Shares in Arris were up more than 7% in after-hours trading Wednesday after the company turned in a solid Q2 and announced revised guidance that comes in at the higher end of previous revenues expectations and net income that’s trending above earlier guidance.
Q2 was Arris’s “best quarter ever,” company chairman and CEO Bob Stanzione declared on the company’s earnings call.
Q2 results, which include Arris’s acquisition of Pace plc in January, saw revenues climb to $1.73 billion, from $1.26 billion a year ago, and GAAP net income of 44 cents per diluted share, up from 11 cents. For Q3, Arris expects revenues of $1.7 billion to $1.75 billion, and GAAP net income of 28 cents to 33 cents.
“I'd say that the macro environment for our business is looking good and holding steady,” Stanzione said, holding that U.S. cable consolation “seems to be done” for the time being.
He also sees U.S. telco and satellite markets improving as AT&T/DirecTV look to regain momentum, Verizon gets past the disruption of its wireline workers strike, and Frontier digests its acquisitions of FiOS properties and looks to accelerate marketing programs.
Long Live The Set-Top Box
Arris saw a 40% surge in customer premises equipment sales in Q2 versus the prior year period, driven by the Pace acquisition.
Broadband CPE slumped 8%, but video CPE revenues soared 85% year-on-year amid solid demand across telcos, cable operators and satellite TV operators.
Stanzione said the debate centered on the FCC’s pursuit of new set-top rules have cast a cloud on the set-top market that isn’t warranted.
“I think the evidence right here [in the financial results] is that set-top boxes are not going away,” Stanzione said. “We are designing new, next-generation set-tops for major cable operators around the world as we speak. We believe that video set-tops will remain a significant component of our business for quite some time into the future."
On the network side, sales of Converged Cable Access Platform (CCAP) and PON products were up year-on-year, but down from record levels in Q1. Notably, shipments of downstream software licenses down significantly as capacity previously purchased was being deployed and utilized across our customer networks, according to Bruce McClelland, president of Arris’s Network and Cloud division.
He said Arris has begun lab and certification testing on a new “Gen2” upstream linecard that is on track for full field trails later this quarter.
McClelland also said Arris has made “great progress” on remote PHY products that place the physical access layer of the DOCSIS CMTS into the fiber node.
That module can either go into an existing Arris fiber node and connect via the E6000 chassis, or ultimately to a “virtual DOCSIS core” that is under development, and will likely compete with a virtual CCAP that Nokia will be offering following its acquisition of Gainspeed.
Arris-Comcast Warrants Agreement
Arris also shed some light on a warrant agreement with Comcast announced earlier this month that spans the supply of products for the MSO’s video (including X1), high-speed data and voice services, including wireless gateways.
Dave Potts, Arris’s CFO, said the warrants are for up to 8 million shares over 2016 (up to 3 million shares) and 2017 (up to 5 million shares) based on sales and product mix targets. It has some accounting impacts, as Arris must record a fair value as a reduction to revenue. In Q2, Arris recorded $4.3 million related to the first six months of sales.
Even if Comcast were to earn the full lot of shares, its "ownership postion would still be below 5%," Arris told Light Reading when the warrants agreement was announced.
Warrants agreements are becoming more common between Comcast and its key vendors.
In March, Universal Electronics struck a warrants agreement with Comcast as an extension of the vendor’s arrangement to develop new products in partnership with the MSO. That followed a development and supply collaboration renewed earlier in the year in which UEI supplies the voice remote for Comcast’s X1 platform (Comcast announced today that it has deployed about 8 million of those), and positions it to provide products for Xfinity Home, the MSO’s home security and automation service, as well.