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Shares of communications networking equipment maker ARRIS International (NASDAQ: ARRS) fell as much as 15.3% Thursday morning, following the release of preliminary fourth-quarter results and an acquisition announcement involving two divisions from Broadcom (NASDAQ: AVGO) and Brocade (NASDAQ: BRCD).
First, ARRIS published a downright solid earnings report. Bolstered by the acquisition of set-top box specialist Pace, which closed at the very beginning of fiscal year 2016, the company reported strong growth across the board. Earnings increased 60% year over year to land at $1.76 billion, while adjusted earnings of $0.79 per share represented a 27% annual increase. Both figures exceeded Wall Street's best guesses. Moreover, the order backlog surged 54% higher on a book-to-bill ratio just above the magic 1.0 mark, providing ARRIS investors with significant visibility into revenue strength for the next few quarters.
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Separately, ARRIS also announced a $800 million all-cash buyout of Broadcom's Ruckus Wireless and Brocade ICX Switch operations. The deal will add economies of scale to ARRIS' broadly similar product portfolio, while allowing the pending Broadcom/Brocade merger to meet its regulatory requirements and wrap things up.
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Ruckus and ICX Switch will technically remain Brocade businesses until the Broadcom merger is completed, which is where ARRIS takes over the reins. It's like watching three oil tankers making U-turns around each other in the English Channel. But it all seems to be working out.
Market makers are not punishing ARRIS for this deal, either -- it actually makes good strategic sense, and should pay for itself in cost synergies and elevated cash flows over the next few years.
Instead, today's sellers are focusing on guidance figures that paint a bleak picture for the first quarter of 2017. CEO Bruce McClelland said that the first quarter will be "slow" for a number of "very specific reasons."
These effects include the closing of a large customer's call center contract, currency effects in Latin America, normal quarterly seasonality, and a technology transition in ARRIS' cable networking products. Furthermore, unexpectedly strong sales in the fourth quarter left some customers with overloaded inventories, reducing their need for additional orders at this time.
In all, ARRIS comes with a lot of moving parts right now. If any of this stuff -- or all of it -- left you scratching your head, it's probably best to hold your horses until this period of rapid business changes blows over. The stock is neither overvalued nor particularly cheap today, and management could probably use some time to integrate the rash of recent acquisitions.
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