NDS Group Expands Away from U.S.

NDS Group Plc (NNDS) reported a solid second quarter of 2008, despite a currency headwind and beat our revenue and earnings estimates handily. Continued strength in conditional access, gaming and DVR technologies, as well as new deals in emerging markets helped drive revenues and growth. We have maintained our revenue estimates while lowering earnings outlook for 2008 and 2009 and expect the company to continue to expand in emerging markets while adding additional revenue streams in developed markets.

The results for the second quarter were much better than our estimates due to the new technology initiatives. We expect the company to continue to grow revenues in excess of 18% while growing earnings by more than 17% for 2008, as the company has now established a presence in several emerging markets and can now begin to leverage its presence in these markets to fuel growth through add-on service revenues.

Additionally, the continued add-on acquisitions help to improve its technology and could be leveraged into further revenue growth opportunities in the longer term. As the company continues to take advantage of the move towards connecting DVR boxes to broadband, we expect the shares to perform well.

NDS continues to focus on emerging markets and away from the U.S., where it is not readily known. This strategy has worked well for the company and bodes well for the future. The company is a leader in the smart card-based conditional access system.

We continue to rate shares of NNDS a Buy, and have fixed our price target at $62.50, based on the company selling between 22.5x to 25x our new 2008 EPADS estimate of $2.74 per share. We also applied a DCF [discounted cash flow] analysis to determine the average price of NNDS stock in 2008. We remain optimistic that the company will continue to execute and expand its footprint in the News Corp. (NWS - Snapshot Report) umbrella and continue to expand its presence.

Udayan Mukherjee contributed to this report.

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