Recently, Arris Group Inc. (ARRS), a leading infrastructure gear supplier to cable operators won a significant contract from Time Warner Cable Inc. (TWC), as reported by LightReading. According to the source, Arris will supply the bulk (around 60%) of total edge-QAMs to Time Warner Cable. The contract size is likely to be more than $25 million through the end of 2011.

According to our view, this contract is crucial for Arris, since the company just reported disappointing second quarter 2010 financial results. Comcast Corp. (CMCSA), the largest customer of Arris is on the verge of full deployment of high-speed DOCSIS 3.0 networks. This in turn significantly reduces the high-margin Cable Modem Termination System (CMTS) business of Arris. Management hinted that in 2010, total sales to Comcast will decline year over year.

Arris’ industry leading D5 edge-QAM is capable of sharing bandwidth and resources within multiple applications that includes switched digital video (SDV), video-on-demand, and DOCSIS 3.0. We believe SDV roll-out will boost up in the second half of 2010 since large cable MSOs are increasingly deploying HD TV channels, HD VOD, and DOCSIS 3.0. Comcast also decided to follow suite and also recruited Arris as one of its edge-QAM suppliers.

We believe Arris needs to get more such orders to get rid of its top-line volatility. The market for broadband infrastructure offerings is highly competitive and is prolifically supplied by large companies Incorporatedluding Motorola Inc. (MOT), Cisco Systems Inc. (CSCO), and L.M. Ericsson AB (ERIC). These competitors have broader product portfolios targeting diversified markets of cable TV, telecom and satellite communications.

Arris is solely dependent on cable operators for its revenue. The lack of industry diversification may result in limited business prospects since potential shifts in industry dynamics may adversely impact cable TV service providers. We do not find any near-term growth catalyst for Arris and thus maintain our Underperform recommendation. Currently Arris is a short-term Zacks #5 Rank (‘Strong Sell’).

Zacks Investment Research

1. (ARRS) Arris Group Analyst Downgrades Stock to UnderperformWe downgrade our recommendation for Arris Group Inc. (ARRS) to Underperform, following its disappointing second...
2. (ARRS) Arris Group Analyst Downgrades Stock to NeutralWe are downgrading our recommendation for Arris Group Inc. (ARRS) to Neutral, which means the...
3. (ARRS) Arris Group Upgraded to OutperformWe upgrade our recommendation for Arris Group Inc. (ARRS) to Outperform ahead of its fourth...
4. (ARRS) Arris Group is on a Buying SpreeArris Group Inc. (ARRS) has decided to acquire the privately held Digeo Inc. Incorporatedluding its...
5. (ARRS) Arris Group Marching Forward with Cable Modem Termination SystemArris Group Inc. (ARRS) continues to receive increasing market traction for its industry leading C4...
6. (ARRS) Arris Fortifies Digital Video FootholdYesterday, Arris Group Inc. (ARRS) said it acquired patents and video processing technology for digital...

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