Arris sees 18% drop in CPE revenue as U-verse and FiOS business craters

Arris reported an 18 percent drop in customer premises equipment sales in the second quarter, driven by a 7 percent drop in sales of set-tops and gateways to cable companies, and a 17 percent decline in sales of these products to telco services AT&T U-verse and Verizon FiOS.

U-verse and FiOS collectively had their worst quarter for subscriber growth ever in the second quarter, with the services adding only 4,000 new subscribers between them during the period. 

Arris' overall revenue was down 11.8 percent in the second quarter to $1.26 billion, meeting Arris' recently downgraded projections.

Arris Chairman and CEO Bob Stanzione said he expects the company's CPE business to improve in the second half of 2015. The company's telco business, he added, will probably remain soft, especially with AT&T likely to focus on the satellite side of its business following the close of the carrier's purchase of DirecTV.

Broadband-based CPE sales did increase 10 percent for Arris in the quarter, driven by what the company said was strong demand among customers like Comcast (NASDAQ: CMCSA) to improve their broadband speeds. Arris expects this business to keep improving as these customers embark on DOCSIS 3.1 upgrades in the coming months. The company said it expects its DOCSIS 3.1 products to be involved in field trials by the end of the year, and the business to ramp up in 2016.

"Service providers are beginning to deploy new and faster services and they're running out of capacity for their data," Stanzione said. "That's good news for us."

Meanwhile, Arris reported a year-over-year increase of 3 percent in sales in its network and cloud unit, with operating profit spiking 12 percent. The company recently closed its acquisition of ActiveVideo Networks with partner Charter (NASDAQ: CHTR).

Arris only lightly touched on its proposed $2.1 billion purchase of CPE rival Pace. The company reiterated its belief that the deal gives it a significantly enhanced position in the International CPE space, diversifying its fortunes away from the volatility of the consolidating U.S. pay-TV market.

Arris executives also said that buying Pace improves the company's market position in the satellite TV market. This is important, they said, because AT&T's (NYSE: T) purchase of DirecTV (NASDAQ: DTV) could kick start a migration of U-verse subscribers to satellite services. Arris expects its deal for Pace to close in the fourth quarter. 

Stanzione said Comcast increased its spending with the company after regulators shot down Comcast's proposed purchase of Time Warner Cable (NYSE: TWC) in April. He also said that Charter slowed its spending with Arris after Charter announced plans to purchase TWC and Bright House. But Stanzione said he expects Charter to increase spending after those transactions are completed.

For more:
- see this Arris release

Related articles:
Arris sells cable supplies unit to UK's Technetix, streamlines for Pace purchase
Arris: OTT use has declined by 2% from last year
Arris-Pace approval process moves along as DoJ makes second request for info