We reiterate our Neutral recommendation on Arris Enterprises Inc. (ARRS). The company reported weak financial results for the first quarter of 2013, missing the Zacks Consensus Estimate. Management provided a disappointing financial outlook for the ensuing second quarter. However, demand for Arris’ newly-launched products is expected to rise from the second half of 2013.
Why Kept at Neutral?
We believe that home gateways, Wi-Fi enabled modems, edged routers and multi-screen software segments will be the main growth drivers for Arris going forward. The recent acquisition of the cable set-top box business of Motorola Mobility, a subsidiary of Google Inc. (GOOG), will transform the company into an integrated equipment supplier in thehigh-speed video and Internet delivery market. In our view, both the top and the bottom lines of Arris are expected to benefit immensely from this acquisition.
So far, Arris has been a small contender in the high-speed video and Internet delivery market. Together, the merged entity will have a commanding global presence with more than 500 customers in 70 countries. Further, this deal will strengthen Arris’ patent portfolio and provide a license to access several patents of Motorola Mobility. With Motorola Mobility’s Cable Home business in its kitty, Arris is likely to become a formidable player in the video infrastructure and customer premises equipments for the cable TV industry.
On Jun 10, 2013, Arris declared that Comcast Corp. (CMCSA) has started commercially deploying the company’s E6000 Converged Edged Router. Furthermore, Comcast will be launching Arris’ XG1 gateway for its innovative X1 TV service from the third quarter of 2013. Comcast and Time Warner Cable Inc. (TWC) are the two prime customers of the company. Historically, these two customers accounted for over 45% of the total revenue.
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