I’d classify the 2Q06 earnings and conference call from NTL Incorporated as mixed. Mixed is not quite good enough for the short-term as that means there some issues. For NTLI shares to jump over the low expectations built into the stock, a clean quarter is required. I don’t think we will get that until 4Q06 and 1Q07 but management did a good job of explaining its strategy and setting expectations for 3Q so I think the shares will hold in their current range. I plan to hold my position.
Financial results were quite close to expectations with pro forma revenue of EBITDA of £884 million and £293 million. Revenues were about £10 million light as lower than expected customer counts were offset by higher than expected ARPU. EBITDA was also a little light but was within the lower end of the range of estimates. Any EBITDA shortfall was in the content and business segments which are much less important than the consumer/cable segment which accounts for over 75% of the company’s revenue.
The real problem which prevents me from classifying the quarter as “good enough” is lower subscriber counts than expected. NTLI lost 19,000 customers against expectations for a gain in 5,000 range. Management repeatedly called the loss “mechanical” referring to an internal plan to focus on more profitable, triple play subscribers. An unexpectedly large increase in ARPU appears to support management’s contention but given the intense competitive environment in the UK, investors are unlikely to believe management’s confident long-term projections until subscriber counts stabilize and grow…..

Underlying subscriber metrics were mixed. Digital and analog TV figures were better than expected while broadband gains were significant but below expectations. Telephony, the weakest area in recent quarters, again lost a small number of customers.
Positives in the quarter included ARPU of £42.21 vs. expectations for £41.50 to £41.85, better than expected RGU’s per customer, and higher than expected triple play penetration. Each of these measures supports management’s strategy and projections, but to reiterate, investors require stable customer adds in order to have confidence in the long-term free cash flow generating ability of NTLI.
And free cash flow ultimately is the story here. In a slide used on the call, management outlined that current run rate free cash flow is £224 million or over $400 million. This is before any of the £200 million ($360 million) in operating synergies are realized. Those should be fully in place for 2008. Given this free cash flow profile, one analyst asked about the interest of private equity. Management was very clear that they are open and receptive to any approach that would enhance shareholder value. I found this statement to be clearer than prior comments.
The bottom line is that despite a low bar, NTLI wasn’t quite able to get over the hump this quarter due to worse than expected subscriber counts. These trends aren’t likely to reverse in 3Q so I don’t expect a quick rebound in NTLI shares. However, management did its best job ever on the call of explaining in great detail exactly what it was doing to meet its financial and subscriber goals and was able to show initial progress in bringing NTL up to Telewest standards. As long as this progress is consistent, eventually the free cash flow story will find investors. I remain impatient and a little worried but long.