ARRS Arris International Plc - Ordinary Shares

Yesterday, after the closing bell, Arris Group Inc. (ARRS) declared its first-quarter 2011 financial results that fell below the Zacks Consensus Estimates. Furthermore, the company’s ensuing second-quarter 2011 financial outlook was weak mainly due to higher start-up expenses for newly launched products. As a result, in the after market trade on NASDAQ, stock price of Arris went down by 99 cents (7.62%) to $12.0.

EPS

GAAP net income in the first quarter of 2011 was $11.9 million or 9 cents per share compared with a net income of $19 million or 15 cents per share in the prior-year quarter. Adjusted (excluding special items) EPS, in the reported quarter was 11 cents, well below the Zacks Consensus Estimate of 14 cents.

Revenue

Total revenue of $267.4 million was up 0.3% year over year but slightly below the Zacks Consensus Estimate of $269 million. Quarterly Domestic revenue was 71% and International revenue was 29%. Comcast Corp. (CMCSA) and Time Warner Cable Inc. (TWC) together constituted 43.2% of total quarterly revenue.

Margins

Quarterly gross margin came in at 36.3% compared with 42.2% in the year-ago quarter, signifying unfavorable product mix.  Operating income, in the first quarter of 2011 was $15.1 million compared with $34 million in the prior-year quarter. Quarterly operating margin was 5.7% compared with 12.7% in the year-ago quarter.

Cash Flow

Arris consumed $3.6 million cash for operation during the first quarter of 2011 compared with a cash generation of $48.2 million in the prior-year quarter. Quarterly free cash flow (cash flow from operation less capital expenditure) was a negative $9.8 million compared with $43.6 million in the year-ago quarter.

Balance Sheet

At the end of the first quarter of 2011, Arris had $619.6 million of cash & marketable securities on its balance sheet compared with $620.1 million at the end of fiscal 2010. Total debt was $205.5 million at the end of the reported quarter compared with $202.6 million at the end of fiscal 2010. At the end of the first quarter of 2011, debt-to-capitalization ratio was 0.17 compared with 0.17 at the end of fiscal 2010.

Order Backlog and Book-to-Bill

Total order backlog of Arris, at the end of the first quarter of 2011 was $177.5 million compared with $195.1 million at the end of the prior-year quarter. Book-to-bill ratio was 1.14 in the reported quarter compared with 1.19 in the prior-year quarter.

Broadband Communications Systems Segment

Quarterly revenue was $206.6 million, down 1% year over year. Quarterly gross margin was 37.3% in the reported quarter, significantly below 45.4% in the year-ago quarter. The company achieved a record high 62,764 C4 CMTS downstream shipment.

Access, Transport, & Supplies Segment

Quarterly revenue was $45.6 million, up 8.1% year over year. Quarterly gross margin was 24.1% compared with 23% in the year-ago quarter.

Media & Communication System Segment

Quarterly revenue was $15.2 million, down 3.8% year over year. Quarterly gross margin was 58.6% compared with 51.5% in the year-ago quarter.

Future Financial outlook

Management provided guidance that net sales in the second quarter of 2011 will be within the range of $260 million - $280 million. EPS, on a GAAP basis, are expected within the range of 6 cents to 10 cents. EPS, on a non-GAAP basis, are expected within the range of 13 cents to 17 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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