Zacks_Analysts' Blog : Arris Beats, Outlook in Line - Analyst Blog

Yesterday, after the closing bell, Arris Group Inc. (ARRS) declared solid financial results for second-quarter 2011. Furthermore, the company’s ensuing third-quarter 2011 financial outlook was in line with the Zacks Consensus Estimates.

EPS

GAAP net income in the second quarter of 2011 was $16.7 million or 13 cents per share compared with a net income of $19.8 million or 15 cents per share in the prior-year quarter. Adjusted (excluding special items) EPS, in the reported quarter was 21 cents, miles ahead of the Zacks Consensus Estimate of 15 cents.

Revenue

Quarterly total revenue of $265.8 million was down 5.2% year over year and also below the Zacks Consensus Estimate of $271 million. Quarterly Domestic revenue was 68% and International revenue was 32%. Comcast Corp. (CMCSA) and Time Warner Cable Inc. (TWC) together constituted 35.7% of total second-quarter revenue.

Margins

Quarterly gross margin came in at 40.2% compared with 40.4% in the year-ago quarter.  Operating income, in the second quarter of 2011, was $25.5 million compared with $34.2 million in the prior-year quarter. Quarterly operating margin was 9.6% compared with 12.2% in the year-ago quarter.

Cash Flow

Arris generated $31.4 million cash from operation during the second quarter of 2011 compared with $35.2 million in the prior-year quarter. Quarterly free cash flow (cash flow from operation less capital expenditure) was $25.1 million compared with $29.6 million in the year-ago quarter.

Balance Sheet

At the end of the second quarter of 2011, Arris had $591.5 million of cash & marketable securities on its balance sheet compared with $620.1 million at the end of fiscal 2010. Total debt was $208.3 million at the end of the reported quarter compared with $202.6 million at the end of fiscal 2010. At the end of the second quarter of 2011, debt-to-capitalization ratio was 0.17 compared with 0.17 at the end of fiscal 2010.

Order Backlog and Book-to-Bill

Total order backlog of Arris, at the end of the second quarter of 2011, was $154.2 million compared with $174.1 million at the end of the prior-year quarter. Book-to-bill ratio was 0.91 in the reported quarter compared with 0.92 in the prior-year quarter. In the previous quarter, Arris repurchased approximately 5.1 million of its common outstanding shares for a consideration of $57.6 million.

Broadband Communications Systems Segment

Quarterly revenue was $201.8 million, down 7% year over year. Quarterly gross margin was 42.5% compared with 42.7% in the year-ago quarter. The company achieved a record high 79,000 C4 CMTS downstream shipment.

Access, Transport, & Supplies Segment

Quarterly revenue was $46.9 million, down 3.1% year over year. Quarterly gross margin was 24.2% compared with 27.2% in the year-ago quarter.

Media & Communication System Segment

Quarterly revenue was $17.1 million, up 14.8% year over year. Quarterly gross margin was 57.1% compared with 49.1% in the year-ago quarter.

Future Financial outlook

Management’s guidance for net sales in the third quarter of 2011 will be within the range of $270 million - $290 million. EPS, on a GAAP basis, are expected within the range of 9 cents to 13 cents. EPS, on a non-GAAP basis, are expected within the range of 19 cents to 23 cents.  This includes stock-based compensation expenses of 3 cents per share.

Recommendation

We maintain our long-term Neutral recommendation on Arris. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.