Arris' new CEO Bruce McClelland on strategy, DOCSIS 3.1 and M&A

Arris
Bruce McClelland

… with Bruce McClelland, newly named CEO of Arris

If ever there was a right time for a CEO to drop the mic, it was after Arris’ second quarter conference call, when Bob Stanzione reported the leading pay-TV vendor’s best quarterly revenue performance. Ever.

Arris took in $1.73 billion in sales in the second quarter, a 37.3 percent year-over-year increase.

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Sales spiked 40 percent in the pay-TV vendor's CPE division to $1.17 billion, with the company reporting improvements across its video CPE product spectrum. Arris' network and cloud sales grew 33 percent, meanwhile, to $564 million.

A few weeks later, the company moved Stanzione its founding CEO to the position of executive chairman, upping network and cloud chief Bruce McClelland, a 16-year company veteran, into the chief executive slot.

FierceCable caught up with McClelland for an email exchange, just as they were putting his name on his new office.

FierceCable: Do you feel prepared to fill Stanzione’s shoes? They grew pretty big during the second quarter.

Bruce McClelland: Throughout my 16 years with Arris, I’ve had the pleasure and benefit of working closely with Bob Stanzione and the Arris executive team. We’ve collaborated in growing and transforming the business, and we share a ‘customer first’ philosophy, passionate belief in our people and relentless drive to innovate.

I joined Arris in 1999 as a VP of engineering. Since then, I have been fortunate enough to hold a variety of leadership roles within the organization, spanning the cloud, network, home (CPE) and services. It’s given me an excellent understanding – a holistic view – of every part of the business. Most recently, as president of our network and cloud and global services businesses, I drove our worldwide leadership in CMTS, creating a global footprint for growth.

FierceCable: Now that you’re ‘The Man,’ how will Arris’ strategic direction change?

McClelland: Really, this transition is a natural evolution and our strategy remains clear. I’ve worked closely with Bob Stanzione and many of the Arris’ leadership team over an extended period of time, crafting and implementing the company’s strategy. We remain focused on delivering on the plan outlined at the investor conference earlier this year, and re-iterated on the 2Q earnings call. And it’s working.

But with every business, the strategy is designed to flex. We’re lucky enough to work in a dynamic, rapidly evolving global marketplace, and I will continue to adjust our strategy to address new opportunities. The industry is in the early stages of multi-year upgrade cycle, to answer exponential consumer demand for broadband services, and to create ever-more compelling entertainment services. We are perfectly placed, working closely with our many service provider customers and direct-to-consumer channel partners, to capitalize on what’s ahead.

Underpinning everything, exceptional innovation matched with outstanding execution will continue to be the hallmarks of Arris’ success.

FierceCable: Does your promotion serve as a mandate for network and cloud now being the future of the company? Is it more important than CPE going forward?

McClelland: As we look at future growth potential, I can summarize our opportunity with a single word: Bandwidth. Bandwidth consumption is a fundamental driver, across every part of our business.

Clearly, there’s a huge opportunity in our network and cloud business. You’re going to see an increase in service-provider investment in networks and software, to enable additional capacity to handle advanced services and consumer demand for new applications. So broadband expansion and the drive to gigabit speeds absolutely is a priority for us, whether a service provider uses twisted pair, fiber or hybrid fiber/coax network. But simply delivering fast speeds to the home is not enough – we’re also working closely with our service-provider customers to ensure a peerless subscriber experience and differentiated gigabit speeds throughout the home on every CPE device.

As a result, you’ll also see an increased demand on our global services team to ensure that everything works together and evolves seamlessly, especially as service providers begin transitioning to all-IP networks.

But we remain excited about the opportunities available in the set-top business – the evolution to converged multimedia gateway, the increasing CPE refresh rate and international growth are areas of strategic attention for me and my team.

FierceCable: Arris’ network and cloud sales spiked nicely in the second quarter. What’s driving that growth?

McClelland: Within the network and cloud segment, the driving force behind the continued strength is the race by service providers to deliver gigabit-per-second broadband speeds to the mass consumer market. This has led to a broad adoption of our products and professional services to support service providers in accelerating their deployment.

In particular, we had terrific momentum in equipping cable operators with a strong mix of fiber optic products and services from across our access technologies portfolio to meet operators’ appetite to expand broadband capacity and extend their fiber network closer to the customer. As well as another strong quarter with our E6000 CCAP platform as operators prepare for the deployment of DOCSIS: 3.1 capabilities.

We have a great pipeline of new products, including next-generation line cards for the E6000, Remote Phy upgrades for our node platforms, Full Duplex and extended spectrum DOCSIS, 4K and HEVC encoding and transcoding capabilities that will all fuel future growth.

We’ll of course be at the upcoming Cable-Tec Expo showing customers many of these new product innovations. 

FierceCable: During your Q2 earnings call, Bob Stanzione thanked Pokémon Go for the company’s success. Can you explain the relationship between data consumption and Arris’ growth?

McClelland: Pokémon Go is just the latest in a series of new internet-enabled consumer applications that are adopted by consumers at a breathtaking speed. It was downloaded many millions of times and has been driving network bandwidth to gamers – much of it over the cellular network, but also a sizable amount over Wi-Fi connected to our customers’ plants and over our equipment in the home and our outdoor Wi-Fi solutions. I think the point here is really that no one can predict what the next ‘killer app’ will be, but we can confidently say there will be many! And that the consumer demand for bandwidth really has no limit.

Virtual reality seems to be the next concept that could have real consumer appeal – and drive an incredible amount of bandwidth usage – demanding solutions like ours to help navigate a future of high-bandwidth traffic on mobile, fixed line and Wi-Fi networks.

Clearly, augmented or virtual reality are not the only areas that we anticipate will necessitate new technology and expertise to manage bandwidth consumption. Looking forward, it’s clear that the pace of broadband and video convergence will continue to quicken, and the expertise we’ve gained through our involvement in every modern-day transition in TV and broadband will be crucial.

FierceCable: What has been the impact of DOCSIS 3.1 deployment on Arris’ sales?

McClelland: In some ways, 2016 is a “get-ready” year for operators that are early adopters of DOCSIS 3.1 technology. From a deployment perspective, operators first need to make spectrum available on their plant for the next DOCSIS 3.1 channels, and activate the functionality on the CCAP platform. They can then start to add DOCSIS: 3.1 subscribers with new broadband gateways. We expect this process to continue for the rest of 2016, and more significant volume of DOCSIS 3.1 CPE devices to be deployed in 2017.

From an Arris perspective, we declared general availability of DOCSIS 3.1 functionality for our E6000 CCAP platform earlier this year, and are working with customers to upgrade their installed base to support the new OFDM capabilities. And we’re also seeing more HFC networks upgraded as they drive fiber deeper in the access network.

Consumers are now experiencing DOCSIS 3.1 Gbps data services through the end-to-end suite of ARRIS products, and next year we will continue to expand our CPE portfolio with a broad range of voice and data devices with advanced Wi-Fi capabilities.

Needless to say, DOCSIS 3.1 is, and will continue to be, an area of opportunity for Arris.

FierceCable: What has been the impact of the network virtualization trend on Arris’ bottom line? How has the company adjusted to that trend?

McClelland: While many of our products today are “packaged” as custom high-performance appliances, in many ways, it is the software inside that is the magic behind the product. As standard x86 computer platforms become more capable, and the i/o continues to improve, it becomes possible to run this software on industry standard data center hardware.

We have begun this shift in many of our product lines already, and expect this trend to continue, providing customers the option of purchasing software to run in their data center, hosting the service in the cloud or buying a highly optimized, high-performance appliance solution. We are in close collaboration with our customers to really hit the mark and provide a full suite of options to meet their needs.

As an example, our assurance portfolio has several virtualized products today that can be deployed in the cloud or as an enterprise software application. Functionality such as subscriber management, fault management and workforce management are all provided in a scalable, robust software solution running on standard industry hardware platforms.

FierceCable: What are the long-term growth prospects in the video CPE market for 4K/HDR?

McClelland: With respect to 4K, we anticipate seeing video services platforms (VSPs) to take a path similar to Netflix and offering 4K as an option for video programming delivered as IP. As that takes hold, it will drive bandwidth consumption, much like other future applications such as virtual reality and augmented reality. 

Arris is in a strong position to help service providers with their 4K deployments, as in the case of NOS, Portugal’s broadband and TV service provider, which selected our ZD4500 set-top for its new, immersive 4K service. We will see more of those types of arrangements in the near term.

We also expect that as the base of UltraHD displays accelerates, announcements of UltraHD programming will become frequent. As we have already seen, initial announcements will be for premium experiences such as 4K sports from legacy operators and high-quality cinematic/episodic programming from newer OTT entrants. 

We are likely to see significant growth of the 1080p HDR version of UltraHD as a way to improve the consumer quality of experience for a wide range of content without significant bandwidth overhead. And over time, creatives will begin to use all the UltraHD knobs and dials strategically to engage viewers in the story in a way that has not previously been possible. 

FierceCable: Revenue has been particularly robust on the set-top side. Can you talk about what’s driving that growth?

McClelland: As Larry Robinson, president of our CPE business, said on our last earnings call: “We continue to ship significant volumes of set-tops worldwide.” So let’s not count the set-top out anytime soon.

A number of trends are driving our growth in set-tops:

First, the set-top as we’ve traditionally known it is changing form to a converged services multimedia gateway at the front end of the home, distributing advanced services to lighter weight IP clients that decode the content. The migration to an IP delivery architecture also includes networking gear, which further increases aggregate spend.

Second, the CPE refresh rate is speeding up. Whereas in the past, it was common for traditional or digital set-tops to be out in the field for 10+ years, now advanced technologies – like DVR requirements for hard drive capacities, 4K and HDR – are creating new upgrade cycles. As a result, operators are beginning to deploy more aggressively, and products are cycling in the field in a much quicker fashion. And as we migrate to IP video, everyone will need to receive that upgrade.

Third, the international opportunity is increasing across what is a very diverse market with diverse needs. We continue to ship set-tops at advanced rates globally, as evidenced by recent partnerships with NOS in Portugal and Omantel in Oman. Currently the international market (EMEA, Caribbean & LatAm and Asia) accounts for about 30 percent of Arris total revenues, and we plan to increase it to 40 percent.

FierceCable: Bob Stanzione said proposed set-top regulation isn’t having an impact right now. Do you see this having a major impact on the business further out?

McClelland: The complexities resulting from the proposed FCC “Unlock the Box” proposal have certainly highlighted the challenge of making dramatic changes to the current pay-TV ecosystem. A healthy dialogue continues within the industry, with an increased focus around the significant evolution already in flight, which largely accomplishes the goals outlines by Congress and the FCC.

We are optimistic that logic will prevail, and the adoption already underway of broadband IP video delivery to consumer devices will be embraced by the FCC. Arris is playing a leading role with our customers to enable this transition.

Regardless of the go-forward implementation specifics, the move toward ubiquitous IP video will take several years to fully achieve. The Arris portfolio is well-positioned to enable this shift.

FierceCable: Can you frame Arris’ broader M&A strategy, following the big acquisition of Pace and divestitures such as Whole Home Solution?

McClelland: I think the most important aspect to an M&A strategy is to be ready to take advantage of opportunities when they present themselves. To that end, we have a very disciplined approach to capital management that provides us a lot of flexibility to take advantage of both large and small opportunities. As the industry matures and consolidation continues across service providers, OEMs and silicon technology providers, Arris will look for ways to expand our portfolio, grow our international business and gain scale to innovate and invest in key areas that are relevant to our customers.

The Pace acquisition is an example of Arris’ ongoing legacy of investing in the right opportunities to significantly grow our business. The divesture of Whole Home Solution, and our partnership with Espial to continue supporting WHS, enable us to focus our R&D investment across our entire broadband and video portfolio – spanning the cloud, network, home (CPE) and services – dedicated to enabling the next generation of entertainment and communication experiences that are connected and personalized.

Last year, we invested more than $534 million in R&D. And, already in the first half of this year, we’ve committed more than $313 million toward broadening that focus.

We will continue to seek organic and inorganic investment opportunities to broaden our leadership and global scale.

FierceCable: How has the acquisition of Pace changed Arris’ business?

McClelland: The Pace acquisition provided a number of strategic benefits for Arris, our customers, employees, partners and shareholders. Here are a few key highlights:

For one, It gave Arris unmatched global scale and the industry’s most competitive portfolio – across the cloud, network, home, and services.

Secondly, it established Arris as the clear leader in CPE (both video and broadband devices) – including worldwide leadership in satellite TV, which is a new opportunity for us.

Third, it established new global leadership in HFC/optics, which is a growth area for us in 2016. This complements Arris’ established CMTS leadership position.

Lastly, it uniquely positioned Arris to deliver the future of gigabit Wi-Fi – bringing new synergies in software and R&D to our leadership in CPE devices, for both Wi-Fi-enabled IP set-tops and the growing requirements for faster Wi-Fi broadband speeds in the home.

I should also note that the integration of Pace is effectively complete.

FierceCable: What has been the impact of operator consolidation on ARRIS? 

McClelland: Consolidation is a reality of operating in this market, but it feels like we’ve reached more of a steady state in the last three to six months. As a result, we anticipate an increased focus from our customers around the strategic imperative of growing their customer base and improving their operations and profitability. We’ll be there for them as this translates into network capacity expansion, new feature deployment and more advanced subscriber equipment.

On our side, the acquisition of Pace gave us the scale to capitalize on evolving industry conditions. We have strong synergies and a more diversified customer base and product portfolio, which helps insulate us to some extent against economic shifts or fallout from consolidation.

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