What: Shares of ARRIS International (NASDAQ: ARRS) rose as much as 18.9% in early Thursday trading, before stabilizing at a more modest 13% gain. The surge was driven by a strong second-quarter report, which left analysts scratching their heads over a large earnings surprise.
So what: In the second quarter, the telecom equipment maker's unaudited report showed adjusted earnings of $0.84 per diluted share on $1.73 billion in top-line sales. The 37% year-over-year revenue leap rested on the acquisition of industry peer Pace, which closed in early January.
The bottom-line stunner was a direct result of a $69 million tax benefit, which in turn was unlocked by the Pace buyout. GAAP (generally accepted accounting principles) earnings before taxes stopped at $13.7 million, or about half of the year-ago figure on the same line.
Now what: The Pace integration is proceeding smoothly, producing cost savings slightly ahead of schedule. CFO Dave Potts noted that ARRIS is on track to land in the upper half of existing full-year guidance ranges.
ARRIS is already shipping modest volumes of advanced products like 4K set-top cable boxes and DOCSIS 3.1 cable modems, setting the stage for strong growth as these technologies become a mainstream part of consumer markets.
CEO Bob Stanzione explained the potential growth drivers he sees on the horizon:
I can't think of a better example of the growth of broadband consumption than the sensational adoption of the game Pokemon Go. This augmented reality experience is just the beginning of what I think is going to be a phenomenal surge in demand across all types of networks over the next several years. And Arris will be in the middle of serving those new market demands.