Arris Beats The Street In Q3

But Announces Weak Q4 Guidance Amid Slower Operator Spending
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Arris posted solid third quarter results Wednesday, but paired that with weaker-than-expected guidance for the fourth quarter as the supplier braces for slower spending among some telco and cable customers and potential challenges linked to ongoing operator consolidation.

Arris posted earnings of 81 cents per share on revenues of $1.4 billion, up 32% year-over-year, beating Wall Street’s expected earnings of 72 cents per share on revenues of $1.39 billion. Looking ahead, Arris said it expects fourth quarter sales in the range of $1.23 billion to $1.27 billion, with earnings in the range of 58 cents to 63 cents per share, versus an expected $1.33 billion and 62 cents.

Analysts took that in stride, as Raymond James analyst Simon Leopold maintained his “Strong Buy” rating, and National Alliance Securities analyst Bryan Coyne reiterated his “Buy” ranking on the stock.

Despite the weaker guidance, “[w]e argue that this presents an opportunity for investors waiting for an entry point because a favorable mix shift enables it to deliver good earnings in 2015,” Leopold wrote.

“As surprising and deep as the Q4 guidance miss was, we believe its release lifts a major overhang on the stock, allowing investors to turn their focus on growth catalyst following carrier M&A,” Coyne wrote.

Arris announced that four customers represented greater than 10% of revenues in the third quarter, but no longer identifies them. Along with Comcast and Time Warner Cable, other operators that have historically been in this 10%-or-greater group include Charter Communications, AT&T and Verizon Communications.

While weak spending by AT&T, which is in the process of merging with DirecTV, “should not come as a surprise,” progress by Pace in the U.S. market “is an issue in the near term,” Leopold noted. “We are not as concerned about a pause when Comcast, Time Warner, and Charter eventually complete their transaction.”

Banking On DOCSIS 3.1

Despite the expected Q4 hiccup, Arris said it remains bullish about the future.

“Once we get through the upcoming industry M&A activities, I believe we'll see a robust increase in capital spending,” Arris chairman and CEO Bob Stanzione said on Wednesday’s earnings call, adding later: “There's still considerable investment going on in the network. But I believe that spending will accelerate once all these things settle down.”

One area the company is banking on is DOCSIS 3.1, the emerging platform that will enable operators to deliver multi-gigabit speeds on their HFC networks. Arris, which demonstrated D3.1-based capabilities at the recent SCTE Cable-Tec Expo, expects product trials to be underway by next summer.

“But we think that 2016 is really where we start to see the volume,” Bruce McClelland, president of Arris’s Network & Cloud and Global Services unit, said.

“It's important to note that we believe DOCSIS 3.1 will result in another wave of upgrades across both the network and the homes,” Stanzione said.

During the third quarter, Arris said cable modem termination system (CMTS) shipments hit record levels, aided by a 33% increase in downstream channels versus the second quarter.

Set-top box unit volumes were up 27% year-over-year, with Arris recently eclipsing a shipment milestone of 1 million video gateways, which includes the DCX3600 device that TWC is starting to offer in New York City and Los Angeles.

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