Zacks_Analysts' Blog : Arris Misses Zacks Estimates - Analyst Blog

Arris Group Inc.  (ARRS) declared weak financial results for third-quarter 2011. Both top line and bottom line fell below the Zacks Consensus Estimates.

EPS

GAAP net income in the third quarter of 2011 was $13.7 million or 11 cents per share compared with a net income of $14 million or 11 cents per share in the prior-year quarter. Adjusted (excluding special items) EPS, in the reported quarter was 17 cents, a penny shy of the Zacks Consensus Estimate.

Revenue

Quarterly total revenue was $274.4 million, remaining flat year over year but failed to meet the Zacks Consensus Estimate of $280 million. Quarterly Domestic revenue was 66.2% and International revenue was 33.8%. Comcast Corp. (CMCSA) and Time Warner Cable Inc. (TWC) together constituted 41.6% of total third-quarter revenue.

Margins

Quarterly gross margin came in at 36.5% compared with 37.2% in the year-ago quarter.  Operating income, in the third quarter of 2011, was $18.5 million compared with $24 million in the prior-year quarter. Quarterly operating margin was 6.7% compared with 8.7% in the year-ago quarter.

Cash Flow

Arris generated $24.5 million of cash from operation during the third quarter of 2011 compared with $12.5 million in the prior-year quarter. Quarterly free cash flow (cash flow from operation less capital expenditure) was $18.1 million compared with $5.7 million in the year-ago quarter.

Balance Sheet

At the end of the third quarter of 2011, Arris had $575 million of cash & marketable securities on its balance sheet compared with $620.1 million at the end of fiscal 2010. Total debt was $206.8 million at the end of the reported quarter compared with $202.6 million at the end of fiscal 2010. At the end of the third 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 third quarter of 2011, was $155.3 million compared with $119.6 million at the end of the prior-year quarter. Book-to-bill ratio was 1.00 in the reported quarter compared with 0.80 in the prior-year quarter. In the previous quarter, Arris repurchased approximately 1.6 million of its common outstanding shares for a total consideration of $17.1 million.

Broadband Communications Systems Segment

Quarterly revenue was $203.6 million, remaining flat year over year. Quarterly gross margin was 37.3% compared with 37.2% in the year-ago quarter. Arris shipped 1.4 million CPE units, 53% of which are DOCSIS 3.0. The company also shipped 73,686 C4 CMTS downstream ports.   

Access, Transport, & Supplies Segment

Quarterly revenue was $54.2 million, up 13.9% year over year. Quarterly gross margin was 25.3% compared with 26.3% in the year-ago quarter.

Media & Communication System Segment

Quarterly revenue was $16.6 million, down 27.5% year over year. Quarterly gross margin was 63.3% compared with 59.6% in the year-ago quarter.

Future Financial Outlook

Management’s guidance for net sales in the fourth quarter of 2011 will be within the range of $270 million - $290 million. EPS, on a GAAP basis, are expected within the range of 8 cents to 12 cents. EPS, on a non-GAAP basis, are expected within the range of 18 cents to 22 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.