EXHIBIT 99.2
CONFERENCE CALL TRANSCRIPT
ARRS - Q4 2005 ARRIS GROUP, INC. EARNINGS CONFERENCE CALL
EVENT DATE/TIME: FEB. 09. 2006 / 8:30AM ET
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Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
CORPORATE PARTICIPANTS
JIM BAUER
ARRIS Group, Inc. - IR
BOB STANZIONE
ARRIS Group, Inc. - Chairman, CEO
DAVE POTTS
ARRIS Group, Inc. - EVP, CFO
JIM LAKIN
ARRIS Group, Inc. - President, ARRIS Broadband
PRESENTATION
OPERATOR
At this time, I'd like to welcome everyone to the ARRIS Group fourth quarter and
full year 2005 earnings conference call. [OPERATOR INSTRUCTIONS] It is now my
pleasure to turn the floor over to your host, Jim Bauer.
JIM BAUER - ARRIS GROUP, INC. - IR
Thank you. Well, first, let me welcome all of the call participants to the ARRIS
conference call with our management team. This morning, we will discuss our
preliminary and unaudited fourth quarter and full year 2005 financial results,
which, you know, we released after the close of markets yesterday. I'm Jim Bauer
and I will be moderating today's call. With us here at the ARRIS headquarters
this morning are Bob Stanzione, ARRIS Chairman and CEO; Dave Potts, Executive
Vice President and Chief Financial Officer; Larry Margolis, ARRIS Executive Vice
President of Strategic Planning and Administration, and Chief Counsel; and Jim
Lakin, our President of the ARRIS Broadband Group. There will be a replay of
this entire call available on a 24-hour basis, as usual, at (877)519-4471 with
pin number 654-8282 through next Tuesday. In addition, of course, there will be
a replay of the call on our corporate website for the next 12 months.
Well, before we begin, I'd like to point out that during the call we will be
making or we may be called to make some forward-looking statements, including
statements regarding matters such as our outlook and expectations for the
industry in general, estimated revenue and earnings for the first quarter of
2006, anticipated gross margin and other financial performance metrics. The
timing and introduction of certain new products and technologies, spending
patterns for some of our largest customers and the outlook for future overall
financial results. It is important to note that actual results may differ
materially from those suggested by any forward-looking statement, which we may
be -- may make today during the call. For any further information in this regard
and for specific examples of risks that could cause actual results to differ
materially, please see our recent filings with the SEC.
Well, before we start the call, let me also note that we may present material on
this call that could be considered non-GAAP financial information. And for any
reconciliation of such non-GAAP financial information to the most directly
comparable GAAP financial measures, please refer to the information on our
corporate website under the heading non-GAAP reconciliations. Well, Bob, Dave,
and Jim are now going to provide some brief comments on our release. After
which, we will open up for questions and answers in the remaining time. With
that, let me turn it over to Bob Stanzione.
BOB STANZIONE - ARRIS GROUP, INC. - CHAIRMAN, CEO
Thanks, Jim and good morning, everyone. Thanks for being on the call this
morning. Let me open the call by saying that I'm really pleased with the
outstanding progress that we've made during the past year. We exceeded all of
our goals and the men and women of ARRIS really delivered a great performance in
'05. Sales were up 39% year-over-year as we won a larger share of the overall
CapEx in the industry. We brought winning products to the market and our
development pipeline is full of new ones for release this year. Profits were up
by a large amount in '05 reflecting the strong performance of ARRIS products in
the market. Our tight management of expenses and our successful record of
designing and manufacturing highly-reliable and feature-rich products at low
cost.
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
At the same time, we earned a healthy amount of cash from operations. Again
reflecting an intense effort to continuously improve operational metrics and
effectively manage our assets. As you know, we entered the year with
considerable debt and exited the year with none. Net income in the last two
quarters were the highest in the Company's history. And as you can see, the
fourth quarter cash generation of 35 million was just superb. All of this sets
us up for a great 2006. We entered the year with more than double the backlog we
had a year ago. Also, the environment that we're operating in is better than
it's been in many, many years. Bandwidth competition and increasing traffic from
IP video downloads continue to drive our successful CMTS business. The fight
between the telcos and cable operators to win end customers with bundles of
service is escalating and driving up the demand for our Voice over IP products.
It's hard to miss the almost daily announcements of new service launches.
Liberty Bongo, Google video, ABC, or CBS, or MTV offering downloads of their
most popular shows. And cable operators offering digital voice services in one
new community after another. All of these services require more of the products
that ARRIS has. And as I've said, we have a healthy lineup of new ones on the
way. We've already begun to ship an entirely new line of the MTAs, the 500
series. We're introducing multi-live units aimed at the large MDU market. A
wireless home Gateway, a DS1 circuit emulation modem to address small businesses
and a new wide band modem capable of delivering over 100 megabits per second of
download speeds. On the CMTS front we've introduced features such as FlexPath
channel bonding for high-speed downloads using the current C4 CMTS platform and
as the year progresses, we will be adding modular CMTS and DOCSIS 3.0
functionality. Jim Lakin is going to explain these more fully in a moment and
will also comment on some very important late-breaking customer news.
Another item I want to address this morning is the so-called EMTA inventory
issue. Again, Jim's going to elaborate, but let me say definitively, it's over.
Recall what we said on our last call. First, we got more output in late Q3 than
we expected as we caught up with demand. And second, we expected customers would
tighten inventory levels at year-end. And therefore we thought demand would
bounce back quickly. Well, it has. As I've said before, this is not necessarily
a smooth business when looked upon on a quarterly basis. However, in the long
run, we're in great shape.
In closing, I want to outline some of our goals for 2006 and beyond. First, we
want to continue to grow top line faster than industry CapEx. We believe we're
in the sweet spot for spending and our focus this year, as it was last year, is
to win a larger share of that CapEx. Next we want to lead the market with new
product and feature innovations in both the CPE and network technology areas.
We'll continue to invest aggressively to bring highly-reliable, feature-rich and
cost-effective products to the market.
Next, we'll continue to diversify our customer base. We see opportunities with
new international customers and even see new opportunities in North America, in
spite of the consolidating marketplace. We'll continue to focus on improving
operational metrics, inventory turns, DSOs, product quality and productivity in
general and finally, we expect to increase cash from operations. And now that
we've exceeded our 8 to 10% operating margin goal for the second half of '05, we
will try to stay at or above the high end of that range. All in all, I see 2006
as another year of growth. The environment certainly improved and we've
positioned ourselves well within it. Now Dave Potts will go through the numbers.
DAVE POTTS - ARRIS GROUP, INC. - EVP, CFO
Thanks, Bob and thank you all for joining us this morning. Let me start by
saying I'm very pleased to report spectacular Q4 and full-year 2005 results.
Some major highlights, revenues were $181.3 million in Q4 and as we expected,
were down from the third quarter of 2005. For the full year, revenues were
$680.4 million, and compared to $490 million in 2004, up approximately 39%.
Gross margins were 31.9%, up from our third quarter level of 27.4%, reflecting
several factors I will touch on in a moment. We posted GAAP income of $0.20 per
share in the fourth quarter. Excluding stock compensation expense, certain
changes in estimates related to restructuring reserves and amortization of
intangibles, which are, of course, non-GAAP measures. Our EPS was income of
$0.24 per share. We've attached a reconciliation of our U.S. GAAP EPS to our
non-GAAP EPS to the press release and it is also available on our website.
We ended the fourth quarter with approximately $129 million of cash, cash
equivalents, and short-term investments, up $36 million from the third quarter
2005 level of $94 million. We generated approximately $35 million of cash from
operating activities in the fourth quarter. We ended Q4 with an order backlog of
approximately $166 million, down $5 million from the Q3 2005 level, but up $91
million from the end of 2004. Our book-to-bill ratio was 0.97 in Q4 and compares
to 1.02 in the third quarter of 2005.
Let's review some of the details. Again, revenues were $181.3 million in the
quarter, which, again, as we expected, were down $19.6 million or 10% from the
third quarter of 2005. The reduction reflects a decrease of purchases of our
EMTAs as customers adjusted their inventory positions in Q4. Jim Lakin will
comment more on this in a moment. Fourth quarter 2005 revenues were up $51.9
million or 40% from the fourth quarter of
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
2004, while full-year revenues were $680.4 million, up 190.4 million or 38.8% as
compared to the full year 2004. The year-over-year increases reflect the growth
in the VoIP market and certainly our success in it.
Sales of our broadband products were $92.9 million in Q4 and compare to 81.3
million and 77.7 million in Q3, 2005. And Q4, 2004 respectively. The increases
from Q3 reflect higher sales of both our CBR and CMTS products. For the full
year 2005, broadband sales were 315.1 million, compare to 300.2 million in 2004.
Sales of our supplies and CPE products in Q4, 2005, which includes the MPAs and
cable modems, were $88.4 million, and compare to 119.7 million and 51.7 million
in the third quarter 2005 and the fourth quarter 2004 respectively. For the full
year, supplies and CPE sales were 365.3 million, compared to 189.8 million for
2004, essentially doubling year-over-year.
Now let me turn to ARRIS sales to our 10% customers. In the fourth quarter 2005,
sales to Comcast were $57.2 million, up from $50.4 million in Q3. Sales to Cox
were $28.4 million, down from $34.0 million in Q3. Sales to Time Warner were
11.8 million, down from the Q3 level of 23.2. Sales to Liberty Global were 25.3
million, down from the Q3 level of 26.7 million. Total international sales were
52.3 million in the fourth quarter and compare to 52.4 million in the third
quarter of 2005 and 42.3 million in the fourth quarter of 2004. Our backlog at
the end of the fourth quarter was 166.5 million, down 4.8 million from the 171.2
million level at the end of Q3, but up 90.9 million from the end of 2004.
Bookings were $176.6 million in Q4 as compared to $205.4 million in the third
quarter. Our book-to-bill ratio was 0.97 in Q4 as compared to 1.02 in Q3.
Let's turn to the income statement. On a GAAP basis, our net income for the
fourth quarter was $22 million, or $0.20 per share and compares to a profit of
18.8 million or $0.18 per share in the third quarter 2005, and a loss of
$600,000 or $0.01 per share in the fourth quarter of 2004. The fourth quarter
2005 GAAP income includes a charge of $2.6 million or $0.02 per share, related
to noncash stock compensation expense as we adopted the provisions of SFAS 123R.
As we previously announced, we chose to early adopt 123R in the third quarter.
You will note that we've adjusted our historic figures and our GAAP to non-GAAP
reconciliation attached to our press release to highlight noncash compensation
costs previously recorded in our P&L under the former rules. Our Q4 net income
also includes amortization of intangibles related to past acquisitions of about
$200,000 and adjustments to restructuring reserves related to real estate leases
of about $900,000. The sum of these two items is about $0.01 per share.
Excluding these items, our profit was $25.6 million or $0.24 per share in the
fourth quarter.
Let me touch on some of the specific lines. First, gross margin, in the fourth
quarter, our overall gross margin was 31.9%, up from both the Q3, 2005 level of
27.4% and the Q4, 2004 level of 26.1%. Our gross margins in our supplies and CPE
product category declined in Q4, reflecting some pricing actions. In Q4, they
were 119.9% as compared to 22.2% in Q3. In our broadband product category, we
saw an increase in gross margins. They were 43.3% in Q4 as compared to 34.9% in
Q3. Several factors led to this favorable performance. First, our cost reduction
plans continue to be on track and we achieved product cost reductions
quarter-over-quarter. Second, as we mentioned on our Q3 call, we recorded
inventory reserves of over $2 million in Q3, which did not repeat in Q4. Lastly,
we also had a favorable product mix within the broadband category in Q4.
Next, operating expenses. In Q4, our R&D expense was $15 million as compared to
$16 million in Q3. Overall operating expenses including selling, general, R&D,
and administrative expenses were $36.7 million in Q4, in line with the expense
range we provided in October. This compares to $36.3 million in Q3, 2005. It
should be noted that operating expenses included noncash stock compensation
expense of $2.4 million in Q4, as compared to $2.5 million in Q3. Q4, 2005
operating expenses also included the $900,000 charge to increase restructuring
reserves due to changes in estimates related to real estate lease obligations I
mentioned a moment ago.
Turning to the balance sheet, let me provide some highlights. At the end of the
fourth quarter, we had approximately $129 million of cash, cash equivalents, and
short-term investments, up $35 million, from the $94 million level at the end of
the third quarter. Cash provided by operating activities in the fourth quarter
was $34.6 million. It should be noted that we generated $27.3 million from the
earnings elements of our cash flow in Q4. We are obviously very pleased with our
cash generation in quarter. Inventory ended Q4 at $113.9 million with turns of
4.8. This compares to $90.1 million and 6.8 turns at the end of Q3. The increase
relates to more EMTAs on hand as our customers adjusted their inventory levels.
Lastly, DSOs were 45 days in Q4 and compared to 42 days in Q3.
Let's turn to guidance. We continue to limit our guidance to the current
quarter. At this point, we anticipate that revenues for Q1, 2006 will be in the
range of 185 to $200 million. We are forecasting overall gross margins to be in
the range of 27 to 29% in the first quarter. We do anticipate a change in
product mix and we are also planning for some price reductions, which Jim will
comment on in a moment. With respect to operating expenses, we anticipate being
in the range of 33 to $36 million.
For clarity, our operating expense includes approximately $2.1 million of
noncash stock compensation expense. From an earnings perspective, we anticipate
GAAP income to be in the $0.17 to $0.21 per share range in the first quarter.
That includes a $0.02 per share expense for stock
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
compensation expense and amortization of intangibles. And lastly for clarity,
we're assuming a weighted average share base of approximately 108 million
shares. So, that concludes my remarks for now. Let me turn it over to Jim Lakin.
JIM LAKIN - ARRIS GROUP, INC. - PRESIDENT, ARRIS BROADBAND
Thanks, Dave. I'm happy to report today the continuing success and strong demand
that ARRIS is experiencing across both our existing and our new product lines.
Our CMTS and high-speed data products continue to do well in domestic and
international markets. With increases over the third quarter and over the same
quarter last year. Initial reaction to our D5 digital multimedia termination
system and our FlexPath wide band feature has been very positive. At the same
time, our CBR telephony product line appears to have legs for several more
quarters.
As we mentioned in our guidance for Q4, demand for our EMTAs in Q4 was down from
Q3 levels as our customers deployed from their inventories. Unit sales for the
fourth quarter were 581,000 units. This is still 3.4 times the level we saw in
the fourth quarter of 2004 and the second highest quarter we have ever had. We
are aware that there has been some concern in the market over the disparity
between the number of units shipped and the number deployed. We believe that
faced with the limited supply and long lead times in 2005, our customer
stockpiled units, in advance of launching service, as our capacity caught up to
demand and our lead time shortened, we saw a reduction in orders for EMTAs in
the fourth quarter as our customers adjusted their year-end inventory levels.
In the last few weeks of the fourth quarter and continuing into the first
quarter of 2006, we have seen a steady rise in demand as these customer
inventories have been drawn down. We anticipate that EMTA unit volumes in the
first quarter of '06 will once again approach or exceed third quarter '05
levels. Our top EMTA customers in the fourth quarter were Charter, Comcast, Cox,
Telenet, Time Warner and Videotron. New customers for EMTAs added during the
quarter included Cablemas and CNA in Mexico, Ortel, a service provider in India,
and TVTel in Portugal.
We released the 500 series Touchstone products in the fourth quarter, having
already received DOCSIS 2.0 and EuroDOCSIS 2.0 certification of the products in
the third quarter. This next generation product line incorporates more
integrated components and takes better advantage of the scalable production
techniques to further reduce product cost. The 500 series products are being
well-received by most of our customers. One large customer, however, has
requested that we integrate the 500 series electronics with our 400 series
battery to ease their battery replacement process. We expect to implement this
version of our 500 series unit by Q3, 2006. In the interim, we will continue
shipping 400 series units to this customer at somewhat reduced margins. It is
important for you to note that we will continue to innovate in the AMTA product
line to maintain differentiation from our competitors with such advanced
features as loop diagnostics, modem relay and remote monitoring of voice quality
metrics.
And now for some -- a piece of late-breaking news. We have just agreed to a new
two-year contract with Comcast for the purchase of our EMTA equipment. Which
includes a minimum purchase commitment of 1.2 million units. ARRIS and Comcast
have been working closely over the last three years to develop an optimal set of
the MTA specifications, that enable the Comcast digital voice service. ARRIS is
extremely pleased to be a part of the Comcast digital voice initiative with the
C4 CMTS and the Touchstone EMTA product lines, extending Comcast voice-over
cable leadership, dating back to 1998. Other exciting new CPE products currently
under development are 12 line MTA, our FlexPath 100 megabit wide band cable
modem, a wireless EMTA home Gateway and a DS1 circuit emulation modem. The
multiline MTA will allow our customers to cost effective -- to offer
cost-effective Voice over IP services to apartment dwellers and small office
complex. It is already in high demand from our customers.
The FlexPath 100 megabit cable modem will dovetail with our FlexPath 100 megabit
feature on the C4 CMTS. FlexPath will allow cable operators to compete favorably
against Telco fiber to the Premise services. Lab evaluation units of the
multiline MTA have already been provided to customers this quarter and full
production is expected in second quarter. Prototypes of the wide band modem are
in trials and with more planned. Lab evaluation units of the production version
will be available during the first quarter and full production is expected in
the second quarter. The wireless EMTA home Gateway enables the installation of a
single product to support both Voice over IP and wireless high-speed data
access. The DS1 circuit emulation modem provides T1 services over a DOCSIS
high-speed data channel. T1 services interconnect Legacy commercial PBXs with
the public telephone network and provide back haul for cellular traffic.
Our CMTS business also continues to grow at a healthy pace and we expect it to
continue to do so. We shipped 3,805 downstreams, up 33% from Q3 and 64% more
than the same quarter in 2004. Major customers for our CMTS products in Q4
included CableVision Argentina, Cablemas in Mexico, Charter, Comcast, Insight,
and Liberty Global. New customers included Midiate a Japanese operator
affiliated with Liberty Global and Telemedia S.A. in Mexico. Of particular note
is the continuing increase in CMTS shipments to Comcast as they increased the
number of Cadant C4 high density cable access models deployed to support
increases in bandwidth for subscriber. This is reflective of the increasing the
aggressive
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
bandwidth war being waged between the cable operators and the telecos and the
major expansion in network traffic fueled by subscriber demand for such services
as music and video downloads. As an example, Comcast now offers basic 6 megabit
service and enhanced 8 megabit service. And we are testing a 16 megabit service
for several of our customers and we've heard plans of two operators who intend
to offer a 30 megabit premium service.
It is important to remember that as downstream bandwidth for subscriber goes up,
the number of subscribers that can be served by a single cable access module
goes down somewhat proportionally. This trend portends to a continued demand for
our CMTS products to fuel the continuing competition with the telecos.
ARRIS continues its wideband trial activity. Our trial at Hanaro in Korea is
ongoing and we have just completed a successful 100 megabit lab trial with a
large European MSO that historically has not been a customer of ours. Both
utilize ARRIS prototype FlexPath cable modems delivering 100 megabit service
based on packet bonding.
We have made steady progress in our Keystone D5 digital multimedia termination
system program. We recently realigned this program to more directly address the
requirements of the emerging modular CMTS and DOCSIS 3.0 standards. The D5 is
now capable of supporting both existing legacy digital video services as well as
future DOCSIS 3.0 wideband data and IPTV services. We have shipped samples to
key customers and for interoperability costs. We have completed several
interoperability tests with major video on demand server system vendors. These
tests have proceeded smoothly. We have verified the D5 offers the highest video
stream count of any edge quan in the industry. Over 480 video streams of mixed
standard definition and high definition content with all of the video on demand
trick modes can be sourced from one D5 EMTS across 48 downstream RF channels.
And we have defined a version of the product that can be applied to the
downstream physical layer of the modular CMTS next-generation network
architecture. The D5 DMTS together with our Evolution plan for the Cadant C4
CMTS positions ARRIS as an end to end provider of MCMTS compliant next
generation network architecture solutions.
In summary, here are some key points. We have seen a good ramp on new EMTA
orders in the last few weeks of 2005 and continuing to date in 2006. We have the
needed capacity of our EMTA manufacturing lines to stay ahead of demand. Our
CMTS business is robust as our customers continue to increase the bandwidth they
provide to their subscribers. We are signing up new customers for the CMTS.
Major new prospects are currently testing out CMTS in their labs. Our
Cornerstone CBR business continues to generate good revenues and while we will
not achieve the volumes of 2005, we expect continued viability throughout 2006
and our D5 digital multimedia termination system is shipping in sample volumes.
It has completed several interoperability tests and is in several ongoing
customer trials. As I conclude my prepared remarks, let me again emphasize that
we continue to reduce product costs. We are very bullish about our markets, our
products, and our ability to garner the additional share going forward. Now I
will turn the proceedings over to Jim Bauer who will conduct our question and
answer session.
JIM BAUER - ARRIS GROUP, INC. - IR
It's now time for the questions and answers, so, we will move into that phase of
our conference call. Maybe you could come back on line and give the participants
your instructions.
QUESTION AND ANSWER
OPERATOR
[OPERATOR INSTRUCTIONS] Your first question comes from Steve with CIBC world
markets.
UNIDENTIFIED
Hi, guys, just a couple of questions on the House keeping front. MTA pricing,
year-over-year change there?
UNIDENTIFIED
We've seen probably a -- a fairly gradual decline in price -- somewhere in the
6% range over the early 2005 pricing. We'd expect more price declines in 2006,
as well. And, of course, that's why we're so focused on cost reduction.
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
UNIDENTIFIED
Okay. I was wondering about that going forward. And then also is -- if you could
just -- to give a number of cable modems shipped, HDT units shipped and CDR
ports.
UNIDENTIFIED
Yeah, okay. Let's see, cable modems. Roughly 85,000.
UNIDENTIFIED
Uh-huh.
UNIDENTIFIED
And what was the other one you wanted?
UNIDENTIFIED
HDT and CBR ports.
UNIDENTIFIED
HDT is 18 HDTs. CBR Voice Ports, 158,600.
UNIDENTIFIED
Okay. And then what was stock comp expense for R&D and SG&A for this quarter and
last quarter, if you can break them out between the two categories?
UNIDENTIFIED
Sure, so $100,000, it goes upstairs into cost of goods. It's about $600,000 into
R&D and the rest is in SG&A, which is like a million 8, a million 9, same
numbers for both quarters.
UNIDENTIFIED
Yeah, if you could put that in the release going forward, that would be very
helpful, but whatever. Another question just on housekeeping, any sales of the
written-off inventory in the last quarter?
UNIDENTIFIED
We did have some, yes.
UNIDENTIFIED
Okay. And -- and is there any written off inventory left?
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
UNIDENTIFIED
Yes.
UNIDENTIFIED
Okay. Just checking in on that. And then, you know, I wanted to ask sort of on
the D5, it sounds like that's moving forward and that did get some, you know,
sort of good coverage at CT E. Wondering when you say you're adding legacy video
onto it, if you could discuss more what that means from a technology perspective
and where if repositions the box or what it means to a customer in terms of
ability to use it?
UNIDENTIFIED
The -- the legacy part is basically the native mode impact 2 transport stream.
Which is digitally packaged. It's not IP-based. It's multiplex. And it comes to
the -- the box as a -- in a gigabit Ethernet format. It is switched on an
individual program stream basis inside the box, repackaged into a multiplex and
then modulated in a 64 qualm or 265 qualm format for transmission to the set-top
box. It is compatible with the existing legacy set-top boxes in this mode. In
the second mode, it's basically transmitting docksis-based traffic, similar to a
CMTS and is compatible with current generation and future generation wide band
cable modems and is also compatible with the newer generations of set-top boxes,
which have docksis cable modems embedded in them. We will have the product on
display at the NCTA show here in Atlanta.
UNIDENTIFIED
Okay, thanks very much. And last question, Comcast. Any sign that they've burned
down inventories in the last quarter? I know they kind of cracked back pretty
hard on spending? And/or rebuilding inventories this quarter?
UNIDENTIFIED
Well, we just signed a brand-new contract with them for 1.2 million units and
they're taking a considerable number of them this quarter.
UNIDENTIFIED
Okay, thanks very much.
OPERATOR
Thank you. Your next question comes from Bill Choi with Kaufman brothers.
UNIDENTIFIED
Great, thank you. Wanted to look deeper into the CMTS strength here. Considering
how cable operators in the past have had lumpy purchases of these major cost
items, wondering if, you know, you anticipate this CMTS strength to continue on
a sequential basis throughout '06? And if you could talk a little bit about the
key drivers -- you've talked about the bandwidth growth, but when does the high
reliability features on our CMTS, which differentiates your box, start to matter
for gaining market share as VOIP continues? And maybe talk a limb bit about the
CMTS -- what happens to that business with the upcoming Comcast Time Warner
acquisition of Adelphia properties?
UNIDENTIFIED
Okay. I'm not sure I can answer all of your questions, obviously we give
guidance for the coming quarter and we see the CMTS business continuing strong
in that quarter. I -- in my prepared remarks, I think, you know, I talked about
the fact that this bandwidth war is not ebaiting. It's basically accelerating so
I personally feel that it's -- that we have a very good market to play into
here. A very strong and growing market over the
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
next couple of years. On the other -- I can't comment on individual customers
and what they might or might not do. So, I really can't comment on your question
about Time Warner versus Comcast and the Adelphia acquisition. Particularly. But
I think if you just think about what some of the market analysts -- the industry
analysts are doing in terms of forecasting the -- where the CapEx is going to
get spent in 2006, 2007, 2008, high-speed data, voice-over IP, are on the top of
their list and certainly they've been raising their estimates as to market size
over the last two or three quarters. On the desirability of our product versus
our competitors, of course, we've always felt that the -- the keys to the
kingdom here were not only the reliability of the product, but it's wire spread
performance, it's density, it's ability to handle for subscribers per dollar of
CapEx spent, were all things that would lead us to expanding our market share
and that's going to be a big, big focus for us in 2006.
UNIDENTIFIED
When you look at your installed base of CMTS products, before 2004, they were
predominantly won by eight cards. You started to get your double-density cards
out. Where we are on the upgrade of that existing base just to double the
densities?
UNIDENTIFIED
You know, I would have to go back and -- and look at the detail on that, but I
- -- my sense is that we've really just begun because we've shipped large numbers
of chassis that were fully filled with 1 by 8s. So, I'd have to look at that. I
don't have the information at hand.
UNIDENTIFIED
All right. Looking at your backlog, can you talk about -- can you characterize
it, you know, what percentage might be broadband or CMTS-related versus the
other division?
UNIDENTIFIED
Again, I think our guidance is going to have to stand as it is.
UNIDENTIFIED
Okay. All right, thanks.
OPERATOR
Thank you. Your next question is coming from Brian Coyne with Friedman Billings
Ramsey.
UNIDENTIFIED
Good morning. Thanks for taking my call. First, congrats on the -- on the solid
quarter and it sounds like improving outlook. Just a few questions, I wondered
if you could start off talking a little bit more color on the Comcast EMTA deal.
You mentioned 1.2 million as a minimum unit number. Any other details you can
provide, particularly if there's any kind of pricing guarantees or floors or
anything like that set? Or perhaps, you know, if there's something in the deals
that contemplate, you know, ASP declines that are kind of, you know, within the
range of what you're looking for during 2006? Is it a little bit more, a little
bit less? Anything else on that front?
UNIDENTIFIED
Really can't comment anymore at this point. We will probably have a press
release that's been approved by Comcast at some point in the next couple of
weeks.
UNIDENTIFIED
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
Great, okay. Any -- is that replacing anything that you had in agreement
previously?
UNIDENTIFIED
No.
UNIDENTIFIED
Okay, so brand new.
UNIDENTIFIED
Yes.
UNIDENTIFIED
Okay, great. Second question, really, on the Time Warner spreading freeze over
the past few months, would you say that -- again, I know you can't talk with too
much specificity about customers, but it sounded like that was probably a bigger
impact to you than, you know, than -- than any kind of, you know, potential
Comcast slowdown on that front. Is that a fair characterization? And how is that
changing as we get going here into 2006?
UNIDENTIFIED
I wouldn't single out any specific customer. I think it was across the board
pretty much, industry had -- had built up quite a bit of inventory and just --
at least our customer base had. And they took them a quarter to bleed it off.
But it's done, it's over.
UNIDENTIFIED
When I think in Bob's script he mentioned a little bit about how the looking
ahead into the March quarter, that the number could be, you know, back in the
range of what the September quarter, you know, the huge 863 number ended up
being. Is that -- you know, could you say if that's kind of driven by, you know,
any one -- obviously without customer names, you know, any kind of one or two
customers in particularly? Or again, are you seeing a nice general uptrend
across the board?
UNIDENTIFIED
It's very broad. It's very broadly based. We're seeing a return to historic
levels, if I can use the term, we're one quarter away. And across the board with
all of our customers. And, of course, we're adding new customers, as well.
UNIDENTIFIED
Uh-huh. And then touching back on the EMTA deal with Comcast, are you getting --
you're going to see some that of start to kick in in this quarter. Is that deal
kind of kick off now? Or is it next quarter? I mean is the -- you know, beyond
the kind of two-year commitment, any other details on time period?
UNIDENTIFIED
Can't give you much in the way of details until we have approval from Comcast,
but yes, it kicks in in the first quarter.
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
UNIDENTIFIED
Great, okay. One other quick one and I might chime in a little later. Back on
the voice modem, you know, micro chin talked about a 30% drop in its ASPs coming
up as they ship into you. I wondered if you could talk about how that impacts
your gross margins? Only it sounds like for the better, but given the fact of
the mix of everything else going on with the product line, do you see that, you
know, materially improving year -- your blended gross margins on those? Or is
that weighted toward perhaps one of the newer products?
UNIDENTIFIED
I -- I really can't get into the details of our products. But across the board,
we continue to be very aggressive at cost reduction.
UNIDENTIFIED
All right, great, I will jump back to the end of the queue if there's time.
Thanks.
OPERATOR
That thank you, your next question is coming from Jason Ader with Thomas Weisel.
UNIDENTIFIED
Good morning, everyone. Thanks for taking the call. I just wanted to, you know,
get into the gross margin issue just so I understand it. So, you guided to 27 to
29% in Q1. You did close to 32% in Q4. That's a pretty steep drop. I'm assuming
some of it is product mix and some is the specific customer issue you talked
about I think where you said the -- they want the 500 model with the 400
battery. Is that right?
UNIDENTIFIED
Indeed, it's product mix and as we said, we do anticipate that we will have some
price reductions going forward.
UNIDENTIFIED
Okay. But, you know, I talked to JimLakin about your new product and, you know,
I think, Jim, you've talked about it having a much lower cost structure -- cost
of goods. So, why would you -- is the new model coming in at a gross margin
that's below what you've done historically?
UNIDENTIFIED
It's -- it's basically the fact that you don't cut in a new model on every
customer simultaneously. So, it's -- what we'll see is we will see the product
cut in over the course of the first and second quarter and in the case of the
one customer, in the third quarter. So, we'll still have some shipments of 400
series product.
UNIDENTIFIED
So, what would be the expectation as we go through the year for the EMTA
margins?
UNIDENTIFIED
We don't go past one quarter of guidance, so, we will see as we go. We will
obviously have cost-reduction programs that we will continue down the path with
and we will go from there.
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
UNIDENTIFIED
Jason, this is Bob. Our track record on cost reduction I think speaks for
itself. We've done a great job in improving margins much throughout this
introductory line of EMTAs. I commented on every call that the things go up and
down. When we talk about average price concessions year-over-year, we're talking
about averages, but they don't happen, you know, a little bit each week, they
happen in -- in chunks. And then they stay stable for a while. So, you will see
some noise in the gross margins within that category for that reason and none
other. On top of that, Jim mentioned that we have to put the 400 series battery
in the 500 series electronics. That -- there's an introduction cost associated
with that, which we'll incur in the first quarter. But I think, you know, I
stand on our record of improving margins as we introduce products and as the
volumes go up. Both on the supplies and CPE side as well as on the CMTS side.
And then there will be a fairly significant shift in mix from Q4 to Q1 because
of this resurgence in demand for MTAs to begin with.
UNIDENTIFIED
I'm not trying to -- I'm certainly not trying to criticize your track record
there.
UNIDENTIFIED
I -- I just wanted to remind you and try to explain why it doesn't go up or
down. It will bounce a little bit.
UNIDENTIFIED
So, -- all right so -- just thinking about this, I know, Dave, you don't want to
give guidance past the first quarter, but thinking about this logically,
assuming you turn over to the 400 more so in Q2 than you do in Q1 -- I'm talking
about the 500, then you, you know, kind of fix this specific customer issue and
have it done by Q3, then kind of all else being equal, you would think the EMTA
margins should improve as we go through the year. Is that fair to say?
UNIDENTIFIED
That's fair to say.
UNIDENTIFIED
Okay. And then just on the CBR business, you haven't given any specific
granularity on that, but could you at least comment on when the it was up
sequentially or year-over-year or, you know, kind of how -- how it trended
sequentially in year-over-year?
UNIDENTIFIED
Yeah, it -- it was up -- let me look and see exactly where it was.
UNIDENTIFIED
Voice Ports were up and HDTs were down and what we expect this year, correct me,
Jim, if I'm wrong, is that the -- that it will be down and it will be declining
as the year goes on. We still think we're going to be selling this product in
2007. But certainly not at the levels of 2004 and 5.
UNIDENTIFIED
Right. And 2004 and 2005 -- 2004 we shipped 554,000 Voice Ports and 2005, we
shipped 565,000.
UNIDENTIFIED
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
And what about HDTs?
UNIDENTIFIED
194 in 2004 and 23 in 2005. That basically is a precursor to the decline of the
product line.
UNIDENTIFIED
Okay, so in 2006, we should be at -- we should expect a -- a steeper
year-over-year decline for the overall CVR business, is that right --
UNIDENTIFIED
You should expect a decline in year-over-year CBR revenues from 2005 to 2006.
UNIDENTIFIED
Would it be bigger than 2004 to 2005?
UNIDENTIFIED
Well, it wasn't -- it wasn't --
UNIDENTIFIED
Probably --
UNIDENTIFIED
It wasn't much of a decline.
UNIDENTIFIED
We've been surprised by this before --
UNIDENTIFIED
You guys talked about a lower price per port in 2005 --
UNIDENTIFIED
You're talking about on a revenue base. You're right.
UNIDENTIFIED
All right. All right. And then just one quick last question. You know,
optically, you had your back -- your bookings -- your book-to-bill, I'm sorry,
was below 1 and yet your guidance was up. Somebody asked me a question a few
minutes ago about that. You know, how do you guys
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
explain that? I guess the bookings are for more than one quarter. But, you know,
how would you explain that to somebody, why your book-to-bill would be below 1,
yet your guidance --
UNIDENTIFIED
I'd call it a timing thing more than anything. We're pretty bullish, obviously,
about the first quarter and one of the reasons is the orders we've received in
the first month of -- of the quarter.
UNIDENTIFIED
Perfect. Okay, thanks, guys.
OPERATOR
Thank you. Your next question is coming from Todd Kaufman with Raymond James.
UNIDENTIFIED
Thank you, if you I could follow up your average selling price of customer based
equipment, it sounded like you signaled that from early '05 to late '05, you
only saw a 6% decline in average selling prices, which sounds very tame and yet
we've seen a pretty sharp decline in your customer premise-based margins and as
you signaled, you're guiding your gross margins overall down again in the March
quarter. My question is has there been a sharper decline in average selling
prices in the current quarter that you haven't yet shared with us?
UNIDENTIFIED
Not sure. What -- how to answer that question. We don't usually comment on
margins by product.
UNIDENTIFIED
It would seem your pricing has been very tame just in general on the customer
premise based side.
UNIDENTIFIED
It has been.
UNIDENTIFIED
But your margins have come down --
UNIDENTIFIED
Recall that throughout 2005, up until October or so, there's a shortage of these
items and that -- that in and of itself helped stablize prices that actually
below the amount of price reduction that we expected to experience in 2005. I
think it's fair to say that we expect more price concessions in 2006 as we saw
in 2005 as the supply has caught up with the demand. Nevertheless, we believe we
can overall, during the year, maintain the margins as we kick in the cost
reductions.
UNIDENTIFIED
Okay. Just a follow-up question, you cited early on in your prepared remarks
that you thought this inventory issue, you said it's over.
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
UNIDENTIFIED
Right.
UNIDENTIFIED
And it sounded like your reasoning behind that was that you currently are seeing
a snap back in demand, in just very, very near-term trends. Is there any other
supporting material that you've seen as it relates to the large volume of units
that have been shipped by yourselves and others over the last thee or four
quarters compared to the relatively small number of subscribers that signed on
over the last three or four quarters that you can cite to give you comfort that
this issue is truly behind you?
UNIDENTIFIED
Well, when you have customers calling in December and January asking you to ship
as fast as you can, you get a sense that they don't have inventory.
UNIDENTIFIED
We also try hard to look on an almost city by city basis as to what our
customers are doing. But, of course, we're not privy to exactly what they're
buying from other vendors. So, it's a little tougher to do that but we do
attempt to do that and those analysises that we have indicate that there's
certainly a pipeline. There's a -- there's a month or two of inventory that the
customers like to keep on -- on hand. And their product ramp expectations for
the year are fairly aggressive. And factoring owl of that together, we think
that -- that we're going to see demand snap back in the first quarter. And
that's what our guidance is based on. and Jim's comments, that he thinks we will
be back at the level of units that we shipped in the third quarter and perhaps
exceed it.
UNIDENTIFIED
Just one last follow-on on that, when you talk to your customers about this
issue and you look back say two or three quarters, when you and the industry was
significantly outshipping, where do they say those units went? Were they just
tossed in the garbage as somewhat obsolete? Or what happened to all of those
units?
UNIDENTIFIED
There are new communities being launched every day. The largest cable operator
in the country, Comcast, is just getting under way and is stocking up for a big
rollout this year. There are a multitude of international customers. So, no
they're not throwing them away. There is some churn and there is some shrinkage
along the way. So, you know, again, every indication we have -- and the
strongest indication you can get, is an order from a customer and our order of
velocity and our shipment velocity, in fact, in the month of January, has -- has
been encouraging. And leads us to the guidance that we just issued.
UNIDENTIFIED
Thank you very much. Good luck.
UNIDENTIFIED
I hope that helps. Again, it's -- it's not really perfectly clear. The lineup of
units with the announced deployment rates of some of the customers, but we don't
have the international story and what, Jim, 35, 40% of our units go out of this
country.
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
UNIDENTIFIED
Well over 30%.
UNIDENTIFIED
To customers outside the U.S. And I think that's been underestimated, perhaps.
UNIDENTIFIED
Thank you. That's very helpful.
UNIDENTIFIED
Good.
OPERATOR
Thank you. Your next question is coming from Simon with Morgan Keegan.
UNIDENTIFIED
Hi, guys. Thanks a lot. A couple of quick questions. Let's start with a
clarification. You ran through your customer mix during the prepared remarks.
And did some comparisons, Q4 to Q3. And looking back at the previous quarter's
transcript, some of the numbers, for example, Comcast for Q3, seem to have
changed. Just wondering if I missed something and maybe some restatements or
whether there were changes for how it was presented on the last call?
UNIDENTIFIED
Yes, yes, that's exactly right. We actually included the affiliates of both
Comcast, which would include Susquehanna, U.S. cable and Mid-Continent. We will
make it comparable as our 10K and 10Q filing for you. When will you have your Qs
and Ks out?
UNIDENTIFIED
On the filing dates, I would think March 15.
UNIDENTIFIED
Yeah.
UNIDENTIFIED
Okay. Next question, then, and I suspect it was something like that, but wasn't
quite sure. The next question is you -- you talked about the gross margin for
the broadband division. The 43% nice improvement. And you gave us a rundown of
the three factors that led to that improvement. If you could give us a little
bit more insight into the contributions of each of those, how many points of the
improvement came from the cost reduction, the inventory reserve and the mix
change and some sense of how -- how to think about that group of products in the
first quarter where you've guided already?
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
UNIDENTIFIED
We don't get into the specific granularity, obviously, but on the inventory
reserve side we said it was over $2 million. That piece you can get. The product
cost reductions, again, competitively, we would not want to get into that and
the rest of it becomes product mix.
UNIDENTIFIED
So, is it your sense that this group should provide a similar gross margin in
the -- in the first quarter?
UNIDENTIFIED
Well, it -- it can -- within the product, it depends upon the mix of customers
and the products within -- of course, the bit rate product is in there, as is
the CMTS and, you know, there are different prices for different customers.
UNIDENTIFIED
Right, I guess what I'm really struggling with and what I imagine several of us
are thinking is the guidance for the overall gross margin being down a little
with this group presenting the upside to the gross margin. Just trying to figure
out where the lower gross margin comes from in the first calendar quarter.
UNIDENTIFIED
Again, mix is probably the biggest thing because we will have many more EMTAs
which have lower margin. Again, we said we anticipate some reduction in pricing.
So, those are the two big pieces.
UNIDENTIFIED
Great. Thank you very much.
UNIDENTIFIED
Okay.
OPERATOR
Thank you. Your next question is coming from Ehud Gelblum with JPMorgan.
UNIDENTIFIED
Hey, thank you very much. A couple of questions to add on. First of all,
following along with the topic that came up earlier, I remember when scientific
Atlantic and Motorola were shipping a lot of digital set-top boxes, a lot of
comparisons were made in the early 2000s, from the number of digital subscribers
that the U.S. was signing up to the number of digital set-tops that -- that the
vendors were producing. And the ratio ended up being something close to 2:1, I
think it was about 1.8:1 in terms of the number of set-tops that went out versus
the number of subscribers. I think it was always a mystery -- but it seemed that
that was the rough ratio of actual boxes to actual subscribers. That's kind of
part of the business. Do you have a sense as to, in the EMTA basis, is there a
similar ratio on the number of EMTAs that you and your competitors would ship to
the actual number of subscribers that we can see? So, in my mind, I think it
should not be 1:1, there is excess for a number of reasons. Do you have a sense
as to what that should be? Will it be similar to digital set-tops?
UNIDENTIFIED
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
I think it's too early to tell. It probably will at some point reach a steady
state. Of course, it's going to be more than 1:1 because you do have some
shrink. You do have some churn where they don't recover the CPE gear and then
you also have acceleration at this point. We have many more, as Bob mentioned,
many more sites are getting ready and turning up and what have you. So, you tend
to see the -- you tend to see that kind of uptick -- but I, you know, I couldn't
give you a ratio at this point. Perhaps in a couple of quarters when we see most
of the sites are up and operating and getting more to a steady state install
rate, we might have a sense of that. I think it would be less than 2:1.
UNIDENTIFIED
If we can turn, I guess, to the gross margins, not to beat a dead horse, but I
want to try to attack it from a separate direction. Let's disect that
into the pieces and look just say at the CMTS gross margins, I assume they were
up, as well. Putting mix aside, just looking at the CMTS gross margins, do you
think they're sustainable at this level, whatever that happened to be going
forward? I don't mean next quarter, I mean over the next year. Or do you think
they go up from here?
UNIDENTIFIED
I think they stay -- they're stable. I think what happens is we will probably
see some competition. We obviously have competition, the CMTS space, but we
continue to be pretty bullish about our prospects for cost reduction across the
career year. And as we bring out new models of the product, we focus on cost as
well as features.
UNIDENTIFIED
So, CMTS margins should only go up from here, just slightly.
UNIDENTIFIED
I would think they're going to stay stable. We have competition, we have two
very powerful competitors.
UNIDENTIFIED
Is it right to assume that the Cornerstone and margins higher than the CMTS
margins?
UNIDENTIFIED
I can't comment on individual margins that way.
UNIDENTIFIED
Okay. I guess as we go through the next year or two, and -- or next three years,
with a larger percent of it. Do you have a sense as to where long-term -- where
should gross margins be in the EMTA, just a long-term model to keep in our head?
UNIDENTIFIED
This would be obviously very ballparkish. Probably 40 -- 40ish on broadband and
20ish on the other stuff. I mean projecting out that far, so, so difficult. We
probably won't even be making EMTAs five years from now, there will be a new
product that replaces it. But 40ish, 20ish.
UNIDENTIFIED
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
That gives us a good sense as to how that works. I appreciate that. Last thing,
speaking of competitors. We don't know the revenue, but the Dorp streams, they
were up 40%. Do you think you're gaining share at places like Comcast and taking
away from competitors like Cisco or think Comcast and others are just buying a
lot and all of your boats are being floated.
UNIDENTIFIED
I think both. I think they're buying a lot and I think -- it feels to us like
we're gaining share. We're not positive of that, but when we factor in the
competitive goods, it feels good. I probably have the most optimistic viewpoint
of the CMTS of anyone around the table here. I watch people download shows on to
their video iPods and all the next things that are just exploding right now.
That all are going to add traffic and are going to cause customers to demand
higher speeds. And what Jim's folks are doing in the Far East and Japan and
Korea and in Europe now, I think is a very exciting prospect. And flex path can
be done with a software upgrade. So, you know, I'm just really excited about
what might occur with the business even over the next 12 months. The other part
of it is the competition from the -- especially from Verizon with bios, offering
very, very high download speeds. If you think about people downloading movies
where they have to wait a half hour to download it as compared to downloading it
in a couple of minutes with flex path or bios, I think the operators are going
to grab the product as soon as we get it out there.
UNIDENTIFIED
Great, one last thing, Time Warner seemed to be down a lot this quarter. Did
they seem to have an inventory issue? What happened to Time Warner --
UNIDENTIFIED
Yes, yes, I think so. Again, I -- I commented last quarter that I thought this
thing was a little overblown and if you kind of looked at what we've shipped at
the -- if you could see what we shipped by week over, you know, the
September/October point -- period, we shipped a lot at the end of September. If
some of that had spilled over into October, we probably wouldn't have even had
all of this conversation, but the operators also seasonally cut back in the
fourth quarter. So, you know, I guess we weren't quite as alarmed as -- as some
were.
UNIDENTIFIED
So, you don't think you lost share there?
UNIDENTIFIED
No, no, not at all.
UNIDENTIFIED
Okay, thank you so much.
OPERATOR
Thank you. Your next question is coming from John Anthony with SG Cowen.
UNIDENTIFIED
Good morning, guys. A few questions, I apologize if you hit any of these topics
already. First, uses of cash?
UNIDENTIFIED
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
FCOs.
UNIDENTIFIED
Okay --
UNIDENTIFIED
You mean in the quarter?
UNIDENTIFIED
No, no, no -- I mean what would you use your cash for since... [ laughter ]
UNIDENTIFIED
We were down the different path!
UNIDENTIFIED
Okay. This year, for example, for the first three quarters, we used it to fund
working capital in the business. We were growing quite rapidly and we drew on
our cash reserves. We cashed in on a lot of that in the fourth quarter. We might
use it for acquisitions in the future. We certainly want to have a war chest.
Our memory is -- of the 2001/2002 period of time, is still vivid in our minds.
So, we believe that it's important for a company of our type to have a war chest
if you will and a cushion. And for -- well, those are some ideas.
UNIDENTIFIED
And CapEx is probably 10 to 12 again, something like that.
UNIDENTIFIED
Okay. And with respect to some of the answers you just gave, how should we look
at your working capital needs for this year, you know, obviously if all goes
well, the EMTAs are going to continue to grow and your business is going to
continue to grow. So, from a working capital standpoint, you know, what should
our expectations be?
UNIDENTIFIED
I would guess that inventory probably modulates down just a touch because we did
end the year with some EMTAs in inventory, which I think we could pull down.
Receivables, it's spikiness of quarters and how it goes. I don't think there's a
significant increase in working capital from accounts receivable. So, you know,
I really don't see any marked change. I think if anything, we go down a little
bit.
UNIDENTIFIED
Okay, it's safe to say this year will be largely governed by net income and the
usual forces outside of working capital.
UNIDENTIFIED
That's correct.
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
UNIDENTIFIED
Okay. And since I heard the word acquisitions, I -- I can't help but ask this
question, given that you guys are pretty much the last man standing as a
stand-alone cable infrastructure company. What does the -- I guess what is the
- -- the standard answer? And how do you feel about your independence at this
point, given that everyone seems to be getting gobbled up?
UNIDENTIFIED
Well, you know, you couldn't help asking and I have to give you the standard
answer, I guess. We feel like we're in a great position right now. Motorola and
Cisco, they're our two key competitors right now. Now that scientific Atlanta is
part of Cisco. I think we can do just fine. First of all, we have done just fine
with those competitors in the marketplace for the past several years. And I
think that we have the ability to move quicker. Our solutions are closer to the
center of the bullseye because we are more focused on the needs of those
customers. So, I think we can do just fine.
UNIDENTIFIED
Well, let me rephrase the question and ask you another quick question, as well.
I guess -- are you -- are you bent on being an independent company? Is another
way to ask the question? And then secondly, given the revenue per employee, how
much further can you guys scale up before you need to add head count?
UNIDENTIFIED
Okay. Bent on being independent, you know, I would say, you know, make an offer
- -- I mean it's -- what can I say? As a CEO of a company, if someone comes in
with an offer that is attractive to our shareholders, we have no choice but to
give it very serious consideration. What was the second part of the question?
UNIDENTIFIED
The second question is -- I mean your revenue per employee is very high, you
could kind of give us a sense for where -- I mean it seems -- all of these
questions point to the in fact you're at an interesting junction point. It seems
if you want on get a lot bigger, you're going to have to acquire and bring on
heads. That's what I'm trying to figure out.
UNIDENTIFIED
Okay. Well, we believe that we can grow our top line faster than we grow our
expenses. So, you know, that's our goal, as I talked about 2006 goals, I talked
about growing top line faster than the market's growing. We think the market is
growing 6 to 8% this year in terms of CapEx, I think we can do better than that.
We talked about operational exellence and I talked about productivity and,
therefore, it's our goal to continue to improve productivity and have even more
revenue per employee. Now, you know, that will -- we'll see how it plays out. I
think we can do that this year.
UNIDENTIFIED
Perfect. Thanks, guys, congratulations.
UNIDENTIFIED
Thank you.
OPERATOR
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
Thank you. Your next question is coming from Larry Harris with Oppenheimer.
UNIDENTIFIED
Yes. Thank you. And congratulations on the income and the cash flow performance
for the quarter. I have a question relative to income taxes. I'm assuming that
given the guidance, you don't expect a significant level of income tax payments
in 2006. Where do we stand with respect to the income tax carry-forwards and
could you be a taxpayer in 2007 or 2008?
UNIDENTIFIED
We entered the year with about $150 million of -- of U.S. NOLs. If you just take
our net income, we will say 50 came off, which leaves us 100 for -- for the
go-forward. So, I would think that if -- if trends continue, it's possible that
in 2007 we could become a taxpayer at some point.
UNIDENTIFIED
And what sort of rate, you know, would be applicable at some point in 2007?
UNIDENTIFIED
So, our rate is about 38.5%.
UNIDENTIFIED
Understood. Okay. That's great. And I just, you know, just briefly in terms of
the EMTA marketplace, Terayon said they're weighing strategic options.
Have they been today a major competitor? Have you seen new entrance into the
EMTA market?
UNIDENTIFIED
Terayon hasn't been a major competitor. They have fairly minor market share and
that probably is contributing to their decision to re-evaluate being in the
business. New entrance, no, not seeing new entrance at this point.
UNIDENTIFIED
Good. Okay. Thank you.
OPERATOR
Thank you. Your next question is coming from Anton Wahlman with Needham.
UNIDENTIFIED
Hey. Can you hear me?
UNIDENTIFIED
Yes.
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
UNIDENTIFIED
Two quick ones on the modems. First of all, this deal you signed with Comcast, I
found out it was 1.2 million units over two years. It sounds to me that if you
sort of do the math on that, that boils down to sort of straight line it for the
sake of argument to 150,000 units a quarter, that that seems to me to be, you
know, what they ought to have been buying sort of anyway, in general, if you had
just stayed in there and had a decent market share. I mean is -- it seems to me
this sort of co-defies the general court of business or some part of the general
course of business. Is that fair observation? Or --
UNIDENTIFIED
I think it's a fair observation.
UNIDENTIFIED
Okay.
UNIDENTIFIED
It kind of locks in -- it kind of locks in and assures our major share of their
business over the next two years.
UNIDENTIFIED
Yeah, you should emphasize that it's a minimum of 1.2 million.
UNIDENTIFIED
I know, clearly, they probably wouldn't, you know, lock themselves up for what,
you know, their best case scenario, but rather something like that, but I mean
- -- I don't -- I don't interpret this based upon what you said being an increase
in market share in the account, but rather co-defying some percentage of what
you ought to have been doing with them if you just stayed in the game and not
tripped it up somewhere.
UNIDENTIFIED
That's right. And they have a policy of multivendor.
UNIDENTIFIED
Clearly. And the other question I have is -- I mean I advanced the theory
several months ago on where the subject of all of these cable modems go and was
wondering if you could comment on the notion of -- I mean some -- some of the
people that get a cable modem that has a phone Jack might be customers that
aren't utilizing the phone Jack. Quantitatively and antidotally, would you
suggest that that's a meaningful practice out there? Or just kind of in the
noise?
UNIDENTIFIED
I don't think it's meaningful as yet, Anton, but I agree with you at some point
it will be meaningful.
UNIDENTIFIED
Okay. That's all I had. Thank you.
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
UNIDENTIFIED
We're at the point where we're quite a bit over our scheduled time. So, why
don't we take one more question and then we will wrap up the conference call.
OPERATOR
Thank you. Your last question is coming from Michael Perica with Breen Murray.
UNIDENTIFIED
Thank you, gentlemen for taking my question. Just a follow on Anton's question.
I'm not asking for a specific number, but do you have a stated minimum market
share written in the Comcast agreement? Even I think you folks are going to ship
a message of a lot more than 1.2 million -- I'm not asking for the number, but
is there language like that in the contract?
UNIDENTIFIED
I really -- I'm really prohibited from giving you any more information than I
gave you in my prepared comments. I'm really sorry I can't answer that.
UNIDENTIFIED
Fair enough. Moving on to the book-to-bill, since this is probably one of the
only formats to talk about the March quarter guidance, do you expect the
book-to-bill ratio in the March quarter to be above 1?
UNIDENTIFIED
No. I can't answer that, either. Because I don't know. The things that we've
said in the past is really don't get too, too focused on book-to-bill in it a
three-month period. Remember, we had some -- we've had negative -- I mean below
one book-to-bills and had blow-out quarters following them because, you know, a
little bit of order is coming in in the beginning of the quarter, you know, just
kind of swamping. So --
UNIDENTIFIED
I think you need to remember that -- that our lead times for deliveries have
shortened dramatically. And we've -- we've worked with our suppliers,
particularly in the -- in the CPE business part of the business, to get to a
very, very short lead time and that basically means that our customers are very
comfortable in -- in giving us orders with short lead times themselves.
UNIDENTIFIED
I see. How about we're halfway through the quarter, how has the book-to-bill
been?
UNIDENTIFIED
As I said earlier, January has been good. And very encouraging. I can only
answer that qualitatively.
UNIDENTIFIED
Fair enough. Thank you, gentlemen.
Feb. 09. 2006/8:30AM, ARRS - Q4 2005 ARRIS Group, Inc. Earnings Conference Call
UNIDENTIFIED
Thank you.
UNIDENTIFIED
Thank you.
UNIDENTIFIED
Just in closing here, just want to emphasize what I just said. That we're
starting the year off very well and we didn't talk much on the call about the
new products that we're -- we're deploying this year in the CPE area. That will
be a highlight, I think, of the second half of this year. So, I'm looking
forward to our next call and thank you for being on this morning. With that,
we'll -- we'll sign off. Thank you.
UNIDENTIFIED
Thank you much.
UNIDENTIFIED
This concludes the call.
OPERATOR
This concludes today's conference call. You may now disconnect.
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