Arris Secured Big Edge-QAM Contract - Analyst Blog

Recently, Arris Group Inc. (ARRS), a leading infrastructure gear supplier to cable operators won a significant contract from Time Warner Cable Inc. (TWC), as reported by LightReading. According to the source, Arris will supply the bulk (around 60%) of total edge-QAMs to Time Warner Cable. The contract size is likely to be more than $25 million through the end of 2011. 

According to our view, this contract is crucial for Arris, since the company just reported disappointing second quarter 2010 financial results. Comcast Corp. (CMCSA), the largest customer of Arris is on the verge of full deployment of high-speed DOCSIS 3.0 networks. This in turn significantly reduces the high-margin Cable Modem Termination System (CMTS) business of Arris. Management hinted that in 2010, total sales to Comcast will decline year over year.

Arris’ industry leading D5 edge-QAM is capable of sharing bandwidth and resources within multiple applications that includes switched digital video (SDV), video-on-demand, and DOCSIS 3.0. We believe SDV roll-out will boost up in the second half of 2010 since large cable MSOs are increasingly deploying HD TV channels, HD VOD, and DOCSIS 3.0. Comcast also decided to follow suite and also recruited Arris as one of its edge-QAM suppliers. 

We believe Arris needs to get more such orders to get rid of its top-line volatility. The market for broadband infrastructure offerings is highly competitive and is prolifically supplied by large companies, including Motorola Inc. (MOT), Cisco Systems Inc. (CSCO), and L.M. Ericsson AB (ERIC). These competitors have broader product portfolios targeting diversified markets of cable TV, telecom and satellite communications.

Arris is solely dependent on cable operators for its revenue. The lack of industry diversification may result in limited business prospects since potential shifts in industry dynamics may adversely impact cable TV service providers. We do not find any near-term growth catalyst for Arris and thus maintain our Underperform recommendation. Currently Arris is a short-term Zacks #5 Rank ('Strong Sell').

 
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