Arris Cites Comcast in Weak Forecast

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Arris is predicting a "very disappointing" first quarter of sales, attributing the slowdown to a drop in orders for cable voice modems from its largest single customer, Comcast.

Comcast experienced "an apparent leveling-out of their net subscriber growth over the past two quarters," Arris CEO Bob Stanzione said, on a conference call Thursday with financial analysts on fourth-quarter and year-end 2007 results. "Adjustment of inventory is causing Comcast orders in Q1 to fall to a very low level."

Comcast, which also reported earnings Thursday, posted a net loss of 94,000 basic video subs for the fourth quarter but added 604,000 digital voice and 331,000 Internet customers in the period.

The most significant factor for the decline, according to Stanzione, was that Comcast last year added as a second supplier of cable voice modems. 

That competing vendor is Thomson, which in July announced a purchasing agreement with Comcast for Thomson's DHG535 voice-enabled cable modems. The products are referred to in the industry as eMTAs, or embedded multimedia terminal adapters.


As a result, Arris projected revenues for the first quarter 2008 will be between $270 million and $285 million, 13% to 18% below analysts' consensus Q1 revenue estimate of $328 million, according to Thomson Financial. 


Stanzione added, however, that even with lower sales first-quarter sales, Arris expects to remain profitable and that sales will "bounce back sharply as the year goes on."


Comcast's spending patterns are also affecting sales of Arris' cable modem termination systems, Stanzione said. The operator "appears to be reserving much of their CMTS budget for an aggressive DOCSIS 3.0 rollout in the second half of the year to meet their objective of wideband deployment over 20% of their footprint by year-end," he said.

Stanzione noted that CMTS sales to Time Warner Cable, Bright House Networks, and Cablevision System began to "take off" in the fourth quarter, adding that Time Warner recently announced that it had passed 3 million voice-over-IP subscribers.

In 2008, "we will see significant benefit coming from DOCSIS 3.0, from switched digital video, from commercial services rollouts," Stanzione said. "In addition, we see growing demand for our on-demand products as subscribers seek more control over content and MSOs increase their focus on advanced advertising."


For the fourth quarter, Arris had revenues of $249.6 million, up 6% compared with the year-earlier period but down 2% sequentially. Arris attributed the decline to lower eMTA sales, shipping about 1.7 million total cable modems and eMTAs in the fourth quarter. The fourth-quarter revenues also included about $6.6 million in sales from C-COR, recorded after Arris completed the acquisition Dec. 14.

For the full year 2007, Arris revenues were $992.2 million, an 11% increase over 2006.


When asked on the call whether the D5 Universal Edge QAM was profitable on a gross margin basis, Arris CFO David Potts said it wasn't.

"First of all the D5 sales are off to bit of a slow start," Potts said. "I think the SDV deployments are off to a bit of a slow start." He added that volumes are expected to increase over the course of the year and a "very significant design spin that is in process" will also yield cost reductions in the latter part of the year.

He said Arris does not break out sales of individual product lines, but said the D5 currently "is a very small percentage" of overall sales. Potts said the D5 could possibly generate $10 million to $15 million per quarter in sales by the fourth quarter 2008.

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