Arris Beats Despite Lower Profit

Arris Group Inc. (ARRS - Analyst Report) reported fourth quarter 2010 non-GAAP earnings per share of 19 cents moving ahead of the Zacks Consensus Estimate of 14 cents per share. EPS remained flat sequentially and declined 40.6% from year ago quarter. Reported EPS also had a 3 cents per diluted share of full year benefit related with Congress passing the R&D tax credit legislation in December 2010.

For full year 2010, the adjusted net income decreased 15.8% from full year 2009 to 85 cents. This, however, surpassed the Zacks Consensus Estimate of 70 cents per share.

Management stated that the results were in line with their expectations and continued to strengthen the balance sheet during the quarter.

Quarter and Year: Highlights

Revenue during the quarter decreased 3% sequentially and 11.3% from last year quarter to $266.2 million. The revenue edged past the Zacks Consensus Revenue Estimate of $263.0 million.

For full year 2010 revenue shed 1.8% from last year revenue to $1.09 billion and was in line with the Zacks Consensus Revenue Estimate for the full year.

Shift in product mix resulted gross margin to decrease 8.6 percentage points from year ago quarter to 36.2%. Gross margin also declined 1 percentage point from the last quarter.

Operating profit decreased 64.1% from prior year quarter to $17.7 million and operating margin was 6.6% in the reported quarter, shedding 8.3 percentage points from the prior year quarter.

Arris, at the end of the quarter, had $620.1 million of cash, cash equivalents and short-term investments, versus $625.6 million at the end of the last year same quarter and $640.4 million at the prior quarter.

Arris repurchased 2.9 million shares of its common stock for $30 million and used $5 million to repurchase convertible notes.  During the year, the company used $92.6 million to repurchase 6.8 million shares of its common stock. It also used $24 million in face value of convertible notes. 

Cash from operating activities during the quarter was $22.6 million and for full year the company generated $118.5 million. During the same period in 2009 the company had generated $69.8 million and $241.0 million of cash from operating activities.

Book-to-bill ratio was 1.08 compared with 0.92 in the same quarter last year and 0.80 in prior quarter. Order backlog decreased 2.8% year over year but increased 17.4% sequentially to $140.4 million.

Guidance

For the next quarter, management expects the revenue to be between $260 and $280 million. Zacks Consensus Revenue Estimate projects the revenue for next quarter to be $257 million. Adjusted net income per diluted share is expected to be in the range of 14-18 cents and GAAP net income per diluted share in the range of 5-9 cents. Zacks Consensus Estimate for next year EPS is at 12 cents per share.

Conclusion

Estimates for the quarter had been trending up in the run-up to the earnings release and for the current quarter estimates moved up by a penny to 14 cents, though no analysts revised estimates over the past month. The full-year estimate for next year has been stable over the past month with only 1 analyst giving a positive revision. The current Zacks Consensus Estimate for 2011 is 66 cents. The full-year Zacks Consensus Estimate for 2010 had been stable over the last month at 70 cents.

Arris has diversified its offering into digital video market. In order to prevent competitive threat, cable operators are gradually shifting towards an all-IP triple-play converged architecture that will offer cost-effective solutions to their customers. In this respect, Arris innovative IP video gateway solutions may become a major growth driver for the company. Additionally, Arris has a healthy balance sheet. Peers for Arris include, EXFO Inc (EXFO - Snapshot Report), ADTRAN Inc. (ADTN - Analyst Report) and Calix Inc. (CALX - Snapshot Report).

We currently have a Zacks #2 Rank for Arris, which translates to a Buy rating, on short term basis. For long term we have a Neutral recommendation.

Read the full analyst report on ARRS

Read the full analyst report on ADTN

Read the full analyst report on EXFO

Read the full analyst report on CALX