Arris Braces For Cable’s Set-Top Transition

Fills Pipeline With IP-Capable Products As MSOs Leave Legacy Boxes Behind
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Wednesday offered the industry its first partial glimpse of how the new Arris is performing nearly four months after clinching its $2.35 billion acquisition of Motorola Home.

There was the expected surge in revenues as Arris swallowed a company that’s twice its size. But that was paired with the continued, though unsurprising, grim prospects for Motorola’s traditional set-top business as MSOs shift to new IP-capable gateways and client devices.

Overall shipments of those legacy boxes are down 8% to 10% in the first half of the year versus the first half of 2012, Larry Robinson, the new head of Arris’s Home Devices unit, said on Wednesday’s earnings call.

He said Motorola has about a half dozen new products in the pipeline that will start to launch in the fourth quarter of 2013 and into the first half of next year. “With MSOs moving to IP to support second screen experiences, the industry is undergoing a significant inflection point,” Robinson said.

Some of that work is already starting to bear fruit. Comcast, Arris’s largest customer, is preparing to launch the XG1, a QAM/IP hybrid gateway that runs the Comcast Reference Design Kit (RDK), a pre-integrated software platform for the MSO's new line of gateways and client devices.

Arris said it has secured three other design wins with yet-unnamed “large service providers.” Those deals will start to join the revenue stream by late in the fourth quarter or in early 2013, Arris chairman and CEO Bob Stanzione said.

With Motorola Home now in the mix, Arris said it shipped a record number of DOCSIS-powered consumer premises equipment units in the period, with 90% equipped with DOCSIS 3.0, and 60% that were Wi-Fi-enabled gateways.

On the network side, Arris reiterated that it had begun its first “significant shipments” to Comcast of the E6000, a converged access router that is starting off as a super-dense cable modem termination system, but will later be equipped to become a Converged Cable Access Platform (CCAP) that also bakes in the edge QAM function. “Deployments and trials are underway across all geographies,” Stanzione said of the E6000.

Arris also revealed that it will reduce its exposure to its unprofitable legacy GPON fiber-to-the-home business, noting that sales in the product category have dropped significantly since last year. “We don’t expect sales to grow. We expect them to diminish over time,” said Bruce McClelland, who runs Arris’s new Network & Cloud business, which includes the company’s CMTS, QAM, access, video processing and wireline product lines.

On the financial front, Arris posted revenues of $1 billion, beating analyst expectations of $976 million. That number excluded about $66 million in revenues that Motorola Home generated in the 16 days of the quarter before it officially became part of Arris.

Comcast, with $190.1 million of sales (19%), was Arris’s largest customer in the quarter, followed by Time Warner Cable ($98.4 million/9.8%).

Arris forecast third quarter revenues of $1.05 billion to $1.08 billion, a tad lighter than the $1.1 billion expected by analysts.

Despite the “slightly weak sales forecast” for the third quarter, “[w]e believe a pipeline of new projects led by Comcast’s initiative involving Arris’ XG1 Gateway can fuel revenue growth ramping in 4Q,” Raymond James analyst Simon Leopold wrote in note issued Thursday morning.

On the call, Arris was asked to assess the prospect of how further cable MSO consolidation might affect its business. “That’s a wild card. I don’t know what to expect there,” Stanzione said. But in the past, the company being acquired tends to pause spending and “starve the network” and then play catch-up once the deal is done, he said.

Arris shares were up $1.02 (6.53%), to $16.64 each, in morning trading Thursday.

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