Arris Group Plays Big Role In TV's Next Revolution


Television is undergoing a radical phase as Internet-savvy consumers demand to take control of the content they watch.

To keep customers from cutting the cord, as experts put it, in the age of streaming video, cable and telco service providers are scrambling to upgrade technology to better migrate their business model from a one-way TV service to a two-way communications network.

That transition involves high-speed Internet and telephony, plus high-definition TV, 3-D TV and over-the-top Internet protocol such as feature-length video content over the Internet.

Arris Group ( ARRS ) is one of the main providers of the technology that cable and telco companies need to migrate to all-digital and IP-based services. Its gear helps clients compete with streaming video fromNetflix ( NFLX ), Hulu,Amazon ( AMZN ) and others.

Arris' products include routers and cable modems, set tops, gateways, encoders and a platform for multiscreen content marketing.

"The really exciting thing about the company now is that it is in a real leadership position in an industry that is experiencing massive technological shifts," said Brian Coyne, an analyst with National Alliance Securities. He has followed Arris since 2002.

Growing With Focus

Suwanee, Ga.-based Arris was formed in 2000 to address early opportunities in cable modems.

In 2007 it expanded further into network products with its acquisition of C-COR, which also gave it video on demand and other products, including software.

Buying Motorola Home from a subsidiary ofGoogle ( GOOGL ) in April 2013 was especially transformational.

The $2.2 billion cash deal, plus 10.6 million shares of stock issued to Google, gave Arris new cable TV equipment, including a video set-top box business. Google still owns a 7% stake in Arris.

"It essentially tripled the size of the company," Coyne said.

Revenue jumped from $1.3 billion in 2012 to $3.6 billion in 2013, which included less than nine months with the Motorola Home cable-gear business under Arris' belt.

Until the deal, Arris had been focused on a smaller slice of the market -- products needed to facilitate high-speed data inside networks and the home, Coyne says.

Motorola's set-top box business under Google was part of a larger acquisition that the search giant made earlier. But the business had "lost its footing" by the time Arris bought it, Coyne said.

To its credit, he noted, Arris made "a very impressive rebound."

The company now has around a 35% share of the cable-modem market, 15% of the set-top box market and 40% of the cable modem termination system market (for providing high-speed data), RBC Capital Markets analyst Mark Sue said in a recent report.

Sue noted that Arris is gaining share from chief rivalCisco Systems ( CSCO ), which he said is "stepping away" from some deals in customer-premises equipment.

And he pointed out that Arris has more than a year's head start on Cisco with its E6000 converged edge router, addressing a market where Cisco's new products aren't expected to ship until early next year.

Arris says the E6000, which rolled out in large numbers late last year, is doing exceedingly well. It is used to provide subscribers high-speed data service such as cable Internet or voice-over-Internet protocol.

The E6000 platforms "are shipping with only 25% of the potential capacity activated, which leaves room for meaningful incremental software sales as the remaining capacity is needed," Stephens analyst Tim Quillin said in a research note.

Besides Cisco, rivals include Pace, a British company run out of Fort Lauderdale, Fla.

On the networking side of the competition are San Jose, Calif.-basedHarmonic (HLIT) and Boston-area Casa Systems.

Motorola had been a rival until Arris acquired its TV equipment business from Google.

The Motorola acquisition occurred as a new tech cycle was emerging.

The cycle is different from past periods, Coyne says. It's being driven not by service providers, but by consumers wanting more online, over-the-top video.

The transition "touches on all parts of the company's business, not just set-top boxes, but also its networking-cloud division," he said.

"We're in the early days of the transition," he said.

In With The New

Arris' management declined to comment ahead of the release of second-quarter results in late July.

In a first-quarter conference call, CEO Bob Stanzione said the firm is benefiting from "this almost explosion of new over-the-top services coming out, this competition to see who has the best speeds and who has the best service and who has the highest quality customer experience."

Take cable giantComcast 's (CMCSA) bid to take over the second biggest giant in the cable business,Time Warner Cable (TWC). The merger is all about creating a next-generation video platform, analysts say. It would also expand Comcast nationwide, including the top markets of Los Angeles and New York.

The merger -- which could be completed by early next year pending regulatory approval -- will bring more business to Arris, Coyne says.

"There will be a lot of network integration," he said. "This is a situation where the market opportunity gets bigger as a result (of the merger)."

That contrasts with past mergers in the industry, where markets were split up or consolidated, with duplicate networks eliminated.

Comcast and Time Warner Cable are Arris' top two customers. They accounted for 16.6% and 13% of first-quarter sales, respectively. Arris' next largest customers wereCharter Communications (CHTR) andAT&T (T).

Comcast, Time Warner Cable, AT&T, Charter and others are all making investments in equipment to "future proof" their networks, said Sue in his report.

He noted that telcos are expanding their voice and data service with video offerings.

Arris is also gaining new business from outside the U.S. as small to midsize service providers upgrade and expand their networks.

In April, China Network Systems adopted Arris' high-definition set-top boxes and a middleware platform to enable its transition to digital video. China Network serves more than 1 million cable subscribers in Taiwan.

Arris' financial results are gaining momentum in tandem with the new tech upgrades.

Quarterly revenue in the past three years has grown 58% on average, while the average quarterly EPS gain has clocked in at 33%.

First-quarter revenue jumped 246% year-over-year to $1.225 billion, largely due to the Motorola Home deal. Earnings rose 88% to 47 cents a share. Analysts expect full-year revenue to grow 51% to nearly $5.5 billion and earnings to climb 52% to $2.52 a share, according to a Thomson Reuters poll.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: ARRS , NFLX , AMZN , GOOGL , CSCO

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