $875 million ($323 million for broadband devices and $552 million for video devices), down from $1.05 billion ($424 million for broadband devices and $631 million for video devices) in the year-ago period.

The decline in video set-top sales reflected the general softness of the pay market, while direct revenue contribution was impacted by both lower sales volumes and ongoing memory cost issues.

With that backdrop, Arris has already said it would be more selective with its set-top business and put more emphasis on profitability.

RELATED: Arris to Be ‘More Selective’ With Its Set-Top Box Business

Arris is also working with customers on pricing adjustments that reflect increased memory costs, but those benefits are expected to emerge in the second half of the year, Bruce McClelland, Arris’s CEO, said Tuesday on the earnings call.

The drop in broadband CPE sales was attributed to typical “seasonality” in Arris’s business alongside reduced purchases of DOCSIS 3.0 modems and gateways in anticipation of accelerating investments in DOCSIS 3.1 devices, McClelland said

He called that situation a “short-term blip,” noting that Arris will probably exit 2018 with 30% to 40% of cable broadband CPE being DOCSIS 3.1 devices, up from roughly 10% by the end of 2017.

“We expect momentum to return again this quarter as several new DOCSIS 3.1 products ramped up volume and we continue to anticipate a robust broadband CPE upgrade cycle tied to the customer migration to Gigabit services as we're seeing already in our Network & Cloud business,” he explained.

He said Arris expects CPE revenues to return to the “billion dollar range” in the second quarter.

However, “pressure on product cost has not abated, with memory prices continuing to increase and lead times and availability of other components becoming more challenging,” McClelland said.

On the network side, Arris saw strong sales for its E6000 converged cable access platform as MSOs bought into Gen 2 line cards that more than double capacity. Q1 revenues for Arris's Network & Cloud segment were $536.3 million, up 25% year-over-year. 

“We were a little surprised by the strength of the DOCSIS 3.1 capacity purchases this quarter as we'd expected some of this demand later in the year,” McClelland said.

Arris’s new Enterprise business, driven by its acquisition of Ruckus Wireless, came in at a higher than expected $170 million in the quarter.

McClelland said Ruckus Networks has more than 20 technology and operational trials using the CBRS 3.5 GHz band, a slice of shared spectrum that's expected to factor heavily into cable’s future mobile and wireless strategies.

RELATED: Comcast Wants to Test CBRS in Philly

Another bright spot was international sales, which grew 30% year-on-year, a contributed 43% to Arris’s overall revenue in Q1.

Overall Q1 sales were $1.57 billion, down from $1.48 billion in the year-ago quarter and below Wall Street consensus of $1.6 billion, but in line with company guidance. 

Arris ended the quarter with $543 million of cash resources, up from $511 million at the end of 2017.

Arris expects Q2 sales in the range of $1.76 billion to $1.81 billion, reflecting an expected rise in CPE sales, and full-year 2018 revenues of $7.1 billion to $7.3 billion. 

Raymond James analyst Simon Leopold reiterated his “Strong Buy” on Arris stock and a target price of $37 per share.