ARRS Arris International Plc - Ordinary Shares

Arris Group Inc. (ARRS) announced a new share repurchase authorization of $150 million following the completion of the previous share repurchase program. 

Arris rewards its shareholders only in the form of share buybacks. The company has not paid any cash dividend on its common stock since its inception.

Arris has completed its previous share buyback plan of $100 million authorized in 2009. It repurchased $69.3 million shares in 2010 and the remaining $30.7 million shares in the ongoing second quarter. Arris did not purchase any shares in 2009 or in the first quarter of 2011.

Arris continues to maintain its healthy balance sheet with strong capital structure. As of March 31, 2011, Arris had $619.6 million of cash and marketable securities and $505.5 million of total debt on its balance sheet. Debt-to-capitalization ratio was 0.17 times, unchanged from the end of fiscal 2010.

Arris, supplier of communications technology to broadband operators, reported disappointing results in the recently concluded first quarter. Earnings per share missed the Zacks Consensus Estimate by 3 cents on falling gross margins and higher operating expenses.

Revenue improved slightly year over year on growing demand on both domestic and international levels. However, revenue was below the Zacks Consensus Estimate.

In the long term, we believe Arris stands to benefit from the intense competition among cable operators, satellite carriers, and telecom service providers for broadband market share. As residential VoIP and HDTV services continue to grow, operators are benefiting from increased network traffic owing to robust demand for video download and file sharing.

This massive requirement for data transport is driving Arris’ sales to cable operators, seeking to improve their transport offerings. Apart from the U.S., massive deployment of DOCSIS 3.0 technology in Europe and Latin America also bode well for its long-term growth.

On the other hand, Arris is solely dependent on cable operators for its revenue. Customer concentration is significantly high for Arris. Historically, its two major clients, Comcast Corp. (CMCSA) and Time Warner Cable Inc. (TWC), accounted for nearly 50% of its total revenue. Arris expect revenue from these major clients to decline going forward. In the first quarter of 2011, Comcast and Time Warner Cable together contributed 43.2% of total revenue.

Further, higher start-up expenses for the newly launched products will remain headwinds going forward. We expect margin pressure to continue in the near future due to the impending completion of DOCSIS 3.0 deployment by U.S. cable MSO.

We are currently maintaining our long-term Neutral rating with the Zacks #3 (Hold) Rank on the stock.

 
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