We are upgrading our recommendation on Arris Group Inc. (ARRS) to Outperform backed by the company’s decision to acquire the cable set top box business of Motorola Mobility. Management provided a strong outlook for the ensuing first quarter of 2013.
Why the Upgrade?
In a major strategic move, in December 2012, Arris decided to acquire the cable set top box business of Motorola Mobility, a subsidiary of Google Inc. (GOOG). The acquisition of the Motorola set top box business will undoubtedly help Arris attain a strong foothold in the video offerings market. Together, the merged entity will have a global presence with more than 500 customers in 70 countries. This will reduce Arris’ dependence on Comcast Corp. (CMCSA) and Time Warner Cable Inc. (TWC), which together constitute around half of the company’s total revenue. Arris currently has a Zacks Rank #2 (Buy).
The newly launched products of Arris are gaining solid market traction. The Moxi home gateway is in commercial deployment with 10 customers. The newly introduced E6000 router will act as a powerful C4 cable modem termination system of the company while it can be converted into a Converged Cable Access Platform. Arris is expected to generate revenue from E6000 in the first quarter of 2013.
Total order backlog of Arris, at the end of fiscal 2012, was $222.6 million compared with $148.5 million at the end of fiscal 2011. The book-to-bill ratio was 1.11 in the fourth-quarter 2012 compared with 0.98 in the prior-year quarter.
Arris is gradually diversifying its operations in the international (outside of U.S.) markets. In the fourth quarter of 2012, international businesses represents 25.6% of the total revenue. Total market opportunity of Arris’ product portfolio is likely to increase to $10.6 billion in 2014/2015 from $4.4 billion in 2009.
We believe significant gorwth opportunities in Asia, particularly in China, will help the company to achieve this target. Geographic diversification will reduce Arris’ dependance on U.S. cable operators.
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