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Analyst Blog

Yesterday, after the closing bell, Arris Group Inc. (ARRS - Analyst Report) declared financial results for the third quarter of 2012 beating the Zacks Consensus Estimates. The company exited the third quarter with a strong order backlog.

GAAP net income in the third quarter of 2012 was $17.9 million or 15 cents per share compared with $13.7 million or 11 cents per share in the prior-year quarter. However, quarterly adjusted (excluding special items) earnings per share came in at 19 cents, beating the Zacks Consensus Estimate by a penny.

Quarterly total revenue was $357.4 million, up 30.3% year over year and mostly in line with the Zacks Consensus Estimate of $358 million. Quarterly Domestic revenue was 78% while International revenue was 22%. Comcast Corp. (CMCSA - Analyst Report) and Time Warner Cable Inc. (TWC - Analyst Report) together constituted 52.2% of the total third-quarter revenue.

Quarterly gross margin came in at 31.3% compared with 36.5% in the year-ago quarter.  Operating income, in the third quarter of 2012, was $23.1 million compared with $18.5 million in the prior-year quarter. Quarterly operating margin was 6.5% compared with 6.7% in the year-ago quarter.

Total order backlog of Arris, at the end of the previous quarter, was $185.5 million compared with $155.3 million at the end of the year-ago quarter. Book-to-bill ratio was 0.82 in the third quarter compared with 1.00 in the prior-year quarter. In the previous quarter, Arris repurchased approximately 0.8 million of its common outstanding shares for a total consideration of $10.4 million.

Arris generated $6.7 million of cash from operations during the third quarter of 2012 compared with $24.5 million in the prior-year quarter. Quarterly free cash flow (cash flow from operation-less capital expenditure) was $1.5 million compared with $18.1 million in the year-ago quarter.

At the end of the third quarter of 2012, Arris had $548.4 million of cash & marketable securities on its balance sheet compared with $589.9 million at the end of 2011. Total debt was $219 million at the end of the third quarter of 2012 compared with $209.8 million at the end of 2011. At the end of the third quarter of 2012, debt-to-capitalization ratio was 0.19 compared with 0.19 at the end of 2011.

Broadband Communications Systems Segment

Quarterly revenue was $283.5 million, up 39.2% year over year. Quarterly gross margin was 31.4% compared with 37.3% in the year-ago quarter. Arris shipped a record high 2.626 million CPE units, 88% of which are DOCSIS 3.0. The company also shipped 81,364 C4 CMTS downstream ports. The company’s E6000 Cable Edge Router is currently undergoing multiple trial runs.

Access, Transport, & Supplies Segment

Quarterly revenue was $56.7 million, up 4.6% year over year. Quarterly gross margin was 21%, compared with 25.3% year over year.

Media & Communication System Segment

Quarterly revenue was $17.3 million, up 4.2% year over year. Quarterly gross margin was 63.6% compared with 63.3% in the year-ago quarter.

Future Financial outlook

Management’s guidance for net sales in the fourth quarter of 2012 will be within the range of $345 million - $365 million. Earnings per share, on a GAAP basis, are expected within the range of 13 cents to 17 cents. Earnings per share, on a non-GAAP basis, are expected within the range of 26 cents to 30 cents.  This includes stock-based compensation expenses of 4 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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