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Arris Group Inc. (ARRS) declared mixed financial results for the fourth quarter of 2011. GAAP net loss in the fourth quarter of 2011 was $54.7 million or a loss of 47 cents per share compared with a net income of $11.3 million or 9 cents per share in the prior-year quarter. However, adjusted (excluding special items) EPS, in the reported quarter, was 17 cents, exactly in line with the Zacks Consensus Estimate.

Quarterly total revenue was $281.1 million, up 5.6% year over year, but failed to meet the Zacks Consensus Estimate of $289 million. Quarterly Domestic revenue was 68.6% while International revenue was 31.4%. Comcast Corp. (CMCSA) and Time Warner Cable Inc. (TWC) together constituted 45.8% of total fourth-quarter revenue.

Quarterly gross margin came in at 37.9% compared with 36.2% in the year-ago quarter.  Operating loss, in the fourth quarter of 2011, was $67.3 million compared with an operating income of $17.8 million in the prior-year quarter. Quarterly operating margin was a negative 23.9% compared with 6.7% in the year-ago quarter. Total order backlog of Arris, at the end of 2011, was $148.5 million compared with $140.4 million at the end of 2010. Book-to-bill ratio was 0.98 in the reported quarter compared with 1.08 in the prior-year quarter. In the previous quarter, Arris repurchased approximately 3.3 million of its common outstanding shares for a total consideration of $34.4 million.

Arris generated $60.9 million of cash from operation during the fourth quarter of 2011 compared with $22.6 million in the prior-year quarter. Quarterly free cash flow (cash flow from operation less capital expenditure) was $56.5 million compared with $17.1 million in the year-ago quarter. At the end of 2011, Arris had $589.9 million of cash & marketable securities on its balance sheet compared with $620.1 million at the end of 2010. Total debt was $209.8 million at the end of 2011 compared with $202.6 million at the end of 2010. At the end of 2011, debt-to-capitalization ratio was 0.19 compared with 0.17 at the end of 2010.

Broadband Communications Systems Segment

Quarterly revenue was $212 million, remaining flat year over year. Quarterly gross margin was 38.3% compared with 38.2% in the year-ago quarter. Arris shipped a total of 1.2 million CPE units, 46% of which are DOCSIS 3.0. The company also shipped a record high 99,968 C4 CMTS downstream ports. Arris is conducting trial runs for Moxi Gateway product with six customers, of which two customers are expected to launch this product commercially in the first quarter of 2012.    

Access, Transport, & Supplies Segment

Quarterly revenue was $51 million, up 18.9% year over year. Quarterly gross margin was 25.9% compared with 24.8% in the year-ago quarter.

Media & Communication System Segment

Quarterly revenue was $18.1 million, up 56% year over year. Quarterly gross margin was 67% compared with 44% in the year-ago quarter.

Future Financial outlook

Management’s guidance for net sales in the first quarter of 2012 will be within the range of $285 million - $305 million. EPS, on a GAAP basis, are expected within the range of 1 cent to 5 cents. EPS, on a non-GAAP basis, are expected within the range of 10 cents to 14 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.

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