Arris completes digestion of Pace meal, turns to Ruckus as dessert

When Arris made its bid for Pace, the two companies had combined revenues of $8 billion. We said at the time that it would be a case of 2 and 2 adding up to 3, and so it has transpired, with 2016 results bringing revenues of $6.83 billion. In effect Arris paid $2.1 billion to buy almost precisely the same amount of revenue – $2.1 billion.

This has been at the expense of operating incomes halving for 2016, but they are on the mend, with Q4 up on Q4 2015, with this quarter’s $86 million net income being almost as much as the entire of 2015, which came in at $92 million. It is safe to say that the effort of swallowing Pace whole, so soon after acquiring Motorola Home, is finally paying dividends.

Fourth quarter revenues were $1.759 billion, and the period was cash positive, leaving $1.1 billion in the bank and $1.1 billion of orders on the future order book.

But just as soon as Arris has recovered from one acquisition, and it has announced another, buying Ruckus plus further campus switching assets from Brocade’s ICX range of switches, for $800 million, almost all the cash it currently holds. To win that deal against richer opposition shows a determination by Arris management not to be outgunned or outgrown by anyone. And it also shows a management team not scared to take on risk. Given that Ruckus was acquired by Brocade for $1.2 billion net of cash, it seems to somehow have achieved a serious bargain.

Arris is buying these assets from Broadcom, surplus to requirements from its Brocade acquisition, primarily because it has its own existing switching and WiFi businesses, and does not want the overlap. The discount is perhaps because Broadcom is also in a hurry and understands that this part of the Brocade deal put it in a position where it would be wasting some of the acquired assets if they were allowed to hang around. Arris also has to take on the additional cost of unvested employee stock awards.

This takes Arris in a new direction. We have applauded Arris for buying Pace and Motorola, making the point that if the set top market was to be shorn of margin, it was best to have a bigger slice of it. But at the same time Faultline Online Reporter has worried that set tops themselves are not enough. New Arris CEO Bruce McClelland is perhaps keenly aware of this and while Arris already has great assets in and around DOCSIS and CCAP, it now has a set of switches which can be used for campuses, enterprise and government deals, and a foothold in carrier WiFi – something that will come in real handy as Arris customers like Comcast and Charter, look to become wireless organisations. Ruckus has products in NFV and in Wireless Gateways, which will help improve margins in this market and some of the Ruckus products, notably mostly installed outside the US, have focussed on MDUs – an untapped area of broadband in the US, now coming to the fore.

The Ruckus part of the business will continue to be led by current Ruckus COO, Dan Rabinovitsj and it is clear that Arris has partnered Ruckus on many projects in the past and there is a good culture fit.