NDS Group F2Q07 Earnings Preview

Excerpts from analyst Todd Mitchell's preview of NDS Group's 2Q07 earnings report to be released tomorrow at 3:00 a.m. EST (For a full length pdf version of this report, click here.):

NDS reports fiscal 2Q07 results Tuesday January 30 before the open. Results are released at 3:00 a.m. EST and are broadly disseminated by the open of the U.S. market. Management will host a conference call at 8:00 a.m. EST to discuss results. Those wishing to participate may call 866-832-0717.

We look for revenue of $168 million, EBITDA of $40 million and EPS of $0.55. We are at the high end of estimates. Excluding ours, consensus is for revenue of $165 million, EBITDA of $38 million and EPS of $0.53. DVR licensing contributions could to be lower than we forecast, but NDS should benefit from the slide in the U.S. dollar.

HD and DVR growth is accelerating growth rate of CA business. We expect conditional access revenue to increase 10% from fiscal 2Q06. The biggest driver this quarter is HD and DVR upgrades, in particular DirecTV. We believe the upgrade cycle has added 200 basis points to 300 basis points of growth to NDS's core conditional access business.

Delay in DirecTV's HD DVR puts some risk in New Technologies forecast. NDS' technology is still not being used by DirecTV to run its HD DVR. Delays at this high volume customer put some risk in our forecast for a 32% increase in New Technology revenue, although it will probably be offset by growth from other applications.

Management is likely to highlight Jungo acquisition. The $107.5 million transaction was the big event of the quarter and can be seen as a play on DBS and telco bundling. NDS believes telcos will seek to provision a host of new services through residential gateways. In the future, a hybrid DBS/IPTV service could be united at this point.

Analyst day is likely to highlight new technologies for CE market. NDS will host a analyst day on Wednesday at News Corp's HQ. We expect NDS to emphasize new VideoGuard technology for CE devices, including mobile video services on both cell and wimax networks. This is the year some of this technology becomes a commercial reality.

Stock is likely to continue to perform well in front of analyst day. NNDS has underperformed recently due to concerns about execution issues with DirecTV and how Liberty Media's control might change the competitive dynamic for NDS, in our opinion. We feel that NDS had a strong showing at CES and we expect shares to trade up in front of its analyst day.

Demand for NDS technology is being driven by upgrade cycle. NNDS is one of the leading technology providers for multichannel TV operators. We believe NDS's end markets are entering a period of high cyclical demand, due to the launch of new broadcast digital service, a shift to HD format and proliferation of new STB with DVRs.

We reiterate our BUY rating and $57 price target for shares of NNDS. We value NNDS at $57 based on a DCF analysis. Our analysis employs a terminal multiple of 22.5x 2009 FCF discounted to present at 12.5%. At our price target of $57, shares of NNDS would trade at just 12.8x 2007E EBITDA and a P/E of 23.3x. We consider NNDS moderately risky.

NNDS 1-yr chart: