-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EF2YmhithaZUhCdxqnTl9m+uxnjUvfarIunb2b5uGWzaHpXkGWez+q91gubytW8M TSjh5aYg6zA3aMxWZh0+IQ== 0000950144-06-001132.txt : 20060214 0000950144-06-001132.hdr.sgml : 20060214 20060213205034 ACCESSION NUMBER: 0000950144-06-001132 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060208 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060214 DATE AS OF CHANGE: 20060213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARRIS GROUP INC CENTRAL INDEX KEY: 0001141107 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 582588724 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-31254 FILM NUMBER: 06606333 BUSINESS ADDRESS: STREET 1: 3871 LAKEFIELD DRIVE CITY: SUWANEE STATE: GA ZIP: 30024 BUSINESS PHONE: 770-622-8400 MAIL ADDRESS: STREET 1: 3871 LAKEFIELD DRIVE CITY: SUWANEE STATE: GA ZIP: 30024 FORMER COMPANY: FORMER CONFORMED NAME: BROADBAND PARENT CORP DATE OF NAME CHANGE: 20010521 8-K 1 g99551e8vk.htm ARRIS GROUP, INC. ARRIS GROUP, INC.
 

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): February 8, 2006
ARRIS Group, Inc.
(Exact name of registrant as specified in its charter)
         
Delaware   000-31254   58-2588724
         
(State or other jurisdiction
of incorporation) 		  (Commission
File Number) 		  (I.R.S. Employer
Identification No.)
         
3871 Lakefield Drive, Suwanee, Georgia       30024
         
(Address of principal executive offices)       (Zip Code)
         
Registrant’s telephone number, including area code:     678-473-8300
Not Applicable
 
Former name or former address, if changed since last report
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
     
[ ]
  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
[ ]
  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
[ ]
  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
[ ]
  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 

 

Item 2.02. Results of Operations and Financial Condition.
On February 8, 2006, ARRIS Group, Inc. issued a press release regarding preliminary and unaudited financial results for the fourth quarter and full year ended December 31, 2005. The press release is attached hereto as Exhibit 99.1 and is incorporated by reference.
On February 9, 2006, ARRIS Group, Inc. held its fourth quarter 2005 earnings conference call to discuss preliminary and unaudited financial results for the fourth quarter and full year ended December 31, 2005. A transcript of the call is attached hereto as Exhibit 99.2 and is incorporated by reference.
Item 9.01. Financial Statements and Exhibits.
(c)   Exhibits
  99.1   Press Release issued February 8, 2006.
  99.2   Transcript of February 9, 2006 Conference Call
The information in this Form 8-K, and the exhibit hereto, is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
         
  ARRIS Group, Inc.
 		  
  By:   /s/ David B Potts    
    David B Potts   
Date: February 13, 2006    Executive Vice President and CFO   
 
EXHIBIT INDEX
99.1   Press Release dated February 8, 2006
99.2   Transcript of February 9, 2006 Conference Call

 

EX-99.1 2 g99551exv99w1.txt EX-99.1 PRESS RELEASE DATED FEBRUARY 8, 2006 EXHIBIT 99.1 FOR IMMEDIATE RELEASE CONTACT: Jim Bauer Investor Relations (678) 473-2647 jim.bauer@arrisi.com ARRIS ANNOUNCES PRELIMINARY AND UNAUDITED FOURTH QUARTER AND FULL YEAR 2005 RESULTS SUWANEE, GA. (FEBRUARY 8, 2006) ARRIS (NASDAQ:ARRS), a global communications technology leader in the development of advanced cable telephony solutions and next generation high speed data across the broadband local access network, today announced preliminary and unaudited financial results for the fourth quarter and full year 2005. FINANCIAL HIGHLIGHTS: - Revenues were $181.3 million for the fourth quarter of 2005, as compared to $129.5 million in the fourth quarter 2004 and to revenues of $201.0 million in the third quarter of 2005. - Full year 2005 revenues were $680.4 million, up $190.4 million or 39% over 2004 revenues of $490.0 million. - Net income per diluted share for the fourth quarter 2005 was $0.20. Excluding the items detailed below, net income per diluted share for the fourth quarter 2005 was $0.24 (a non-GAAP measure). Net income (loss) per diluted share for the full year 2005 was $0.52, an $0.85 improvement from ($0.33) in 2004. - Gross margins were 31.9% in the fourth quarter 2005, up from 27.4% in the third quarter 2005 and reflect a favorable shift in product mix and the effects of continuing cost reduction activities. - Cash on hand and short-term investments at the end of the fourth quarter 2005 were $129.5 million, up $35.1 million from the end of the third quarter, with $34.6 million of cash generated from operating activities. - Book-to-bill ratio was 0.97 in the fourth quarter as compared to 1.02 in the third quarter. FINANCIAL DETAILS: Revenues for the fourth quarter 2005 were $181.3 million with net income (loss) per diluted share of $0.20, inclusive of certain items described below. For the full year 2005, revenues were $680.4 million as compared to $490.0 million in 2004, up approximately 39%. On a U.S. GAAP basis, net income (loss) was $22.0 million or $0.20 per diluted share in the fourth quarter 2005 as compared to the third quarter 2005 net income (loss) of $18.8 million or $0.18 per diluted share and to the fourth quarter 2004 net income (loss) of $(0.6) million or $(0.01) per share. Excluding amortization of intangibles, stock compensation expense and other items, the net income (loss) was $0.24 per diluted share in the fourth quarter 2005. On a U.S. GAAP basis, net income (loss) for 2005 improved $79.9 million to $51.5 million or $0.52 per diluted share, as compared to $(28.4) million or $(0.33) per share in 2004. A reconciliation of our GAAP to our non-GAAP earnings per share is attached to this release and can also be found on our website. Broadband product revenues were $92.9 million in the fourth quarter up approximately 14.3% from the third quarter 2005 level of $81.3 million reflecting improved sales of both the Cadant(TM) CMTS products as well as the Cornerstone CBR products. Supplies & CPE product revenues were $88.4 million in the fourth quarter, down approximately 26.1% compared to $119.7 million in the third quarter of 2005 reflecting primarily the anticipated decrease of E-MTA sales in the fourth quarter. International sales were $52.3 million in the fourth quarter, as compared to $52.4 million in the third quarter 2005. Backlog at the end of the fourth quarter was $166.5 million compared to $171.2 million at the end of the third quarter 2005. Bookings in the fourth quarter were $176.6 million as compared to $205.4 million in the third quarter 2005. Bookings for the full year 2005 were $771.3 million, up approximately 50% from the full year 2004 bookings of $512.6 million. The book-to-bill ratio in the fourth quarter was approximately 0.97, slightly down from 1.02 in the third quarter 2005. The book-to-bill ratio for the full year 2005 was 1.13 as compared to 1.05 for the full year 2004. Gross margins were 31.9% in the fourth quarter as compared to third quarter 2005 margins of 27.4%. This increase is predominantly the result of a change in product mix as well as a continued focus on cost reductions. Gross margins of Broadband products were 43.3% in the fourth quarter as compared to 34.9% in the third quarter. Gross margins of the Supplies & CPE products were 19.9% in the fourth quarter as compared to 22.2% in the third quarter. Operating expenses were $36.7 million in the fourth quarter, which included stock compensation expense of $2.4 million. This compares to $36.3 million for the third quarter, which included $2.5 million of stock compensation expense. Research and development costs included in operating expenses were $15.0 million in the fourth quarter as compared to $16.0 million in the third quarter. The Company had a foreign exchange gain of $0.2 million in the fourth quarter as compared to a loss of $(0.3) million in the third quarter. The Company ended the year with $129.5 million of cash on hand and short-term investments, up from the third quarter level of $94.4 million and from the fourth quarter 2004 level of $103.1 million. Approximately $34.6 million of cash was generated from operating activities in the fourth quarter. Approximately $25.5 million of cash was generated from operating activities for the full year which compares to cash generated from operating activities of $21.5 million in 2004. Inventory and turns for the fourth quarter were $113.9 million and 4.8, respectively, as compared to $90.1 million and 6.8, respectively for the third quarter. Accounts receivable ended the fourth quarter at $83.5 million with DSOs of 45, and compare to $95.8 million and DSOs of 42 at the end of the third quarter 2005. "I am most pleased that ARRIS' results for 2005 reflect outstanding growth in both Company earnings and revenue," said Bob Stanzione, ARRIS Chairman & CEO. "As we enter 2006, we are well positioned to provide new market-leading products for rapidly growing markets such as VoIP, wideband data and new video services. Also, of note is that we ended 2005 with more than double the amount of backlog that we had at the end of 2004. These factors, coupled with our demonstrated operational excellence, rapid product innovation and a very strong balance sheet, give me confidence in the outlook for our business. In addition, the increasing customer and market demand for ever higher transmission speeds, the competitive wars for new customers between the cable, telco and satellite operators and the rapid movement towards IP video should continue to increase capital expenditures in the industry and as a result accelerate the demand for our products." During the fourth quarter the Company announced a major competitive win with Cablemas, Mexico's second largest cable operator. Cablemas selected the ARRIS Cadant C4(TM) CMTS over other equipment manufacturers to provide advanced VoIP and high speed data services to its customers throughout Mexico. In addition, late in the quarter, the ARRIS TM 501B E-MTA received Euro-DOCSIS 2.0 certification by tComLabs as the first RoHS (Restriction of Hazardous Substances) Compliant E-MTA. This certification will be significant as in early 2006 Europe moves to reduce the use of lead and other hazardous materials in products. "We are very pleased with our performance in 2005, in particular our strong position in the accelerating VoIP market, and we are off to a good start in 2006," said David Potts, ARRIS EVP & CFO. He added, "We now anticipate that our revenues for the first quarter of 2006 will be in the range of $185 to $200 million with net income per diluted share, on a U.S. GAAP basis in the range of $0.17 to $0.21 including amortization of intangibles and stock compensation expense of $0.02." ARRIS management will conduct a conference call at 8:30am EST on Thursday, February 9, 2006 to discuss these results in detail. You may participate in this conference call by dialing 877-691-0879 prior to the start of the call and providing the ARRIS Group, Inc. name and Jim Bauer as the moderator. Please note that ARRIS will not accept any calls related to this earnings release during the period between the 6:30pm EST release on February 8, 2006 and the completion of the scheduled conference call on February 9, 2006. A replay of the conference call can be accessed through Wednesday, February 14, 2006 by dialing 877-519-4471 and using the PIN#6915747. A replay also will be made available for a period of 12 months following the conference call on ARRIS' website at www.arrisi.com. ARRIS provides broadband local access networks with innovative next generation high-speed data and telephony systems for the delivery of voice, video and data to the home and business. ARRIS' complete solutions enhance the reliability and value of converged services from the network to the subscriber. Headquartered in Suwanee, Georgia, USA, ARRIS has design, engineering, distribution, service and sales office locations throughout the world. Information about ARRIS' products and services can be found at www.arrisi.com. Forward-looking statements: Statements made in this press release, including those related to: - first quarter 2006 revenues and earnings; - the general market outlook and acceptance of ARRIS products; and - the outlook for industry conditions are forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. Among other things, - projected results for the first quarter of 2006 as well as the general outlook for 2006 and beyond are based on preliminary estimates, assumptions and projections that management believes to be reasonable at this time, but are beyond management's control; and, - because the market in which ARRIS operates is volatile, actions taken and contemplated may not achieve the desired impact relative to changing market conditions and the success of these strategies will be dependent on the effective implementation of those plans while minimizing organizational disruption. In addition to the factors set forth elsewhere in this release, other factors that could cause results to differ from current expectations include: the impact of rapidly changing technologies; the impact of competition on product development and pricing; the ability of ARRIS to react to changes in general industry and market conditions including regulatory developments; rights to intellectual property, market trends and the adoption of industry standards; and consolidations within the telecommunications industry of both the customer and supplier base. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the Company's business. Additional information regarding these and other factors can be found in ARRIS' reports filed with the Securities and Exchange Commission. In providing forward-looking statements, the Company expressly disclaims any obligation to update publicly or otherwise these statements, whether as a result of new information, future events or otherwise. ARRIS GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 2005 2005 2005 2005 DECEMBER 31 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) 2004 ----------- ------------ ----------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 75,286 $ 48,194 $ 97,194 $ 26,546 $ 25,072 Short-term investments 54,250 46,250 - 81,400 78,000 Restricted cash 6,073 4,053 4,037 4,025 4,017 Accounts receivable, net 83,540 95,791 87,900 63,938 55,661 Other receivables 286 887 288 400 420 Inventories, net 113,909 90,122 80,869 76,249 92,636 Other current assets 15,276 20,198 6,700 9,310 9,416 ----------- ------------ ----------- ----------- ---------- Total current assets 348,620 305,495 276,988 261,868 265,222 Property, plant and equipment, net 25,557 26,483 26,351 26,217 27,125 Goodwill 150,569 150,569 150,569 150,569 150,569 Intangibles 920 1,138 1,356 884 1,672 Investments 3,321 3,347 3,223 4,450 3,620 Other assets 416 395 399 2,210 2,470 ----------- ------------ ----------- ----------- ---------- $ 529,403 $ 487,427 $ 458,886 $ 446,198 $ 450,678 =========== ============ =========== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 35,920 $ 25,602 $ 30,863 $ 30,922 $ 30,640 Accrued compensation, benefits and related taxes 20,424 16,083 9,927 6,990 14,845 Current portion of long-term debt - - - - - Other accrued liabilities 29,112 29,828 29,879 30,881 32,111 ----------- ------------ ----------- ----------- ---------- Total current liabilities 85,456 71,513 70,669 68,793 77,596 Long-term debt, net of current portion - - - 75,000 75,000 Other long-term liabilities 18,230 16,683 17,211 16,996 16,781 ----------- ------------ ----------- ----------- ---------- 103,686 88,196 87,880 160,789 169,377 Stockholders' equity: Preferred stock - - - - - Common stock 1,069 1,065 1,053 873 889 Capital in excess of par value 732,405 727,249 727,096 644,891 644,838 Unearned compensation - - (8,112) (3,939) (4,566) Unrealized holding gain on marketable securities 1,076 975 838 742 706 Unfunded pension losses (4,618) (3,345) (3,345) (3,345) (3,345) Accumulated deficit (305,554) (327,520) (346,340) (353,629) (357,038) Unrealized gain on derivatives 1,523 991 - - - Cumulative translation adjustments (184) (184) (184) (184) (183) ----------- ------------ ----------- ----------- ---------- Total stockholders' equity 425,717 399,231 371,006 285,409 281,301 ----------- ------------ ----------- ----------- ---------- $ 529,403 $ 487,427 $ 458,886 $ 446,198 $ 450,678 =========== ============ =========== =========== ==========
ARRIS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
FOR THE THREE MONTHS FOR THE TWELVE MONTHS ENDED DECEMBER 31, ENDED DECEMBER 31, ---------------------- ---------------------- 2005 2004 2005 2004 ---------- --------- --------- ---------- Net sales $ 181,335 $ 129,467 $ 680,417 $ 490,041 Cost of sales 123,473 95,682 489,703 343,864 ---------- --------- --------- ---------- Gross profit 57,862 33,785 190,714 146,177 Gross profit % 31.9% 26.1% 28.0% 29.8% Operating expenses: Selling, general, and administrative expenses 20,588 15,921 74,746 69,082 Provision for doubtful accounts (83) (1,460) (438) (543) Research and development expenses 15,044 16,034 60,135 63,373 Restructuring and impairment charges 901 541 1,331 7,648 Amortization of intangibles 219 4,635 1,212 28,690 ---------- --------- --------- ---------- 36,669 35,671 136,986 168,250 ---------- --------- --------- ---------- Operating income (loss) 21,193 (1,886) 53,728 (22,073) Other expense (income): Interest expense 68 1,339 2,101 5,006 Loss (gain) on debt retirement - - 2,372 4,406 Loss (gain) on investments and notes receivable 131 (269) 146 1,320 Loss (gain) on foreign currency (210) (1,205) (65) (1,301) Other (income) expense, net (881) (268) (2,614) (1,102) ---------- --------- --------- ---------- Income (loss) from continuing operations before income taxes 22,085 (1,483) 51,788 (30,402) Income tax expense (benefit) 271 24 513 108 ---------- --------- --------- ---------- Net income (loss) from continuing operations 21,814 (1,507) 51,275 (30,510) Income from discontinued operations 152 901 208 2,114 ---------- --------- --------- ---------- Net income (loss) $ 21,966 $ (606) $ 51,483 $ (28,396) ========== ========= ========= ========== Net income (loss) per common share - basic: Income (loss) from continuing operations $ 0.21 $ (0.02) $ 0.53 $ (0.36) Income (loss) from discontinued operations 0.00 0.01 0.00 0.02 ---------- --------- --------- ---------- Net income (loss) $ 0.21 $ (0.01) $ 0.53 $ (0.33) ========== ========= ========= ========== Net income (loss) per common share - diluted: Income (loss) from continuing operations $ 0.20 $ (0.02) $ 0.52 $ (0.36) Income (loss) from discontinued operations 0.00 0.01 0.00 0.02 ---------- --------- --------- ---------- Net income (loss) $ 0.20 $ (0.01) $ 0.52 $ (0.33) ========== ========= ========= ========== Weighted average common shares: Basic 105,583 87,792 96,614 85,283 ========== ========= ========= ========== Diluted 107,296 87,792 98,297 85,283 ========== ========= ========= ==========
ARRIS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
FOR THE THREE MONTHS FOR THE TWELVE MONTHS ENDED DECEMBER 31, ENDED DECEMBER 31, ---------------------- ---------------------- 2005 2004 2005 2004 --------- --------- --------- --------- OPERATING ACTIVITIES: Net income (loss) $ 21,966 $ (606) $ 51,483 $ (28,396) Adjustments to reconcile net income (loss) to net cash provided by (used in)operating activities: Depreciation 2,588 2,583 10,529 10,395 Amortization of intangibles 219 4,635 1,212 28,690 Stock compensation expense 2,574 582 6,915 2,826 Amortization of deferred finance fees - 153 305 690 Provision for doubtful accounts (83) (1,460) (438) (543) Loss on disposal of fixed assets 71 85 202 182 Loss (gain) on investments and notes receivable 131 (269) 206 1,320 Loss (gain) on debt retirement - - 2,372 4,406 Impairment of long-lived assets - - 291 - Income from discontinued operations (152) (901) (208) (2,114) Changes in operating assets & liabilities, net of effects of acquisitions and disposals: Accounts receivable 12,334 10,339 (27,191) 1,226 Other receivables 601 2,402 134 860 Inventory (23,787) (4,354) (20,963) (14,074) Accounts payable and accrued liabilities 14,695 (10,720) 7,348 15,510 Other, net 3,405 6,695 (6,739) 554 --------- --------- --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 34,562 9,164 25,458 21,532 INVESTING ACTIVITIES: Purchases of property, plant, and equipment (2,062) (2,984) (9,617) (10,167) Cash proceeds from sale of property, plant, and equipment 2 - 42 - Cash paid for acquisition, net of cash acquired - - (89) (50) Purchases of available-for-sale securities (8,000) (18,000) (59,250) (107,750) Disposals of available-for-sale securities - - 83,032 39,750 Other - 642 (259) 642 --------- --------- --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (10,060) (20,342) 13,859 (77,575) FINANCING ACTIVITIES: Payments on capital lease obligations - - - (14) Payments on debt obligations - - - (1,163) Proceeds from issuance of common stock and other 2,590 385 10,897 7,410 --------- --------- --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,590 385 10,897 6,233 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,092 (10,793) 50,214 (49,810) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 48,194 35,865 25,072 74,882 --------- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 75,286 $ 25,072 $ 75,286 $ 25,072 ========= ========= ========= =========
ARRIS GROUP, INC. SUPPLEMENTAL EARNINGS RECONCILIATION (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Q1 2005 Q2 2005 Q3 2005 Q4 2005 --------------------- ---------------------- --------------------- --------------------- PER DILUTED PER DILUTED PER DILUTED PER DILUTED AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE -------- ----------- -------- ----------- -------- ----------- -------- ----------- Net income (loss) $ 3,408 $ 0.04 $ 7,289 $ 0.08 $ 18,820 0.18 $ 21,966 $ 0.20 Highlighted items: Impacting gross margin: Stock compensation * 31 - 82 - 136 - 125 - Impacting operating expenses: Impairment of long-lived assets 291 - - - - - - - Restructuring charges - adjustments to existing accruals (93) - 198 - 34 - 901 0.01 Amortization of intangibles 557 0.01 218 - 218 - 219 - Stock compensation * 522 0.01 1,095 0.01 2,475 0.02 2,448 0.02 Impacting other expenses: Gain on investment - - - - (60) - 131 - Loss on debt retirement - - 2,372 0.03 - - - - Impacting discontinued operations: Restructuring charges - adjustments to existing accruals (10) - (76) - 30 - (152) - -------- ----------- ---------- ----------- -------- ----------- -------- ----------- Total highlighted items 1,298 0.01 3,889 0.04 2,833 0.03 3,672 0.03 -------- ----------- ---------- ----------- -------- ----------- -------- ----------- Net income (loss) excluding highlighted items $ 4,706 $ 0.05 $ 11,178 $ 0.12 $ 21,653 $ 0.20 $ 25,638 $ 0.24 ======== =========== ======== =========== ======== =========== ======== =========== Weighted average common shares - diluted 90,497 91,356 107,049 107,296 =========== =========== =========== =========== YTD 2005 --------------------- PER DILUTED AMOUNT SHARE -------- ----------- Net income (loss) $ 51,483 $ 0.52 Highlighted items: Impacting gross margin: Stock compensation * 374 - Impacting operating expenses: Impairment of long-lived assets 291 - Restructuring charges - adjustments to existing accruals 1,040 0.01 Amortization of intangibles 1,212 0.01 Stock compensation * 6,540 0.07 Impacting other expenses: Gain on investment 71 - Loss on debt retirement 2,372 0.02 Impacting discontinued operations: Restructuring charges - adjustments to existing accruals (208) - -------- ----------- Total highlighted items 11,692 0.12 -------- ----------- Net income (loss) excluding highlighted items $ 63,175 $ 0.64 ======== =========== Weighted average common shares - diluted 98,297 ===========
* ARRIS adopted SFAS 123R effective July 1, 2005. Prior to the adoption date, the provisions of APB 25 were followed. In the periods prior to July 1, 2005, the Company only recorded compensation expense related to restricted stock and options subject to variable accounting. To provide better comparative information, the historic compensation expenses have been highlighted. ARRIS believes that presenting net income (loss) and related per share amounts adjusted for the items detailed above provides meaningful information that will allow investors to more easily understand ARRIS' financial performance and compare its period-to-period results. With respect to stock compensation expense, ARRIS adopted SFAS 123R effective July 1, 2005, as a result of which ARRIS will record non-cash compensation expense related to grants of options and restricted stock. Depending upon the size, timing and the terms of the grants this non-cash compensation expense may vary significantly. With respect to loss on debt retirement, the call for redemption of ARRIS' outstanding convertible notes in May 2005 resulted in a non-cash charge due to an interest "make-whole" payment triggered by the call. With respect to amortization of intangibles, the intangibles being amortized relate to our most recent acquisitions and will not recur. Similarly, the impairment of long-lived assets, restructuring charge adjustments and gain on investment reflect items that, although they or similar items might recur, are of a nature and magnitude that identifying them separately provides the investors with a greater ability to project ARRIS' future performance. As importantly, in assessing operating performance and preparing budgets and forecasts, ARRIS' management considers performance after making these adjustments and believes that providing investors with the same information provides greater transparency and insight into management's analysis. ARRIS expects to continue providing similar information in the future with schedules reconciling the differences between GAAP and non-GAAP financial measures. EX-99.2 3 g99551exv99w2.txt EX-99.2 EARNINGS CONFERENCE CALL TRANSCRIPT EXHIBIT 99.2 CONFERENCE CALL TRANSCRIPT ARRS - Q4 2005 ARRIS GROUP, INC. EARNINGS CONFERENCE CALL EVENT DATE/TIME: FEB. 09. 2006 / 8:30AM ET (C) 2006 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. 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. DISCLAIMER Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. 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