ARRIS Group, Inc. (ARRS)

Transcription

1 January 02, 2015 ARRIS Group, Inc. (ARRS) Current Recommendation Prior Recommendation Outperform Date of Last Change 10/12/2014 Current Price (01/01/15) $30.19 Target Price $32.00 NEUTRAL SUMMARY (ARRS-NASDAQ) ARRIS posted strong third-quarter 2014 results wherein both the top- and bottom-line figures surpassed the Zacks Consensus Estimate. Strong demand for home gateways, major contract wins and the acquisition of the cable set-top box business of Motorola Mobility transformed the company into an integrated equipment supplier in the high-speed video and Internet delivery market. The company recently collaborated with renowned cloud gaming service operator Playcast Media to deliver gaming facilities to Portugal-based MEO TV subscribers. However, ARRIS is solely dependent on cable operators for its revenues. Lack of industry diversification may limit its business prospects. We, thus, maintain our Neutral recommendation on ARRIS. SUMMARY DATA 52-Week High $ Week Low $23.38 One-Year Return (%) Beta 1.01 Average Daily Volume (sh) 990,942 Shares Outstanding (mil) 145 Market Capitalization ($mil) $4,377 Short Interest Ratio (days) 6.90 Institutional Ownership (%) 86 Insider Ownership (%) 1 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 39.4 Earnings Per Share (%) 18.6 Dividend (%) N/A using TTM EPS 13.1 using 2015 Estimate 10.9 using 2016 Estimate 9.3 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Average Type of Stock Large-Blend Industry Comm Infrastruc Zacks Industry Rank * 114 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 1,000 A 1,068 A 1,199 A 3,621 A ,225 A 1,429 A 1,405 A 1,288 E 5,347 E ,251 E 1,377 E 1,445 E 1,417 E 5,490 E ,791 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.17 A $0.41 A $0.36 A $0.49 A $1.43 A 2014 $0.45 A $0.63 A $0.75 A $0.57 E $2.38 E 2015 $0.52 E $0.68 E $0.80 E $0.78 E $2.78 E 2016 $3.35 E Projected EPS Growth - Next 5 Years % N/A 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW ARRIS Group Inc., headquartered in Suwanee, Ga., is a global provider of media entertainment and data communications solutions. On Apr 17, 2013, ARRIS Group completed the acquisition of the Home Business segment of Motorola Mobility, a subsidiary of Google Inc. After the acquisition, the company was renamed as ARRIS Enterprises Inc. ARRIS is a global technology leader in the development of advanced cable telephony, next-generation high-speed data network, demand-driven video solutions, operations software, and broadband access equipment. The communications equipment and technology provided by ARRIS facilitate the transfer of information on broadband networks. The company s customers are primarily cable MSOs. In addition to its broadband offerings, ARRIS provides infrastructure products for building and maintaining hybrid fiber-coaxial (HFC) networks. The company s largest customers are Comcast Corp. and Time Warner Cable Inc. ARRIS reports in two business segments as follows: o Network and Cloud: This segment manufacturers Hybrid fiber-coaxial equipment, edge routers, metro Wi-Fi, video management, and storage and distribution equipment for cable TV operators. Fiber-based and copper-based broadband transmission equipment for telecom operators. The product portfolio of Network & Cloud segment also includes advanced video head-end management system for both legacy MPEG/DVB systems as well as full IP Video systems. Provides full support for advanced multi-screen video management, protection, monetization and delivery, together with a suite of products for performance management, configuration, and surveillance. The segment accounted for 61.5% of the total revenue in the first half of o Customer Premises Equipments (CPE): This segment provides Cable and DSL modems, EMTAs, gateways and set-top boxes and a series of subscribers premises equipment that enable service providers to offer triple-play voice, video and high-speed data to both residential and business customers. The segment accounted for 38.5% of the total revenue in the first half of The com REASONS TO BUY Rapidly growing demand for the next-generation Converged Cable Access Platform (CCAP) would be a boon for cable TV gear manufacturers. CCAP technology helps cable TV operators to maximize bandwidth, simplify operational structure and evolve according to subscribers demand. Meanwhile, several analysts have estimated that the CCAP market opportunity may reach around $1.7 billion by 2018, which in turn will boost ARRIS business. In the reported quarter, the company generated a significant year-over-year revenue growth of 31.6% with both the Network and Cloud and CPE segments improving 41.8% and 27% year over year, respectively. Quarterly operating margin stood at 8.7% versus 1% in the year-ago quarter. Despite Cisco being the undisputed leader in the overall video infrastructure gear manufacturing industry, ARRIS is far ahead of Cisco and Pace plc, particularly in the video client delivery segment. Recently, ARRIS included Net2TV Corp. s streaming television service, Portico TV, to its operating platform, thereby enhancing its network with Portico s 18 channels. The new service will Equity Research ARRS Page 2

3 be available from the beginning of In Oct 2014, the company also struck a deal with Taiwan Broadband Communications (TBC) to supply E6000 Converged Edge Router (CER). Moreover, ARRIS popular Whole Home Solution Mobile and SecureMedia technologies have been used by Cincinnati Bell carrier to launch its Fioptics TV Everywhere app. In Sep 2014, the company received a major contract from Chile s largest cable MSO (multi-service operator) VTR GlobalCom S.A. to enhance its high-speed broadband network. VTR, which offers triple-play video, high-speed data (Internet) and residential telephony services. ARRIS completed the acquisition of the cable set-top box business of Motorola Mobility which is expected to help it gain a strong foothold in the high-speed video offerings and Internet delivery markets. The merged entity has a 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. The merger is estimated to generate $100 $125 million in annual cost synergies for ARRIS. The company will also expand its global presence by supplying nextgeneration IPTV set-top boxes to Swedish carrier, Telenor. Research firm, Synergy Research Group, stated that the ARRIS/Motorola tie-up may put severe pressure on Cisco, the undisputed leader in the video infrastructure market. Video infrastructure is a lucrative market with ample growth opportunity in the coming years. The company exited the reported quarter with $81.9 million cash from operations against $36.2 million in the prior-year quarter. Total order backlog of ARRIS, at the end of the quarter, was $594.1 million compared with $523.7 million at the end of the year-ago quarter. REASONS TO SELL ARRIS is solely dependent on cable operators for its revenues. Lack of industry diversification may limit its business prospects. Potential shifts in industry dynamics may adversely impact cable TV service providers. This is evident from the fact that large telecom carriers in the U.S. are increasingly expanding their high-speed fiber-based network while satellite TV providers are upgrading their networks. Cable MSOs are gradually losing their basic video customers to lowcost satellite TV and Internet video service providers. Meanwhile, the book-to-bill ratio for the company in the third quarter of 2014 came in at 0.86 compared with 0.99 in the prior-year quarter. Customer concentration remains high for ARRIS. In the third quarter of 2014, Comcast, Time Warner Cable, Charter Communications and AT&T together accounted for 53% of its total revenue. Loss of any of these customers would materially impact the company s top-line growth. The market for broadband infrastructure offerings is highly competitive and is prolifically supplied by large companies, including Cisco Systems and LM Ericsson. These competitors have broader product portfolios targeting diversified markets of cable TV, telecom, and satellite communications. Diversification into the digital video market may not generate expected results since all of these large rivals already have strong footings in this business. Equity Research ARRS Page 3

4 RECENT NEWS Third Quarter of Fiscal 2014 Financial Results Oct 9, 2014 ARRIS Beats Q3 Earnings and Revenues Estimates GAAP net income in the third quarter came in at $54.6 million or $0.37 per share compared with $17.2 million or $0.12 in the prior-year quarter. Moreover, quarterly adjusted (excluding special items) earnings per share of $0.75 handily surpassed the Zacks Consensus Estimate of $0.65. Quarterly total revenue stood at $1,405.4 million, up a whopping 31.6% year over year and beat the Zacks Consensus Estimate of $1,398 million. Segment wise, Network and Cloud segment accounted for $460.8 million revenues, up 41.8% year over year. CPE segment generated $945.4 million of the total revenue, up a substantial 27% from the yearago quarter. Quarterly Domestic revenues accounted for 73% of the total revenue while International revenues contributed the remaining 27%. Notably, Comcast Corp. (CMCSA), Time Warner Cable Inc. (TWC), Charter Communications Inc. (CHTR) and AT&T Inc. together contributed 53% of the total thirdquarter 2014 revenue. Quarterly gross margin came in at 31% compared with 29.7% in the year-ago quarter. Operating income was $122.1 million against $11.2 million in the year-ago quarter. Quarterly operating margin stood at 8.7% versus 1% in the year-ago quarter. Total order backlog of ARRIS, at the end of the quarter under review, was $594.1 million compared with $523.7 million in the comparable period last year. Meanwhile, the book-to-bill ratio was 0.86 compared with 0.99 in the prior-year quarter. ARRIS generated $81.9 million of cash from operations compared with $36.2 million in the year-earlier quarter. Quarterly free cash flow stood at $66.4 million as against $4.2 million in the year-ago quarter. At the end of the third quarter of 2014, ARRIS had $599.1 million of cash & marketable securities on its balance sheet compared with $509.8 million at the end of Total debt stood at $1,487.6 million at the end of the quarter as against $1,744.3 million at 2013-end. Future Financial Outlook Management expects fourth-quarter total revenue in the range of $1,230 $1,270 million. GAAP earnings per share are likely to be between $0.26 and $0.31. Non-GAAP earnings per share are estimated in the $0.58 $0.63 range, including $0.06 of stock-based compensation expenses. Tax rate is projected at 35%. VALUATION ARRIS is currently trading at 10.9x our estimate for fiscal 2014 earnings. This is at a discount to the S&P 500. With respect to our estimated earnings of fiscal 2015, the stock is trading at 9.3x, again a massive discount to both the industry average and the S&P 500. ARRIS is likely to benefit from the continued growth of video and data traffic over cable Internet networks. The company has established a solid foothold in the rapidly growing CMTS market. However, we believe that the market for broadband infrastructure offerings is highly competitive and is prolifically supplied by large companies, including Cisco Systems and LM Ericsson. Thus, we maintain our Neutral recommendation with a target price of $32, based on 11.5x our fiscal 2015 earnings estimate. Equity Research ARRS Page 4

5 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low ARRIS Group, Inc. (ARRS) N/A Industry Average N/A S&P CommScope Holding Company, Inc. (COMM) Equinix, Inc. (EQIX) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA ARRIS Group, Inc. (ARRS) Industry Average S&P Equity Research ARRS Page 5

6 Earnings Surprise and Estimate Revision History Equity Research ARRS Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of ARRS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1141 companies covered: Outperform %, Neutral %, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research ARRS Page 7