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Arris Group, Inc. (NASDAQ:ARRS)

Q3 2012 Earnings Call

October 24, 2012 5:00 p.m. ET

Executives

Bob Puccini -IR

Bob Stanzione - Chairman and CEO

Dave Potts -EVP and CFO

Bruce McClelland - Group President

Analysts

James Kisner - Jefferies

Victor Chiu - Raymond James

Mark Sue - RBC

Greg Mesniaeff - Maxim Group

Jeff Kvaal - Barclays

Amitabh Passi - UBS

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2012 Arris Group Inc. Earnings Conference Call. My name is Chantilly (ph) and I will be your facilitator for today’s call. At this time all participants are in listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Bob Puccini of Investor Relations. Please proceed, sir.

Bob Puccini

Thank you, Chantilly (ph) and welcome to the Arris conference call with management. This afternoon, we will be discussing our third quarter 2012 financial results, which were released after the close of markets today. As usual, we will be using a series of slides during our webcast, which are also posted on the Arris website in the Investor Relations section.

With us here at Arris headquarters are Bob Stanzione, Arris' Chairman and CEO; Dave Potts, Executive Vice President and Chief Financial Officer; and Bruce McClelland, Group President.There will be a replay of this entire call available several hours after the conclusion of the call and a replay of the call and the slides will be available on our corporate website for the next 12 months.

Before we begin, please go to Chart 2. During this call, we may be making forward-looking statements, including our outlook and expectations for our industry in general, estimated revenue and earnings for the fourth quarter 2012, certain financial operating metrics, the timing andintroduction of new products and technologies, anticipated spending patterns by some of our customers and expected sales levels of various product categories. It is important to know that actual results may differ materially from those suggested by any forward-looking statements, which we may make during today's call. For further information in this regard and for specific examples of risks that could cause actual results to differ materially from these forward-looking statements, please see our recent filings with the SEC.

Now, if you go on to Chart 3, Bob and Dave will provide their comments on the quarter results after which, we will open up for questions. Bob?

Bob Stanzione

Thanks Bob, and good afternoon, everyone. Let’s go to chart 4. I'm very pleased to report outstanding September quarter results, with revenues reaching another record highand earnings above the mid-point of our guidance. Revenues were up 2.3% quarter-over-quarter at $357 million, and up a remarkable 30% over the third quarter of 2011.Year-to-date, sales were up 25% over the first nine months of last year and sequentially sales were up in all three of our products segments.

Non-GAAP earnings of $0.25 per share were up $0.01 over the third quarter of 2011 and year-to-date non-GAAP EPS is up 10%. Now remember, we’re paying higher taxes this year because Congress has not yet renewed the R&D tax credits.International sales represented 22% of the total, which is down somewhat from 26% in the prior quarter. Year-to-date, business is down in Canada and Europe and it’s improving in Asia and Latin America.

Cash generated from operating activities was $6.7 million, as we increased inventories to ensure that we can meet Q4 opportunities and we also used cash to continue share repurchases in the quarter, purchasing 812,000 shares at an average price of $12.76.

Please turn to Chart 5. Broadband Communication Systems revenues rose to $284 million, posting about 1% sequential and 39% year-over-year growth. As we predicted, gross marginwas down due to mixed shift and strong sales of CPEs.

A major highlight of the quarter was that shipments of CPE devices increased significantly over to 2.6 million units, which far exceeds any prior quarter. 88% of the shipments were DOCSIS 3.0 capable and we experienced a sharp increase in demand for higher value WiFi-enabled devices.We continueto make good progress with our video gateway solutions with the addition of several small operators and by adding features to meet emerging customer demands.

Looking forward, we’re moving aggressively ahead with several perspective larger customers, who are interested in our RDK and NDS software based video gateways. These programs are gaining momentum,and add to our optimism for substantial growth in the video gateway category.

CMTS downstream port shipments increased slightly to $81,000. However the increase was more than offset by lower upstream shipments. Recall that we introduced a new 24 channel upstream card that peaked demand in the June quarter.

Now moving to Chart 6; ATS sales were up in the quarter and year-to-date. This business remains healthy and we expect year-over-year revenue growth to continue. Broadband video traffic growth is increasing demand in ATS and driving growth for both Optical Nodes and Headend Optics and the deployment of Metro WiFi services increasing demand for wireless WiFi access points that we distribute.MCS sales were also up nicely in the quarter with several new linear advertising deployments.

Now, let’s go to Chart 7. We had a very successful showing at the annual SCTE Expo Conference in Orlando last week. The centerpiece of the event was our formal announcement of the new E6000 Converged Edge Router. The E6000 embodies the objectives of the cable industry CCAP specification and the initial feature set directly targets highly dense DOCSIS IP capacity expansion.

We are well along in trials with multiple lead customers, and we expect several deployments to go live late this quarter. Full commercial sales will be starting in 2013 and we have already received early orders. Our approach of building an integrated, fault tolerant, flexible platform has been well received and as a result of close collaboration with industry leaders such as Comcast, Time Warner Cable, Liberty Global and several others.The E6000 is a great complement to our current C4 CMTS which will continue to target less dense requirements, as well to the MSP QAM platform for dedicated video QAM and modular CMTS applications.

Also at the SCTE show, we announceda new portfolio of advanced wireless voice and data gateways that are able to support almost a gigabyte per second of downstream data capacity. With interfaces for distribution of video and data throughout the home, these new gateways are highly complementary to the E6000, providing operators with very cost effective solutions for extending their HFC networks to fiber like speeds. We are already testing these new gateways with lead customers and expect shipments in the first half of 2013.

And now to my last chart, Chart 8; as you can see our Q4 2012 guidance calls for continued strong year-over-year growth and a significant step up in gross margin, as we expect product mix to shift toward more software and network infrastructure products.

Compared with fourth quarter of last year, the center of our guidance would represent a 24% revenue increase and 33% growth in adjusted earnings per share. Although, book-to-bill is below one, we entered the quarter with backlog up almost $30 million from year ago and order flow early in the quarter is encouraging.

Arris growth this year is clearly far above the growth of CapEx in the industry and reflects the investments we have made over the past few yearsin broadening our portfolio and strengthening our sales coverage. We successfully aligned our products and our sales effort with today's market and as a result, we're clearing winning a larger share of our customer’s capital expenditures.

We have a great pipeline of new products and expanding addressable market and external trends continue to drive traffic growth. The bottom line is that there are solid reasons for us to maintain our optimistic outlook.

And with that I'm turning this over to Dave.

Dave Potts

Thanks Bob and thanks everybody for joining us this afternoon. I'm very pleased with our Q3 results, particularly our non-GAAP EPS which came in the upper half of our guidance. So let's get into some of the details, starting with the financial highlights chart on Chart 10, if you can.

Sales were $357.5 million in the third quarter, which compares to $274.4 million in the third quarter last yearand $349.3 million in the second quarter of 2012, and I’ll provide a breakdown by segment in just a moment.

Gross margin was 31.3% in the third quarter, and compares to 36.5% in the third quarter last year and 33.9% in the second quarter of 2012. And our adjusted non-GAAP EPS was $0.22 in the third quarter, which compares to $0.21 in the third quarter of 2011 and $0.25 in the second quarter of 2012. Our third quarter 2012 GAAP EPS was $0.15 per share, which compares to $0.11 from the third quarter of 2011 and $0.13 in the second quarter of 2012.

One housekeeping note for you. Our GAAP tax rate was approximately 14% in Q3, while our non-GAAP rate was approximately 34%. Included in our GAAP tax rate were discreet tax benefits totaling about $4.2 million, related to provisions return adjustments as we filed our 2011 tax return in September and adjustments to our FIN-48 accruals for uncertain tax positions associated with now closed tax shifts.

So, while we get a cash tax benefit, our non-GAAP EPS does not include the benefit of these discreet items. And as always, a reconciliation of our GAAP to non-GAAP earnings is attached to the press release, and can also be found on our website.

Cash, short term and long term marketable securities were approximately $571 million at the end of the third quarter and we generated about $6.7 million of cash from operating activities in the quarter. I'll also highlight we repurchased about 800,000 shares in the quarter for approximately $10.4 million and year-to-date, we've repurchased 4.5 million shares for about $52 million.

And I'll touch a little more on the balance sheet and cash in just a few minutes but with respect to orders, our order backlog was a $185.8 million at the end of the third quarter and our book-to-bill ratio was 0.82 for the quarter.

So, let's turn to Chart 11 and look at some of the sales details. First, let's focus on the Sales by Segment bar chart for the third quarter, comparing our reported sales by segment.BCS sales were strong at $283.5 million in the third quarter, and compared to $203.6 million in the third quarter of 2011 and $280.6 million in the second quarter of 2012.

With respect to the year-over-year comparison, the increase is in part attributable to the inclusion of sales associated with our late Q4 2011 acquisition of BigBand but it is primarily attributable to the higher demand for our DOCSIS 3.0 CPE equipment.

ATS sales in Q3 were $6.7 million, as compared to $54.2 million in the third quarter of 2011 and $52.2 million last quarter,and MCS sales were $17.3 million in Q3 and compared to $16.6 million in the same period last year and $16.5 million in the second quarter of 2012.

With regards to the geographic split, international sales were $78.7 million in the third quarter, down from both the third quarter of last year and the second quarter of this year. And sales to Time Warner were $69 million and sales to Comcast were $118 million in Q3.

All right. Let’s turn to gross margin on Chart 12 please. Now as expected, our gross margin percentage declined in Q3. For the quarter our overall gross margin was 31.3%, which compares to 36.5% in the third quarter of 2011, and 33.9% in the second quarter of 2012 and the decline reflects a shift in product mix.

Our gross margin percent for BCS was 31.4% in the third quarter of 2012, as compared to the 37.3% in the third quarter last year, and 34.3% in the second quarter of 2012. We have a higher mix of CPE equipment sales in the third quarter 2012.

The gross margin percent of our ATS segment was 21%, as compared to 25.3% in Q3 2011, and 21% in the second quarter of 2012 and the gross margin percent for MCS was 63.6% in the quarter, which compares to 63.3% in the third quarter of 2011 and 67.8% in the second quarter of 2012.

All right; let's turn to operating expenses in Chart 13. Total R&D and SG&A was $80.9 million in the third quarter, up from $71.3 million in the third quarter of 2011, and down from $83 million in the second quarter of 2012. The year-over-year increase includes our investment in BigBand.OpEx came in lower then what we guided, as we continue to find ways to drive efficiencies in the business. All in all, we've done a very good job in managing our expenses, resulting in operating leverage.

In the third quarter, we incurred further reconstruction costsof about $200,000 and amortization of intangibles in the third quarter is lower year-over-year, as a result of the write off of intangibles in the fourth quarter of 2011, partially offset by new amortization resulting from the BigBand acquisition.

All right; let's move to Slide 14 and look at some of the balance sheet and cash flow highlights. We ended the quarter with $571 million of cash, short term and long term marketable securities, as compared to $591 million at the end of the third quarter 2011, and $576 million at the end of the second quarter 2012.And again, we used $10 million to repurchase about 800,000 shares in the quarter, and year-to-date we have repurchased just about 4.5 million shares for $52 million.

Some other things to note; we generated approximately $6.7 million of cash from operating activities in Q3. The (inaudible) 15:47 which are cash basedwere approximately $40 million and we used about $33 million of cash for working capital, in particular $35 million for inventory.

We increased inventory in order to be able to accommodate fourth quarter demand,and we anticipate that we will consume a portion of that in the fourth quarter. CapEx was about $5 million in the quarter, which is in line with our plans and our balance sheet position continues to be very strong with a net cash position including short term and long term investments of approximately $339 million, and the net positionincludes $232 million of 2% convertible notes, due in late 2013.

All right; let's turn to guidance in Chart 15. At this point, for the fourth 2012 we estimate that sales will be in a range of $345 million to $365 million and that non-GAAP EPS will be in a range of $0.26 to $0.30 per diluted share and GAAP EPS will be in a range of $0.13 to $0.17 per diluted share.

We expect a richer product mix in Q4. In particular we anticipate higher sales for CMTS upgrades and I anticipate that R&D and SG&A will be in a range of $80 million to $83 million in Q4. We expect a diluted share count of approximately of 116.5 million and we're assuming a tax rate of about 33.7%.

One final note; we continue to assume that the R&D tax credit legislation will not be passed by year-end. If it is, we would anticipate an improvement of approximately $0.04 to $0.05 in both our GAAP and non-GAAP EPS.And finally, a reconciliation of our GAAP to non-GAAP guidance can be found in Chart 16 and is also attached to the Press Release and we've also included reconciliations of our GAAP to non-GAAP earnings per share on Charts 17 and 18.

So with that I’ll turn it back to Bob and get into the questions-and-answer.

Bob Stanzione

Thanks, Dave. With that we’d like to open the lines up for questions. Chantilly (ph) would you mind coming back on please and letting our participants know how they can get in the queue?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of James Kisner of Jefferies. Please proceed.

James Kisner - Jefferies

So, just, sort of a housekeeping in the form of a real question here, just could you tell us how much of your CPE percentage wasWiFi capable this time around?

Bob Stanzione

We will find it for you here James.

James Kisner - Jefferies

Okay. No problem. I’ll just move on. So I just want to understand the dynamic for CMTS. Given there is kind of a wait for effect in next quarter, just wanted to see what’s driving the strength in CMTS. Obviously, I’m assuming that it’s going to be a fair amount of CCAP and I’m just curious if you could help elaborate on the dynamic there, the brass folks in this last quarter were waiting. And also I'm just wondering, like if there is any particular initiative that you think are driving this? Is it next quarter, people are just, sort of, preparing from more IP video traffic in next year or it’s just wait for effect or the devices that are coming, like could you just help us understand, as much as possible the CMTS as you could.

Bob Stanzione

So I’ll start and Bruce can fill in. Clearly it’s just traffic growth. Traffic growth is pushing the deployment of more C4 across the network and as you can tell by the numbers we’re predicting for the fourth quarter, we expect to have a pretty big uptick in demand for C4 and particularly software license upgrades in the fourth quarter, which is going to be accretive to the gross margin in the quarter.

But looking outa little bit further, the E6000 is going out in trials right now. So if there is a wait for effect, it should be a short one because we’re beginning to ramp the production and we’ve got early orders in from at least one customer that has placed orders; and trials with multiple customers, as I mentioned in our prepared comments. We see customers beginning to think about more downstreams per service group.And with that I’ll transfer over to Bruce and he can elaborate.

Bruce McClelland

Yes. If you peel back the Layer one further and think about where the demand is coming from, a lot of the traffic in the network today is still what you think of as over-the-top traffic. It’s a web surfing, its streaming to third party over-the-top devices et cetera. Many of the large operators have now started to stand up their own IP video streaming servers in addition to that, whether its on-demand traffic or some live streaming content.

And what we see in the next little while is more and more ofthat trend where the service providers move more of their content onto IP. I think more and more of that will become a bigger and bigger piece of the traffic on the network and what will drive some of the additional investment, both in the Headend, as well as the investment for these more capable CPE devices that are capable of taking a larger swath of traffic and distributing it around the home.

And of course the number of connected devices in the home continue to grow significantly. So, I think those are the, more of the kind of underlying phenomenals that are driving the traffic.

Bob Stanzione

And I guess the answer on your question was somewhere around 45% of the devices in the last quarter were embedded wireless devices.

James Kisner - Jefferies

Basically, a quick follow-up on the wireless. Any sense for like, the sustainability of the WiFi next year, next quarter and next year? Do you see it sort ofmoderating a little bit and one has been very strong, Sometimes you see some fall off there or is it, as far as I can see next year, you’re just going to keep going or any thoughts on that?

Bruce McClelland

From what we can tell the trend for embedded WiFi, is not just solid but will continue to grow in percentage of mix. There are a few operators that still have a philosophy of keeping that separate and either having the user provide that or distribute a separate device but we’ve kind of passed the tipping point at this point and from what I can tell, it’s just going to continue to grow and in fact, they are looking for more advanced devices, not only kind of single radio devices but dual band devices that allowthem to have both a 2.4 and 5 gig radioactive at the same time and additional capabilities like roaming and capabilities, of having specialized SSID for additional applications and be able to roam from, inside to outside. There is this kind of an endless list of different enhancements that are in the pipeline now.

Operator

Your next question comes from the line of Simon Leopold of Raymond James. Please proceed, sir.

Victor Chiu - Raymond James

Hi. This is Victor Chiu in for Simon Leopold. Just really quick housekeeping; did you guys speak about OpEx before? Did I miss that?

Bob Puccini

Yeah. Dave did.

Victor Chiu - Raymond James

Sorry I didn’t hear what you. Can you speak about OpEx for Q4?

Dave Potts

We did. I said it’s going to be between $80 million and $83 million and that includes equity comp, right.

Victor Chiu - Raymond James

So, I just wanted to ask about the CPE sales. The CPE performance is fairly impressive this quarter and you mentioned that strength in CPE sales could continue for the foreseeable future, but I don’t know how sustainable you think this is. It seems like the last several quarters have been kind of supported by CPE sales and at what point, do you guys kind of see inflection for that?

Bob Stanzione

While we see in the fourth quarter CPE sales will be down in favor of higher margin network infrastructure sales.

Victor Chiu - Raymond James

Okay. So it’s going to shift back.

Bob Stanzione

So we’ve seen the shift toward CPE occur the first, second and third quarter as they grew. We expect that to abate somewhat in the fourth quarter and network infrastructure products take itsplace,thereby improving the margin in the business.

Victor Chiu - Raymond James

Okay. That makes sense. So and then that’s primarily like you said before, mix of C4 then next generation sales?

Dave Potts

In Q4 the CMTS sales will be 100% C4 sale.As Bob mentioned multiple trials going on but we don’t anticipate recognizing revenue in Q4. And just one additional color on the CPE number; Q3 we think there was some amount of kind of back to school initiative, marketing campaigns and things like that and so we don’t think that high level is sustainable as Bob said but certainly there is significant demand going forward.

Victor Chiu - Raymond James

I don’t know if you guys mentioned how the Gateway sales performedthis quarter. Can you give us some color around that?

Bruce McClelland

I think they were descent. They are certainly still not at the level that we talked about as our target for this year, but they were slightly improved. And as Bob mentioned there is a number of new customers that have just launched in late Q3 and a few more launching in Q4. So we think that will kind of slowly build up here.

Victor Chiu - Raymond James

And I guess one last question. The Motorola under Google struggled to meet expectations for several quarters now and…

Bob Stanzione

We’re having troubled hearing you. Could you just speak just little bit louder?

Victor Chiu - Raymond James

Yes, I’m sorry. So the Motorola business under Google had struggled for the last several quarters and there has been discussions suggesting sale their home business, in this competitive environment shift, are you favor (ph) with the potential sale, and just kind of how do you see that situation evolving?

Bob Stanzione

Well, what we’ve seeing happening over the past couple of years is set top box prices have been coming down. Volumes are still pretty steady but prices have been coming down and we are beginning to see a shift in customer interest in wireless gateways and video gateways, headless gateways. So, we expect that there is going to be a change in the wind so to speak for in-home video devices and we believe we can take advantage of that.

Operator

Your next question comes from the line of Mark Sue of RBC. Please proceed.

Mark Sue - RBC

So gentleman, I guess, I thought is that, is there a big opportunity to gain share as your big competitors are in this somewhat disarray and kind of refocusing on other aspects of their larger businesses. Can you reaccelerate your broad product portfolio to grab some more footprintat your customer base, just your comments there?And then separately, as we look at the balance of the year, it seems that the CapEx environment from a cable point of view is actually not that bad, and just wondering if you could comment on just their thoughts of upgrading their networks. It seems that they are under less competitive threats then they were in prior years. So maybe your visibility generally improved for this customer base?

Bob Stanzione

Okay. So, with the pipeline of new products that we are introducing as we speak, I believe that there is opportunity for us to gain share. I wouldn’t say that it’s because our competitors are in disarray at all. I think our competitors are doing quite well and they are competing very hard in the market place. I think we have just done well this year and we will continue to do well with this pipeline of new products that we have.

The CapEx environment, I think is kind of steady. I wouldn’t say that it’s robust by any means. I think what’s happening is CapEx is being shifted from older technology to new technology and that we are benefiting by that. From what I hear, I don’t think CapEx is up much this year and obviously our sales are up. So we are getting it from someplace else. Bruce, do you want to elaborate little on the competitive environment?

Bruce McClelland

No. I agree. I don’t think they are so much in disarray. I think the trick is obviously making sure we’ve got the right products, positioned where our customers are going to spend their CapEx, and sure there has been a shift towards some of these enhanced gateway devices. We've been well positioned there. We do think there is a shift over the next say 12 and 18 months back to investing on the network side capacity, at the Edge, these Edge routers as well as some upgrades within the HFC infrastructure to be able to accommodate additional narrow cast bandwidth, the service group expansion, adding more downstreams and what not, driving investment in both the optics and the nodes and be able to split service groups and things like that.

So, we do think there is, maybe a shift of a bit of that CapEx dollars towards those types of needs and we have to make sure we're positioned properly to win our fair share this new CMTS CCAP product that we have coming out.

The whole idea here is certainly to gain share with that platform. We'll see how we do but that's where it's targeted.

Mark Sue - RBC

And gentlemen just on international, the dip that you saw, was that Latin America, or was that a little bit of Asia, maybe just those dynamics there? Is there something there?

Bob Stanzione

We did have a dip in Latin America however I think year-over-year we're going to see a nice uptick in what we sell in Latin America. So that one, although the quarter was a little light, I think is a real bright spot in the business. Asia and particularly Japan has been pretty strong throughout the year and strengthened in the third quarter. And then as I mentioned, Europe and Canada have been weaker all year.

Operator

Your next question comes from the line of Greg Mesniaeff of Maxim Group. Please proceed, sir.

Greg Mesniaeff- Maxim Group

My question is regarding the transition to CCAP. As you go through that transition, what kind of startup costs are you looking at in terms of redesigning the form factors and other types of startup related expenses? And when the CCAP products are available concurrently with the current product form factors, what kind of differences in pricing are you foreseeing?

Bruce McClelland

A lot of the startup cost is obviously the development of the product and then that's been going on for a few years now. So a reasonable chunk of that R&D investment that we make every quarter, every year is gone into that new platform, with a whole array of things, its resources, its hardware development, its prototypes, lab equipment, those things. The actual startup costs from a manufacturing production capability prospective is actually fairly modest and we’re putting in obviously additional capacity to build flavors of both products in parallel but it’s actually pretty modest and lot of it is just kind of course of business stuff that you see in the quarterly income statement.

From a pricing perspective, clearly one of the objectives of these dense platforms is to be able to go on more channels with the same amount of circuitry and have a lens (ph) connector be able to produce a lot more channels and the physics allow us to be able to have a lower structure and correspondingly pass on some of those savings to customers clearly. So, I hate to talk about specific numbers because that doesn’t help us but there is a fairly significant savings for customers as they double and triple their capacity to keep up with the demand.

Greg Mesniaeff- Maxim Group

And then just a kind of follow up on that; from a component and raw materials economic standpoint, what kind of economics are you looking at for the CCAP launch as far as, is there product redesign that will give you some opportunity to take some additional cost out of the current form factors or how do you see that playing out?

Bruce McClelland

Yes, yes. So the way to just think of the product, it’s a new platform that we expect to invest in and be in the market for 10 years and so there’s a series of upgrades and new line cards and cost reductions and what not in the pipeline for the next several years that will allow us to innovate, add more capacity, lower the cost, add more features et cetera. So it’s not a single shot and your done thing, it’s similar to the C4 where it’s been in the market and we’ve gone through, I think three or four refresh cycles on the technology over the lifecycle and we think of the 6000 in a similar way.

Greg Mesniaeff- Maxim Group

So,I guess you could say that there is a more efficient use of silicon, right?

Bruce McClelland

Absolutely. Yes, absolutely.Multicore programmable devices allow us to add new things overtime. Yes.

Operator

Your next question comes from the line of Jeff Kvaal of Barclays. Please proceed.

Jeff Kvaal - Barclays

I have two questions. Number one, to take a different frame on the market share question; could you help us understand to what extent Motorola being part of Google is driving or allowing some share gains that maybe in the markets that you’re currently participate in or maybe in markets that you're targeting for next year, perhaps they are not as aggressive. That's thing also would go for Cisco and what's happening with SSA?My second question is on DOCSIS 3.0 and how far along you think we are in that transition, what carriers are you telling about that process?

Bob Stanzione

Jeff, quite honestly I don’t see that Motorola being part of Google has made them any more vulnerable than they have been in the past. In fact, I would say that from what I hear and what we see in the competitive marketplace, they are as sharp a competitor as they have been and I would say the same about Cisco. I don’t think the people on the ground are distracted or discouraged in any way. It’s a tough market out there and we have to fight to win every order that we take and it's been like that for a long time and we invest a lot in making sure we have the right products, the right sales coverage in order to gain share.

I think clearly this year we have gained share in two different ways. One is that we've taken a little bit of share from our competitors but also we’ve aimed our products at where the money is getting spent and we will continue to do that. When I refer to share gains, we’ve clearly gained a bigger share of our customer’s CapEx because we've grown a lot more than their spending is growing.And we've done that more by aiming at where they're going and being there before they the dollars. On the DOCSIS 3 conversion, Bruce?

Bruce McClelland

Yes. I guess two ways to look at it. One is on the Headend equipment the basic initial upgrade from DOCSIS 2.0 to 3.0 capability on the Headend; I think a large portion of that is in place. That's not what they're investing in now. Now it's about adding more capacity and that's kind of an ongoing, never ending process. So, you can't think of it as they're upgraded and they’re because that's clearly not how it works.

On the customer side, it's really hard to give you an accurate number. I think we estimate someone at 30% range as far as the number of devices that have been shipped that are DOCSIS 3.0 capable, versus the installed base of other equipment.But as we’ve talked about there's a whole new pipeline of more advanced devices that instead of doing 4 or 8 downstream channels will do 16 or 24, that begin the ship next year and I think what you'll see is that technology refresh cycle start all over again and as the operators want to increase speeds even further, they’ll have to go back and swap out that gear overtime. So it’s really kind of an ongoing evolution as opposed to a one time and your done thing.

Jeff Kvaal - Barclays

And maybe perhaps to follow up in the first question; would you care to talk about where you think you are gaining share if it’snot coming as much from Motorola and Cisco?

Bob Stanzione

I didn’t say it was coming. It was not coming from them. I think that our big growth this year has been in CPE devices and I think we have clearly gained share there. But I think that where operators maybe spending less this year on set-top boxes because prices have come down in that category and are spending more on higher functionality in their cable modems and EMTAs. So that money is getting shifted over to more of our sweet spots. We will see how the market share reports come out when analysts begin to publish them in a few weeks.

Bruce McClelland

Yeah Jeff, Infonetics I think has a reasonable view on the market. If you take a look at their quarterly market share statistics and certainly we gained share in second quarter based on their analysis. And our key competitors in the CPE space are people like Motorola and Cisco and Technicolor and folks like that, the share gains have certainly come from those places.

Operator

(Operator instructions). Your next question comes from the line of Amitabh Passi of UBS. Please proceed.

Amitabh Passi - UBS

I had a couple questions. I apologize, I joined a little late. It looks like in the December quarter the mix was working a favor with a strong CMTS product shipments. I’m just wondering, does this in some way signal perhaps an inflection point in your mix and margins or should we expect quarter-to-quarter ebbs and flows as we move into 2013 with perhaps CPE shipments again being strong in certain quarters and others?

Bob Stanzione

Well, there will be ebb and flow. I will stick my neck out for it. I think that the gross margin that we saw in the third quarter, that we just reported, I believe is low point. I think that what we are looking for next year with the introduction of the E6000 and what we’re hearing from our customers about what they’re going to be spending money on next year, I would think on average, over the course of 2013, our gross margins would be higher, but our mix will shift somewhat from quarter-to-quarter.

Amitabh Passi - UBS

Bob, perhaps just to follow up on that, what’s driving the strength in the fourth quarter significantly towards CMTS versus the CPE side of your portfolio?

Bob Stanzione

The sales were low in the third quarter in CMTS. And I think that there is a make-up for thatin the fourth quarter where our customers are getting ready for increased traffic over their networks as the days and months go on.

Amitabh Passi - UBS

And then maybe just if I can follow up on the E6K, again I apologize; I don’t know if you give any insight. How should we think about the ramp into 2013? Would you start recognizing revenues in the first quarter, would be late end of the year?

Bruce McClelland

I think we are looking at probably second quarter, although there is certainly a chance we could recognize it in the first quarter. We are now at the stage where some of it in our customer’s hands. They have to go to through their certification testing and qualification and again get it live. So we have a bit of a dependency there.

Amitabh Passi - UBS

And Bruce, will that be margin accretive initially or would you have some negative impact and then as you felt the chassis, you would expect margins to improve?

Bruce McClelland

I think it will be accretive to the mix.

Bob Stanzione

Certainly accretive, think of it as accretive.

Bruce McClelland

Yes, absolutely.

Amitabh Passi - UBS

And then just final one from me; the OpEx guidance for December, it looks like $74 million to $75 million non-GAAP. Is that sustainable throughout 2013 or again it’s there something unusual in the December quarter?

Bob Stanzione

No, I think it’s probably sustainable. We will have obviously the inflationary things but again as I said in my remarks, I really think we’re doing good things to be able to drive efficiencies in the business. So yes, I think we’ll be in a good zone.

Operator

At this time there are no further questions in the audio queue.

Bob Puccini

Okay. Thank you, Chantilly (ph). Bob any final comments or?

Bob Stanzione

Just to reiterate what I said earlier, we’re looking forward to a very strong end-of-year performance and I think we’re positioned for a very good 2013. Thank you all for joining us this afternoon.

Bob Puccini

Great. Thank you. And that concludes our call.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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