Arris 2Q Falls, Outlook Weak - Analyst Blog
Arris Group Inc. (ARRS) declared its second-quarter 2010 financial results that fell below the Zacks Consensus Estimate. GAAP net income in the second quarter was $19.7 million or 15 cents per share compared with a net income of $22.9 million or 18 cents per share in the prior-year quarter. Adjusted (excluding special items) earnings per share (EPS) in the reported quarter were 20 cents, below the Zacks Consensus Estimate of 22 cents.
Revenues
Total revenue of $280.4 million was up 0.7% year over year. This was much below the Zacks Consensus Estimate of $287 million. The drop in revenues was primarily due to a decline in CMTS demand and poor performance at the Media & Communications System division.
Margins
Quarterly gross margin was 40.4% compared with 42.1% in the year-ago quarter. This indicates an unfavorable product mix. Operating expenses in the second quarter were $79.0 million compared with $79.1 million in the prior-year quarter.
Cash Flow
Arris generated $35.2 million cash from operations during the quarter compared with $94.3 million in the prior-year quarter. Quarterly free cash flow (cash flow from operation less capital expenditure) was $29.6 million compared with $88.8 million in the year-ago quarter.
Balance Sheet
At the end of the reported quarter, Arris had $663.4 million of cash & marketable securities on its balance sheet compared with $524.0 million at the end of second-quarter fiscal 2009. Total debt was $213.0 million at the end of the quarter compared with $205.9 million at the end of the year-ago quarter. Debt-to-capitalization ratio was 0.17 compared with 0.18 at the end of year-ago quarter.
Order Backlog and Book-to-Bill
Total order backlog at the end of the quarter was $174.1 million compared with $165.7 million at the end of the prior-year quarter and $195.1 million at the end of the previous quarter. Book-to-bill ratio was 0.92 in the quarter compared with 1.04 in the prior-year quarter and 1.19 in the previous quarter.
Share Repurchase
During the quarter, Arris repurchased approximately 1.9 million shares of common stock for $20.6 million and repurchased $5.0 million (face value) of Convertible Notes for $4.8 million.
Broadband Communications Systems Segment
Quarterly revenues were $217.1 million, up 2.5% year over year. Quarterly gross margin was 42.7% compared with 43.8% in the year-ago quarter. Arris has successfully upgraded its existing C4 CMTS line cards to DOCSIS 3.0 that received fabulous market acceptance along with its D5 Edge QAMs. Due to rapid growth of video traffic, downstream port shipment was over 41,000 during the quarter.
Access, Transport, & Supplies Segment
Quarterly revenues totaled $48.4 million, up 11.5% year over year. Quarterly gross margin was 27.2% compared with 22.6% in the year-ago quarter.
Media & Communication System Segment
Quarterly revenues were $14.9 million, down 36.1% year over year. Quarterly gross margin was 49.1%, significantly below 63.4% in the year-ago quarter.
Future Financial Outlook by Management
Management expects net sales in the third quarter 2010 within the range of $270 million to $290 million. The mid point of $280 million is far below the current Zacks Consensus Estimate of $302 million.
On a GAAP basis, EPS is expected within the range of 7 cents to 11 cents. On a non-GAAP basis, EPS is projected to be in the range of 16 cents to 20 cents. This includes stock-based compensation expenses of 3 cents per share. Excluding the stock-based compensation expense, the non-GAAP EPS range is 13 cents to 17 cents. Its mid point of 15 cents is well below the current Zacks Consensus Estimate of 23 cents.
We maintain our Neutral recommendation on Arris. It is currently a Zacks #3 Rank (Hold) stock.
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