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Friday, February 15, 2008

Arris (ARRS) 4Q:07 Results

It's almost a given that a company with extreme exposure to any one customer is ultimately going to have a problem as that customer has control of the supplier's business. Diversified companies can better weather individual customer supply and demand changes.

In this case, Arris derives 40% of their sales from Comcast. That 40% of Arris's revenues, however, was nearly 100% of Comcast's cable modem needs. Comcast opted to go to a second source for cable modems -- Thomson. Comcast also was over-ordering in anticipation of this change, to make sure they wouldn't get caught short boxes in the transition. There is a two-fold problem for Arris in this situation: 1) their largest customer will order less from them in the future as the orders will be split between themselves and Thomson; 2) Comcast, who previously had as much dependence on Arris as Arris had on Comcast, will now be able to play one supplier against the other to get the best price possible which threatens Arris's profit margins on 40% of their business.

Consequently, guidance for next quarter is down nearly 20% from their prior guidance and significantly below the street.

I don't really follow Arris. Looks cheap for a good reason.

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