Tuesday, March 30, 2004

Daiwa Eurotelcoblog No.4 Wednesday, 13th August, 2003: More variations on our themes (original email blast 9:31 AM, Wednesday, 13th August, 2003)

Got so carried away, I forgot a couple of other important points which were included in our checklist of sector issues to watch in 2003:

Forget cable at your peril

Predictably, the UK financial press has focused on the more sensational aspects of the NTL story, which runs something like "Barclay Knapp drives company into bankruptcy and pockets $2.1m - nice work if you can get it." The real story, in our view, is what NTL actually reported yesterday:

ARPU was up 4% YoY, 1% sequentially on an improving customer mix telephony subs have continued their rebound from Q4's inflection point broadband users grew by 15.6% sequentially triple play penetration is now around 18% versus 8% one year ago
SG&A control is good despite the 8% YoY growth in RGUs churn is down to a 1.08% monthly run-rate versus 1.43% in Q2 2002
capex (8% of sales) undershot previous guidance (and 75% of spending is geared to growth) operating cash flow was up 6.8% YoY.

This company obviously has some challenges ahead, but it appears to be ahead of its own targets (or at least the ones we know about) and would seem to have some headroom to accelerate spending on capturing growth, which we think will focus on the broadband market. We think much of the market continues to downplay the potential threat from cable in Europe, ignoring the strong progress made to date by the likes of Telewest, NTL and UPC (Distribution EBITDA was up 56% YoY in Q1, with 641,000 broadband subs in Western Europe) and may be in for some nasty surprises over the next year. This is an issue we'll be looking at closely when Swisscom reports next week.

Wi-Fi offers more for the retailer than the carrier, and may open up greater scope for voice arbitrage opportunities

Over the past months we've spent a lot of time tracking the free Wi-Fi space, and have postulated that free Wi-Fi ubiquity may offer savvy users a wide range of opportunities to sidestep PSTN and mobile networks for voice services. This short leader piece from the new edition of Wired (http://www.wired.com/wired/archive/11.09/start.html?pg=4) gives a succinct and amusing summary of where the Wi-Fi market is and where it is heading, which would appear to be in the direction we suggested earlier this year.

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