Arris Weathers Comcast's Shift


Comcast Corp.'s telephony pullback in former AT&T Broadband markets might not mean much to the MSO's bottom line, but it sure has hurt the folks at Arris Group Inc.

The cable equipment vendor last week reported fourth-quarter revenue of $122.4 million, a huge drop from the third quarter's $180.6 million.

But because Arris's performance outpaced its quarterly revenue and bottom-line guidance to analysts, the company's stock rose on the news, from $3.69 at close on Jan. 31 to $4.12 on Feb. 4.

Arris shares closed at $4 the next day, when a Credit Suisse First Boston analyst raised her 2003 earnings estimate to a profit of 20 cents per share from an 11-cents-per-share loss.

Revenue for Arris's broadband sector, which sells gear to cable operators — including circuit-switched telephony equipment to AT&T Broadband — dropped from $132.3 million in the third quarter to $79.1 million in the fourth.

Sales to AT&T dropped from $89.5 million in the third quarter to $35 million in the fourth quarter, accounting for nearly all of the quarterly revenue drop.

Over the short term, the company has pinned its hopes on operational efficiencies, cable-modem shipments and future Internet-protocol telephony deployments.

"We completed the outsourcing of all our manufacturing, dramatically improved our balance sheet, divested underperforming assets and, at the same time, have demonstrated market leadership in new technologies such as voice-over-IP and next-generation high-speed data products," CEO Bob Stanzione said. "Although our industry experienced considerable turmoil during the past year, we took the necessary actions to lower our breakeven point and continued to aggressively invest in our future."

The earnings release did contain some good news. Arris generated $651.9 million in revenue for the full year of 2002, up 4 percent from 2001's $628.3 million.

Arris also lowered its per-share loss from $3.13 in 2001 to $2.33 per share.

The company expects the hangover from the Comcast-AT&T Broadband merger to continue into 2003. It expects first-quarter revenue to fall in the $120 million to $130 million range, on par with fourth-quarter 2002.

"It still remains difficult to forecast beyond the current quarter," said Arris executive vice president and chief financial officer Larry Margolis.

With respect to Comcast, Stanzione said, "they are continuing to sell phone service, but it's not one of their top priorities. It's a much lower rate on install."

On other fronts Arris has fared better. Cox Communications Inc. is using the company's Touchstone gear in all of its major-market telephony rollouts, Stanzione noted. Arris shipped 221 host terminals in fourth quarter.

And Stanzione sees an upside in voice-port shipments as telephony penetration increases.

Arris's Cadant division is shipping next-generation cable-modem termination systems to Comcast, including 64 units in the quarter, he added.

On the upside, 2003 should be a strong year for advanced services — with continued telephony and data rollouts — and for plant maintenance, Stanzione said.

"We're expecting a good year for our Telewire division," he noted.

In addition to Comcast's need to rebuild outmoded AT&T Broadband plant, many systems that upgraded plant in the mid- to late 1990s will require "increasing maintenance supplies," Stanzione noted.