ARRS Arris International Plc - Ordinary Shares

We reaffirm our long-term Neutral recommendation on Arris Group Inc. (ARRS). Arris is a major provider of infrastructure solutions for broadband networks. Its success is mostly depend on the cable MSOs decision to install new networks or upgrade the existing networks. If the cable operators fail to compete effectively with other pay-TV service providers, then it will significantly affect Arris’ future growth.

Although third-quarter results fell below the Zacks Consensus Estimates, management provided its fourth-quarter 2011 financial outlook, which was mostly in line with our expectations. Meanwhile, the company has diversified its businesses into the digital video market. Several cable TV operators are gradually shifting toward an all-IP triple-play converged network architecture offering highly cost-effective solution to their customers. In this context, upcoming IP video gateway solutions of Arris may become its future growth driver.     

Customer concentration remains high for the company. Historically, the two major clients, viz, Comcast Corp. (CMCSA) and Time Warner Cable Inc. (TWC), accounted for nearly 40% of total revenue. Loss of any of these customers would materially impact the company’s top-line growth. Management hinted that in 2011, total sales of Comcast will decline year over year. In the previous quarter, total revenue from both these companies went down to just 41.6%.

Arris recently completed the acquisition of BigBand Networks Inc. We believe the acquisition of BigBand is a major step by Arris to convert itself as an all IP-converged network architecture solution provider. BigBand is a specialist in switched digital video. Arris has now acquired the required economies of scale to become the market leader in the SDV segment. The company has also occupied a rich patent portfolio of BigBand, which is spread across dense edge QAM technologies, targeted advertisement insertion, and systems designed to help cable operators migrate to an IP video architecture.

 
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