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November 08, 2006

NTL Likely To Limp Along Awaiting Success of Virgin Rebranding

NTL Incorporated (NTLI) reported mixed 3Q results yesterday. I feel the details are worse than the optimistic tone management had used during several recent Wall Street appearances but I understand why the market did not seem concerned.

NTLI reported flat revenue growth and low single digit growth in EBITDA in its core consumer cable operations. Overall comparisons looked a little more favorable due to the inclusion of Virgin Mobile results this year. EBITDA growth was driven by the flwo through of merger synergies related to the acquisition of Telewest. These financial measures were pretty much in line with analyst estimates....

Subscriber growth trends were a little harder to interpret. Gross additions in TV, broadband, and telephone were good but net additions were negative as churn rose again. I do no believe this was expected by analysts. Management explained away the churn increase on several counts. First, by isolating subscribers lost to tighter credit policies and to moves outside of the company's service area, management claimed a much smaller sub loss due to churn to competitors. Second, separating the subscriber figures at NTL and Telewest showed that Telewest continue to perform well and NTLI is still lagging. Management spent a lot of time explaining how there was no reason that NTL shouldn't move toward Telewest in a further attempt to explain away the issue. Finally, NTL formally announced it was rebranding and changing its name to Virgin Media. This fresh start along with the ability to offer the quad play should help the company's reputation. The Virgin rebranding announcement also buys the company another quarter as it allows 4Q to be viewed as transitional ahead of the formal launch at the beginning of 2007.

One area of unquestionable good news was ARPU, which rose again this quarter. Rising ARPU suggest that the company's focus on high quality subs and upselling additional services is working. Price competition in the UK is intense so the ability to hold pricing suggests that a key element of the corporate strategy is working.

I thought the conference call went well. Management was confident and laid out very explicit answers to questions concerning improving operations and reducing churn. It is clear that the new management team, led by former Comcast executive Steve Burch knows what is doing and is pushing hard to exceed goals.

With the Virgin rebranding ahead, I think NTLU will get a pass form investors at least through 1Q07. The bar has been reset lower and expectations should be low. At some point in 1H07, investors will expect to see improved financial and subscriber performance. Pro forma revenue growth will need to pick up into the mid-single digits while cost savings targets continue to be met.

I have little doubt that cost savings will come through but I fear that the incredibly competitive UK market for all elements of the quad play will be too stiff a headwind even for this competent management. Private equity interest should support the shares in the mid-$20s during the transitional period and if management falls sort of its goals an offer as low as $30 stand a good likelihood success in mid-2007. This setup suggest limited upside and downside in NTLI shares over the next six months --- nothing that provides any interest to me form the long or short side.

Posted by Steve Birenberg at November 8, 2006 03:22 PM in NTLI