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May 10, 2006

NTL Earnings and Guidance Support The Bull Case

NTL Incorporated (NTLI) reported 1Q06 earnings as expected including the hoped for acceleration in cost savings synergies from its merger with Telewest. Investors are responding favorably to the report and follow-up conference call, moving NTLI shares 2-3% higher. I think the stage is set for NTLI shares to move into the mid $30s or higher over the next year as cost savings drive EBITDA and free cash flow growth, improved operational performance provides moderate organic growth, and the Virgin Mobile acquisition further leverages the emerging positive trends at the subscriber level. Additionally, renewed investor respect for U.S. cable stocks following excellent results from Cablevision, Time Warner, and Comcast is slightly lifting valuation for the group and provides a tailwind for NTLI shares. Also, I still think the rumored private equity interest in NTLI makes sense and that a deal could emerge. With downside protected by asset value, free cash flow, and stabilizing operational and financial performance and upside potentially very substantial, NTLI is one of my favorite ideas....

NTLI's 1Q report was a little confusing as the company provided reported and pro forma earnings and sequential and year-over-year comparisons to account for the mid-quarter closing of the Telewest deal. After adjusting for cost that shouldn’t recur once the merger integration is completed in late 2007, it looks tome like NTLI reported 1% revenue growth and 2% EBITDA growth. While this is nothing to be excited about, it should be the base off which growth accelerates due to cost savings and better operating performance.

On the cost savings front, management brought forward the full realization of the £250 million in synergies by 15 months by targeting 1Q08 as the first quarter of full benefit. In Q&A, management went a little further and said that hope to "do better and ado it sooner." I think that will be the case as management seemed quite confident in its formal presentation and Q&A. NTLI has an unfortunate recent history of missing expectations. I think the new management team wants to play UPOD. By the way, at a 6 multiple £250 million is worth $2.7 billion to NTLI's enterprise value or almost $10 per share.

Equally important, 1Q saw continued stabilization of operating and subscriber trends in NTLI's consumer business, especially at the previously struggling NTL standalone. For the second consecutive quarter, ARPU, subscriber additions, and churn all were at least as good as expected. This is a reversal from consistent underperformance through most of 2005. With new management now focused on bringing best practices from Telewest's better performing operations over to NTLI, an improvement in organic revenue and EBITDA growth to the mid single digits is plausible.

On other topics, management noted that much discussed "free broadband" offering from Carphone Warehouse has yet to to hurt NTLI. Management feels this product is aimed at low end customers as opposed to the higher ARPU customers of NTLI and Sky. No free cash flow guidance was provided nor was use of free cash flow discussed. NTLI will considerpartners as it decides how to develop and realize value from its content assets. Trends in the commercial business remain relatively weak but could show improvement long-term as data revenues ramp.

Posted by Steve Birenberg at May 10, 2006 02:01 PM in NTLI