The sledding for Arris was a bit tough in Q4 as sales declined due in part to weak telco TV subscriber gains and slower sales of set-tops and other consumer premises equipment (CPE) to its wider range of service provider customers, including cable operators.
Arris also announced softer-than-expected Q1 2016 guidance, which caused shares to drop more than 10% in after-hours trading Wednesday.
Arris, which wrapped its acquisition of Pace plc on January 4, posted Q4 2015 sales of $1.1 billion, down 12.8% year-over-year, hitting the lower end of its guidance. Arris earned 62 cents per share, down from 78 cents per share a year earlier.
International sales represented 32.4% of total sales. Comcast and Time Warner Cable were Arris’s 10% or greater customers in the period, representing $379 million, or 34% of total sales.
“Sales to U.S. telcos continued down due to the very weak video subscriber additions and AT&T's move away from U-verse video delivery,” Arris chairman and CEO Bob Stanzione said on Wednesday’s earnings call.
As AT&T shifts from U-verse TV deliver and toward DirecTV-based video delivery, “our sales of U-verse video equipment have bottomed out,” Stanzione said later.
And though the ramp up to a new video business has gone slower than AT&T expected, “We predict success there, and we think that business will pick up as the year goes on," he said.
Stanzione also expects Frontier Communications to increase investment in the FiOS footprint it’s buying from Verizon Communications.
On the cable side, “things look fairly good,” Stanzione said, noting that MSOs announced solid revenue forecasts and capital expenditures for 2016.
Among individual product areas, CPE sales dropped 20% year-over-year, though interest in higher-capacity DOCSIS modems and gateways remains strong. Set-tops and other video CPE unit volumes dropped 13% on both a sequential and year-over-year basis.
A bright spot was Arris’s Network and Cloud business, which posted its strongest quarter of the year, led by record shipments of its flagship converged cable access platform (CCAP), the E6000, as investments by MSOs shifted from CPE to the network. Arris set new records for shipments in chassis, downstream channels and software licenses in the CCAP/CMTS category.
Arris said DOCSIS 3.1 field trials got underway in Q4, noting that Comcast expects to start commercial deployments in some markets in the first half of this year.
DOCSIS 3.1, cable’s new multi-gigabit platform for HFC networks, is a “major priority for the majority of our customers in 2016 and beyond,” Bruce McClelland, president of Network and Cloud at Arris, said.
As for the Pace integration, Arris is now addressing overlaps of product roadmaps and corporate functions, with the goal of having opex reductions “substantially completed” by the first half of 2016, Stanzione said, adding that the supply chain team is working on cost-of-sales synergies.
He also acknowledged that there could be some “revenue dissynergies” in the Pace merger, but didn’t have any specific visibility on that to report. “We remain enthusiastic about the benefits of the combination and are committed to getting this integration done quickly."
Arris was also asked about the FCC’s set-top plan and how it might respond if there’s a greater shift toward retail distribution of set-tops and other video devices.
Though Arris sees little consumer benefit to new tech-focused mandates from the government, it believes it already has a strong retail business for cable modems that it could apply to the set-top side.
Arris used to sell “Moxi” boxes at retail (Arris acquired Digeo in 2009). Arris is already looking to expand its retail portfolio to include WiFi routers and other devices that are “adjacent” to its broadband products, Larry Robinson, president of Arris’s CPE unit, said. Expanding that retail portfolio even further would be a “very easy step,” he added.
Arris said it expects Q1 2016 revenues in the range of $1.56 billion to $1.61 billion, and earnings non-GAAP earnings of 37 cents to 42 cents per share (not counting purchase accounting and restructuring). Those were both below consensus of $1.68 billion and 58 cents.
Arris shares were down 10.93% ($2.65) to $21.59 each in after-hours trading Wednesday.