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ARRIS to Gain From Diversified Product Offerings, Risks Stay

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On May 29, we issued an updated research report on ARRIS International plc (ARRS - Free Report) .

The company is focused on driving its profitability by diversifying into higher-margin products, expanding internationally and broadening capabilities to deliver innovative services to address the explosive demand for bandwidth capacity.

Healthy Growth Dynamics

ARRIS continues to build on new design wins across multiple product lines to expand sales with a broad range of international customers.

Consumer demand for faster Internet speed with more capacity continues to grow led by increasing consumption of video. ARRIS provides the technology to enable customers to manage the exponential bandwidth growth cost effectively through steady investments in state-of-the-art technologies like DOCSIS, DSL and Next Generation PON to deliver the highest amount of bandwidth to its subscribers across physical connection.

ARRIS is transforming the entertainment experience through a holistic approach to content delivery, leveraging its expertise in the cloud, network and home to help providers anticipate demand for more personalized, relevant and mobile experiences.

The company's initiatives to broaden its portfolio remain a positive. On Dec 1, 2017, ARRIS completed the acquisition of Ruckus Networks. The buyout is expected to be accretive to its earnings in the coming quarters.

ARRIS has exceeded earnings estimates in each of the preceding four quarters, reflecting an average beat of 18.5%.

Also, the company's efforts to reward shareholders through buybacks look encouraging. For the second quarter of 2018, ARRIS expects revenues in the range of $1,760-$1,810 million with adjusted earnings of 72-77 cents per share. For 2018, the company expects revenues between $7,100 million and $7,350 million with adjusted earnings in the range of $2.80-$3.05 per share.

Over the past three months, the stock has outperformed the industry, reflecting a zero-return against a decline of 1.3% for the latter.



Risks

Escalating cost of operations has the potential to distort ARRIS’ earnings picture and remains a major cause of concern.

Operating risks from high R&D costs for technology-driven products are expected to weigh on the company’s margins and impair its long-term growth to some extent.

Customer concentration remains high for ARRIS with few customers accounting for a significant portion of its revenues. Moreover, the company’s international operations are significantly exposed to foreign currency exchange rate risks.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock.

Key Picks

Better-ranked stocks in the broader industry include Turtle Beach Corporation (HEAR - Free Report) , Micron Technology, Inc. (MU - Free Report) and AudioCodes Ltd. . While Turtle Beach and Micron sport a Zacks Rank #1 (Strong Buy), AudioCodes carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Turtle Beach has topped earnings estimates twice in the trailing four quarters, with an average positive surprise of 33.7%.

Micron has a long-term earnings growth expectation of 10%. It exceeded earnings estimates in each of the trailing four quarters, the average being 8%.

AudioCodes has exceeded earnings estimates thrice in the trailing four quarters, with an average positive surprise of 16.2%.

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