ARRIS Group (NASDAQ:ARRS) reported its first quarter earnings on Tuesday, and it guided for earnings well above expectations for its second quarter. When the company reports again in three months or so, management expects a number between $1.41 billion and $1.45 billion for its revenue resulting in between $0.64 to $0.70 in earnings per share. Analysts had forecast earnings of $0.50 on $1.22 billion in sales.
Management, speaking on the company's earnings call, gave indications that it's business is in a good position for long term growth. The acquisition of Motorola Home has allowed it to grow its video and broadband solutions for customers like AT&T (NYSE:T), which is rapidly growing its U-Verse service.
Here are five quotes every ARRIS investor should hear.
At first glance, the higher-than-expected guidance for the second quarter may look like ARRIS is simply accounting for the increased backlog it generated in the first quarter. While the backlog increased 85%, all indications are that the strength is continuing into the second quarter. CEO Bob Stanzione had the following to say:
Although we are not giving guidance for the third quarter at this time, we are far enough into the second quarter that we have fairly decent visibility into the third, and it looks like the third quarter is shaping up very nicely.
Gaining share in a growing market
One reason for Stanzione's positive outlook on the company's future of its market. With customers like AT&T attempting to differentiate its service through the set-top box (AT&T's box receives the video signal over WiFi), there's high demand for new video solutions in order to stand out.
Stanzione also commented that the company is gaining market share:
Right now, with the share that we are gaining -- we are gaining share, I believe, in both CPE as well as in network and cloud -- as well as the fairly vibrant market that we are selling into ... we see this business doing very well right into the future.
Accelerating upgrade cycle
One way to sell more is for customers to upgrade more frequently. Larry Robinson, President of ARRIS' CPE division, believes that cable operators and telcos will refresh set-top boxes more often:
I think, longer-term, we are anticipating that there will be ... an acceleration of that refresh cycle. So typically boxes will remain in the field for quite sometime historically. We think with the application and service innovation that's taking place, it's setting the stage nicely for boxes to be refreshed on a much bigger rate than historically has been done.
Whether that's from improved technology or churn within the industry is unclear. AT&T was the beneficiary of significant churn last year, as the traditional cable operators lost subscribers to telco operators. AT&T added 194,000 and 201,000 net new subscribers to its television service in the fourth quarter and first quarter, respectively. It accounted for 11% of ARRIS' revenue last quarter.
Gross margin expansion
Since acquiring Motorola Home, ARRIS' gross margin contracted noticeably as it sells more CPE products. Last quarter, the product mix within CPE carried an even lower margin, leading to a gross margin of 28.3%. Looking forward, Stanzione believes its margins will be fine in the long run, as revenue growth more than makes up the difference:
I think we're probably at a good place in gross margins, but maybe some upside from what we had in the first quarter. ... It could [rise]. But it's not -- we are not talking material amounts here.
Growing software business
One product that could help improve gross margin, is ARRIS ability to install software mechanisms to unlock capacity in its products. This option can be particularly attractive to operators that don't want to spend money on a team of workers to upgrade hardware. Although this would result in a lower revenue per megabit at ARRIS, its gross margin on software license sales would be relatively high.
Stanzione sees this becoming a larger part of the business:
Most of the equipment we are selling today is new hardware and software, and what we expect to see over the coming quarters is a growing mix of software license sales into the installed base that we're seeing now.
Putting it all together
ARRIS is positioned well in the market, attracting sales and gaining share since its purchase of Motorola Home. Management's confidence on the conference call ought to inspire confidence in investors.
Adam Levy owns shares of Arris Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.