Arris Group (NASDAQ: ARRS ) reported earnings on Wednesday, beating analyst estimates on both the top and bottom lines. Earnings got a boost from the rollout of Comcast's (NASDAQ: CMCSA ) XG1 platform, and Verizon grew to become the company's second-largest customer ahead of Time Warner Cable (NYSE: TWC ) .
Management answered questions on its fourth-quarter results and outlook for 2014 on the conference call. Here are the quotes you need to hear.
On the Time Warner-Comcast deal
Arris' shares jumped last week when Comcast and Time Warner announced that they've agreed to merge. Comcast taking over Time Warner's households could accelerate the move toward Arris' set-top boxes. When asked about the opportunity, CFO David Potts said:
Both Time Warner and Comcast are following similar technology paths. ... Competition is not lessening but it's increasing, it's escalating in the business. ... With the competition and the similarities that Time Warner and Comcast have in their game plans, I see it as a pretty good year coming up and it could result even in more business for us.
Time Warner is following the same path as Comcast -- higher bandwidth, moving toward IPTV, better user experiences -- so it likely would have continued tapping Arris for set-top boxes. It already has plans to roll out a six-tuner set-top box manufactured by Arris.
With the potential for Time Warner's 11 million subscribers to fall under control of Comcast, however, it all but guarantees Arris will be making the set-top boxes. Comcast has a 7.7% stake in Arris, and tapped the company to make its XG1 box. After all the investment Comcast has put into Arris, it wouldn't make sense to switch to a different manufacturer.
Management was light on the details regarding how the XG1 rollout affected earnings. Note that Comcast was able to increase its video subscribers for the first time in six-and-a-half years last quarter. The X1 platform likely had something to do with that. The platform received excellent reviews and put it a step ahead of other cable providers in terms of IPTV capabilities and user interface.
Comcast offered numerous statistics about its X1 customers on its conference call. Arris' management was much more humble about the impact of the new product. According to Larry Robinson, president of customer premises equipment: "We absolutely did have a nice quarter with respect to completing the XG1 product qualification and beginning shipments for that product. But we also did see ongoing demand or improvements quarter-over-quarter for some of our what I would call more traditional non-video gateway set tops to some of our key customers, but certainly the XG1 played a nice factor in the quarter."
It's nice to see its other set-top products are continuing to see strong demand, but it's leading-edge products like the XG1 that will keep Arris ahead of the competition.
On the future of television delivery
A lot of TV these days is not consumed through a television set. Arris wants to help facilitate video on every connected household device. According to Robinson: "I see gateways becoming more and more present in the marketplace as operators continue to roll out really an entertainment hub within the home that's capable of serving not only you know more traditional set top devices but also we would call customer owned and maintained equipment tablets, Smart TVs, things of that nature. Leveraging the portfolio that we have I think positions us well to help operators through that multi-year migration that we're just beginning to embark on."
Arris' strength is in the cloud and networking, and integrating that with video and the set-top box business it acquired through Motorola Home. As more television moves through the cloud, Arris' portfolio lends itself to this migration and could lead to further growth as it adds another device to the home.
Cable is differentiated through the set-top box now
CEO Bob Stanzione's final words show the tremendous opportunity that lies ahead for Arris. As cable companies try to differentiate their products, they're focusing more on what they can bring to customers through their set-top box and other in-home technology. "Two of our major customers featured in their Super Bowl advertisements the in-home devices that they were offering, indicating to me that the in-home device is an important part that they offer to their customers, and the performance of those in-home devices is dependent upon the network equipment that we have."
Arris, as the leader in set-top boxes, is poised to capitalize on this trend. Although shares climbed another 12% on Thursday, you can also capitalize on this trend by investing in Arris.
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