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Analyst Blog

Yesterday, after the closing bell, Arris Group Inc. (ARRS - Analyst Report) reported lower-than-expected financial results for the second quarter of 2014. While the top line barely met the Zacks Consensus Estimate, the bottom line failed to meet the same.

Moreover, management provided a disappointing financial outlook for the ensuing third quarter. As a result, in the aftermarket trade on Nasdaq, the stock price of Arris was down by $3.42 (10.01%) to $30.75. Arris currently has a Zacks Rank #4 (Sell).

GAAP net income in the first quarter of 2014 was $39 million or 26 cents per share compared with a net loss of $48.5 million or 36 cents per share in the prior-year quarter. However, quarterly adjusted (excluding special items) earnings per share came in at 63 cents, a penny shy of the Zacks Consensus Estimate.

Quarterly total revenue stood at $1,429.1 million, up a whopping 42.9% year over year and in line with the Zacks Consensus Estimate. Segment wise, Network and Cloud segment accounted for $410 million revenues, up 19.2% year over year. CPE segment generated $1,023 million of the total revenue, up a substantial 55.2% year over year.  

Quarterly Domestic revenues accounted for 78% of the total revenue while International revenues contributed the remaining 22%. Comcast Corp. (CMCSA - Analyst Report), Time Warner Cable Inc. (TWC - Analyst Report), Charter Communications Inc. (CHTR - Analyst Report) and AT&T Inc. together constituted 58% of the total second-quarter 2014 revenue.

Quarterly gross margin came in at 29.3% compared with 23.1% in the year-ago quarter.  Operating income, in the reported quarter, was $91.7 million against an operating loss of $88.1 million in the prior-year quarter. Quarterly operating margin stood at 6.4%.

Total order backlog of Arris, at the end of the reported quarter, was $787.6 million compared with $534.9 million at the end of the year-ago quarter. The book-to-bill ratio was 0.85 in the reported quarter compared with 0.95 in the prior-year quarter.

Arris generated $220.3 million of cash from operations in the second quarter of 2014 compared with $294 million in the prior-year quarter. Quarterly free cash flow stood at $206.9 million compared with $180.6 million in the year-ago quarter.

At the end of the second quarter of 2014, Arris had $551.9 million of cash & marketable securities on its balance sheet compared with $509.8 million at the end of 2013. Total debt stood at $1,568 million at the end of the reported quarter as against $1,744.3 million at the end of 2013. The debt-to-capitalization ratio was 0.52 compared with 0.56 at the end of 2013.

Future Financial Outlook

Management expects third-quarter 2014 total revenue of $1,370–$1,410 million. Its mid-point of $1,390 million is significantly below the current Zacks Consensus Estimate of $1,446 million. GAAP earnings per share are likely to be between 35 cents and 40 cents.

Non-GAAP earnings per share are estimated in the 63 cents–68 cents range, including 6 cents per share of stock-based compensation expenses. Its mid-point of around 66 cents stands below the current Zacks Consensus Estimate of 68 cents. Tax rate is projected at 35%.

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