We downgrade our recommendation for Arris Group Inc. (ARRS) to Underperform, following its disappointing second quarter 2010 financial results. Both revenues and EPS fell below the Zacks Consensus Estimates.
Arris is solely dependent on cable operators for its revenues. Most of the cable operators in the U.S. are on the verge of full deployment of high-speed DOCSIS 3.0 networks. This in turn significantly reduces the high margin Cable Modem Termination System (CMTS) business of Arris. In the second quarter 2010, the company suffered adverse product-mix from CMTS to low-margin cable modems and voice enabled E-MTAs.
Video-on-demand and advertising system revenues also suffered a setback due to less-than-expected project approval. Order backlog and book-to-bill ratio declined a lot from the previous quarter. Management has provided a tepid financial outlook. Additionally, the company is suffering from high customer concentration risk.
Diversification into digital video segment may not be fruitful for Arris since this market is highly competitive. We do not find any near-term growth catalyst for Arris and believe its top line will remain volatile during the rest of 2010.
We believe that the market for broadband infrastructure offerings is highly competitive and is prolifically supplied by large companies, including Motorola Inc. (MOT), Cisco Systems Inc. (CSCO) and L.M. Ericsson AB (ERIC). These competitors have broader product portfolios, targeting diversified markets of cable TV, telecom and satellite communications.