Arris Group (NASDAQ: ARRS ) is one of the main providers of equipment cable companies need to compete with over-the-top video services. After purchasing Motorola Home last year for $2.2 billion plus 10.6 million shares of the company stock, it added another piece of the puzzle for home video delivery.
Still, the company has just a 15% share of the set-top box market, 35% share of the cable modem market, and 40% share of the cable modem termination system market. Although Arris has a lot of competition in the set-top box and cable modem market, one of its biggest competitors, Cisco Systems (NASDAQ: CSCO ) , is falling behind the competition and giving up share easily.
Taking the market
Arris launched its E6000 converged edge router last October. The cable modem termination system allows operators to optimize their networks for video delivery. More importantly, Arris is addressing a large market where Cisco's new products aren't expected to ship until early next year.
As Cisco loses ground, Arris has a chance to take a large portion of Cisco's share. Cisco's Service Provider Video segment revenue has already declined over 20% in the first nine months of the company's fiscal year. Still, the segment generated over $4.8 billion in sales last year, 34% more than Arris's total revenue last year.
The E6000 has been a bigger success than anyone predicted. Arris wasn't entirely prepared for early demand and faced supply constraints early on. As of the end of the first quarter, Arris had over 5 million subscribers on the E6000 platform, more than double its fourth quarter subscriber count.
Although the E6000 is just one product, it's a product that can lead to incremental revenue growth in the future.
First, strong products like the E6000 lead to more demand for Arris's in-home equipment as well. Last quarter, management noted that it saw strong demand across the board for its networking equipment.
Arris still has a lot of untapped market share in set-top boxes, which are a big revenue generator. Comparatively, it's doing much better with its networking equipment. If Arris can close the gap by integrating the products more closely, it could see a substantial revenue increase.
The second opportunity for Arris to increase revenue is in software upgrades for the E6000. The product ships with just a portion of its capacity activated. Customers can choose to upgrade the system via a software update that increases capacity.
In other words, each sale of the E6000 today will result in a future software sale in the future. Additionally, that sale is very high margin. Overall, management expects this mechanism to have a positive impact on the company's profit margin.
As multi-service operators look to future proof their products, they are turning to Arris more and more. Last quarter, management noted the company is gaining share in both is consumer premise equipment segment and its network and cloud segment. The two are increasingly tied together with over-the-top video services.
Arris's products, like the E6000, allow operators to buy one piece of hardware that will last them a long time, saving them time and money through software upgrades. Investors can expect Arris to keep those customers, selling them software upgrades, for years to come. Meanwhile, Arris should see strong hardware sales as it gains share.
Of course, it's not exactly future proof. At some point customers will have to upgrade their equipment, but for now more are choosing Arris. If Arris continues to please customers and stay ahead of the competition, those customers should choose the equipment maker again in the far future.
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