Arris Tops But Outlook Down

Yesterday, after market closed, Arris Group Inc. (ARRS: 10.13 0.00 0.00%) declared fourth quarter 2009 financial results. Quarterly total revenue of $300 million was up 2.6% year-over-year and also up 8.8% sequentially. Quarterly revenue also exceeded the Zacks Consensus Estimate of $288 million.

The increase in revenue was the result of the continuous roll-out of DOCSIS 3.0 (Wideband) technology by the U.S. cable MSOs that generated massive demand for the company’s next-generation CMTS Edge Routers and VoIP Terminals.
 
On a GAAP basis, net income in the quarter were $33.3 million or 26 cents per share compared to a net loss of $163.7 million (including goodwill impairment) or a loss of $1.33 per share in the prior-year quarter and a net income of $21.7 million or 17 cents per share in the previous quarter.

Quarterly adjusted EPS (excluding special items) was 30 cents per share, significantly higher than the Zacks Consensus Estimate of 25 cents. This was primarily due to overwhelming success of Arris’ high-margin cable edge routers.
 
Quarterly gross margin was 44.8% compared to 37.2% in the year-ago quarter and 41.9% in the previous quarter. This reflects the aggressive cost-cutting measures taken by management and the favorable product mix. Operating expenses in the reported quarter were $85.2 million compared to $76 million in the prior-year quarter and $76.6 million in the previous quarter.
 
Total order backlog at the end of the same quarter was $144.4 million compared to $114.8 million at the end of the prior-year quarter and $169.5 million at the end of the previous quarter. Book-to-bill ratio was 0.92 in the quarter compared to 0.90 in the prior-year quarter and 1.01 in the previous quarter.
 
Arris generated $69.8 million cash from operations during the quarter compared to $102.5 million in the prior-year quarter and $63 million in the previous quarter. Quarterly free cash flow (cash flow from operations less capital expenditure) was $65.4 million compared to $97.6 million in the year-ago quarter and $59.6 million in the previous quarter.
 
At the end of fiscal 2009, Arris had $625.6 million of cash & marketable securities on its balance sheet compared to $427.3 million at the end of fiscal 2008 and $576.6 million at the end of the third quarter 2009. Total debt was $211.4 million at the end of fiscal 2009 compared to $212 million at the end of fiscal 2008 and $208.6 million at the end of the third quarter 2009.
 
Broadband Communications Systems Segment : Quarterly revenue was $235.7 million, up 4.8% year-over-year and also up 11.5% sequentially. Arris received increasing traction for its CMTS products, primarily driven by the massive deployment of high-speed DOCSIS 3.0 technology by several large cable MSOs.

The company has successfully upgraded its existing C4 CMTS line cards to DOCSIS 3.0 that received fabulous market acceptance together with its newly launched D5 Edge QAMs. Due to the rapid growth of video traffic, downstream port shipment reached a record high level of 44,000 during the reported quarter.
 
Access, Transport & Supplies Segment: Quarterly revenue was $44.3 million, down 12.3% year-over-year and also down 2.6% sequentially. A devastated U.S. housing market together with the credit crunch resulted in the lack of new plant construction and fewer new subscribers.
 
Media & Communication System Segment: Quarterly revenue was $20 million, up 18.3% year-over-year and also up 5.3% sequentially. Arris continues with the deployment of its newly introduced Converged Media Management back office software system and XMS server platform in North America.
 
Future Financial Outlook

Management has guided that net sales in the first quarter 2010 will be within the range of $253 million − $273 million. At its mid-point of $263 million, first quarter projected revenue is well below the Zacks Consensus Estimate of $274 million. EPS on a GAAP basis is expected within the range of 10 cents to 14 cents.

On a non-GAAP basis (excluding stock-based compensations expenses), EPS is expected within the range of 18 cents to 22 cents. At its mid-point of 20 cents, this is mostly in line with the Zacks Consensus Estimate of 19 cents (including stock-based compensation expenses).