We are upgrading our recommendation on
Arris Group Inc.
) to Outperform backed by the company's decision to acquire the
cable set top box business of Motorola Mobility. Management
provided a strong outlook for the ensuing first quarter of
Why the Upgrade?
In a major strategic move, in December 2012, Arris decided to
acquire the cable set top box business of Motorola Mobility, a
). The acquisition of the Motorola set top box business will
undoubtedly help Arris attain a strong foothold in the video
offerings market. Together, the merged entity will have a global
presence with more than 500 customers in 70 countries. This will
reduce Arris' dependence on
Time Warner Cable Inc.
), which together constitute around half of the company's total
revenue. Arris currently has a Zacks Rank #2 (Buy).
The newly launched products of Arris are gaining solid market
traction. The Moxi home gateway is in commercial deployment with
10 customers. The newly introduced E6000 router will act as a
powerful C4 cable modem termination system of the company while
it can be converted into a Converged Cable Access Platform. Arris
is expected to generate revenue from E6000 in the first quarter
Total order backlog of Arris, at the end of fiscal 2012, was
$222.6 million compared with $148.5 million at the end of fiscal
2011. The book-to-bill ratio was 1.11 in the fourth-quarter 2012
compared with 0.98 in the prior-year quarter.
Arris is gradually diversifying its operations in the
international (outside of U.S.) markets. In the fourth quarter of
2012, international businesses represents 25.6% of the total
revenue. Total market opportunity of Arris' product portfolio is
likely to increase to $10.6 billion in 2014/2015 from $4.4
billion in 2009.
We believe significant gorwth opportunities in Asia,
particularly in China, will help the company to achieve this
target. Geographic diversification will reduce Arris' dependance
on U.S. cable operators.
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