The past year produced a lot of static for Arris Group Inc.'s data and telephony products, but 2003 should improve the connection, in CEO Robert Stanzione's view.
With less than a month left before the Duluth, Ga.-based data and voice gear provider states its fourth-quarter 2002 earnings, Stanzione told a group of analysts and journalists at a Needham Growth Conference gathering last week that the company is betting on a better 2003.
Changes that hurt the industry in 2002 — including Adelphia Communications Corp.'s management scandal and bankruptcy, the investigation into Charter Communications Inc.'s accounting practices and fallout from the AT&T Broadband-Comcast Corp. merger — will begin to settle out, Stanzione said.
"All of those things are beginning to right themselves, and I would expect that six months from now, we are going to be facing a much healthier market as these issues begin to be resolved," Stanzione predicted.
Arris specializes in voice and data, and its cash cow is in the older, switched, constant-bitrate telephony products. It has 42 network customers and some 16 million lines installed worldwide.
Only about 20 percent to 25 percent of that capacity is in use, so Stanzione thinks these networks will have an annuity as they begin to fill out.
In the future, Stanzione said, Arris expects that capacity to shift to voice-over-Internet protocol technologies.
"The future as we look at it is, everything is IP, everywhere," said Stanzione. "More and more data and video is being transmitted, and voice of course, over in packets, in IP packets."
The list also includes "more and more IP client devices that are voice-enabled," he added. "Of course, home networking is a big deal right now, with more and more people installing home-networking devices, increasing the traffic on these networks, and of course, IP multimedia."
As a result, Arris has aggressively invested in next-generation high-speed data equipment able to deliver for this IP-oriented market. It has already inked a preferred equipment deal with Comcast Corp. for the MSO's next-generation data deployment in Michigan, and that should generate more gear business for the company.
With cable-modem termination system and access gear now bearing the stamp of Data Over Cable Service Interface Specification 1.1, Arris is also well-positioned to attract more IP cable-telephony contracts.
"Voice-over-IP is actually a fairly complicated endeavor," Stanzione said. "What we've done is spent a lot of time and a lot of engineering effort in developing relationships and becoming experts in interoperability in all facets of doing voice-over-IP. But we are also gaining expertise around with all of the other vendors that are involved in providing piece parts of voice-over-IP service."
So far, Arris has landed several key vendor contracts, including a deal to supply access gear for Comcast's IP-telephony trial in Philadelphia.
"We have to transition now from first generation to second generation, and so far, so good," Stanzione said. "We've done a good job of establishing ourselves in trials and early decisions in voice-over-IP."
But there are questions as to how much of a business cable-delivered telephone service might constitute. During a question-and-answer period, Stanzione found himself defending cable telephony's prospects. He pointed critics to strong numbers in Cox Communications Inc.'s recent financial statements.
When one looks at MSOs' financial performance details, "it is outstanding," he claimed. "The payback is quick, the margins are high, the customer [acceptance] is beating everyone's expectations, and the profitability is there."
Still, VoIP is designed to provide service at a lower cost, and that means less revenue per subscriber for vendors. IP-phone deployments bring in one-third less than the $300 to $400 per subscriber Arris gets for constant bitrate service, Stanzione said.
"Both prices are coming down, however the market is expanding, and part of our growth strategy is to expand our portfolio so we have more of the elements of voice-over-IP," Stanzione said.
It may be a bit of a wait until that product line develops.
"We don't expect there to be much revenue from voice-over-IP in 2003," Stanzione said. "We expect that there will be decisions made in 2003, and that the revenue will begin to grow in 2004."