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June 23, 2006

Conference Call With NTL CEO

On Monday morning, UBS Cable Analyst Aryeh Bourkoff hosted a conference call with Stephen Burch, CEO of NTL Incorporated (NTLI). I thought the call went well although the stock went down on Monday and Tuesday. I continue to hold all of Northlake's long positions in NTLI and feel the stock offers incredible value at current levels.

There were several highlights on the call....

First, Burch remained quite positive on the progress of realizing synergies from the Telewest merger. He stated that "progress was even better than I hoped" and that the company would be able "to continue to move the time frame up" on cost savings. Second, beyond the cost savings, a key point of the merger was to use Telewest best practices to bring NTL's customer service up to par. NTL has a bad reputation in the UK and better customer service could help reduce churn and make it easier to win new subscribers. Burch said that his goals on answering customer calls, average hold time, completion rates on installs, and on-time installs would all be met "well before the end of the year." Putting Burch's commentary on these subjects into the larger picture tells me that the EBITDA and free cash flow growth that is cost driven is largely in the bag.

So what's troubling NTLI shares? Fears of competition in the UK. The majority of questions on the call concerned the competitive environment. Burch responded well but I would classify the questioning as skeptical as far as meeting NTLI's goals for slightly higher basic subscribers, much higher revenue generating units (RGUs), and especially stable to higher average revenue per user (ARPU).

Despite the repeated and skeptical questioning, Burch was very firm in the company's ability to compete and meet its goals. Of particular concern recently has been "free" broadband offerings from Carphone Warehouse and Orange. Carphone has already announced large subscriber gains from the promotions. Burch commented that the offers have had "no significant impact at this point." He said the offerings did not catch management by surprise and that the company had responded with a variety of offerings using TV as its key competitive weapon. He also said that as soon the Virgin Mobile acquisition closes on July 4th, the company would be ready with new bundles using the quadruple play. Burch kept making the point that in the past, NTLI was a reactive company, never taking the lead in the marketplace and often getting caught off guard. He said he is changing the culture and that in the future missteps in subscriber and financial results would no longer occur because the company was too slow.

Finally, there were many questions about potential private equity interest in NTLI. There were widespread reports at the end of 2005 that private equity groups had approached NTLI and some reports were specific about deal pricing in the low to mid-$30s. Burch attempted to dampen speculation but did admit that some contact had been made between private equity and Chairman Jim Mooney. He said that he and Mooney have agreed that Burch should run the company and any private equity discussion would be kept at the Board level. Burch did say he was a proponent of a private equity deal, although I think he meant he was indifferent as to how he and his management team would be rewarded when they met their financial and subscriber goals. I think his cautious comments toward private equity interest might have been responsible for the weak action in NTLI shares since the call.

The questions on the call underscored the debate over NTLI. On the one hand, private equity clearly realizes the value in NTLI's free cash flow generating ability over the next few years. On the other hand, many investors clearly don’t believe that NTLI will be able to meet its subscriber and financial goals. I think the current stock price already assumes that the company will miss its targets. Current estimates call for NTLI to have free cash flow of between $2.50 and $3.00 per share in 2007. That puts the free cash yield between 11-13%. I find that very cheap and over discounting the risks. I think private equity interest provides downside support and I am willing to show patience by holding or adding to current positions.

Posted by Steve Birenberg at June 23, 2006 09:04 AM in NTLI