NDS Still Hopeful For U.S. Deal

When Interspace spoke to NDS (Nasdaq: NNDS) CEO Abe Peled in January, he was optimistic the conditional access (CA) vendor would be able to announce a deal with a U.S. cable operator before the end of June. Yet, despite a number of trials, the elusive breakthrough deal in the United States has not materialised for NDS. It could now be another six months before NDS closes the deal here.

NDS CFO Rick Medlock told Interspace in an exclusive interview, “I think we will be able to do a deal with a U.S. cable player within the next six months. We really want to see a significant win in this market in this calendar year.”

One of the main goals for NDS will be to make a greater impact in the U.S. market, both in terms of offering CA, as well as interactive solutions to channel providers. Medlock comments: “We certainly hope that in the next 12 months, we are able to announce another conditional access win in the U.S. market. We have been doing a number of trials with different operators and some of those are well advanced. We anticipate they will turn into real business and will further our success in the U.S. We are hopeful of winning interactive business in the U.S. as well. The U.S. should be good for a CA win next year, and more interactive business.”

It has been a busy few weeks for NDS. The company announced a stay in its litigation with DirecTV on Aug. 5, and its full-year results for the fiscal year 2003 on Aug. 4.

DirecTV Issues Close To Resolution

Medlock has hailed the company’s settlement with DirecTV as “a positive step.” DirecTV filed a lawsuit against NDS in September 2002 for “misappropriation of trade secrets, breach of contract, fraud and statutory violations relating to NDS’ provision of conditional access services to DirecTV.” In October, NDS countersued DirecTV and claimed it had “misappropriated NDS’ trade secrets and proprietary information, conspired to infringe NDS’ patents, colluded to create unfair competition and breached agreements and licenses restricting the use of NDS’ intellectual property.”

But, with News Corp, the majority shareholder of NDS, agreeing to acquire Hughes Electronics [NYSE: GMH], the parent company of DirecTV, the litigation between NDS and DirecTV was always likely to come to an end. The stay will be in force until News Corp gains regulatory approval for its acquisition of 34 per cent of Hughes Electronics. If the deal is approved, all litigation claims will be dismissed.

Medlock is delighted and said that it made little sense. He told Interspace: “The litigation had really changed round from DirecTV suing us, to us suing DirecTV. Previously, the courts had dismissed all but one of DirecTV’s claims against us, and obviously our claims against them for misuse of our technology were proceeding. So, to the extent we have agreed to stay this litigation, I think this comes from commercial pragmatism. I don’t think it makes sense to continue litigation against a customer, especially one that we hope to maintain as a customer in the future.”

Despite the stay in litigation, Medlock believes the company had a strong position with its case. “DirecTV has now acknowledged that their new card, the D1 card, actually contains NDS technology.”

But, Medlock admits that NDS’ relationship with DirecTV will need some work, having been strained over recent months. “On a pragmatic day-to-day level, clearly the fact we have been suing each other is not helpful to the relationship and I think some bridges will need to be rebuilt between DirecTV and NDS,” noted Medlock

If News Corp’s deal to acquire Hughes Electronics goes through, it seems likely that NDS will pick up a CA contract from DirecTV. On this issue, Medlock comments: “These are all decisions which I am sure will have a lot of scrutiny from the DirecTV management. At this point in time, there is nothing guaranteed, no contracts have been agreed. It will all start to happen if and when News Corp gets control. We think we have a good chance, but we have got to win it.”

Recent Contract Wins

NDS has had a very good start to 2003. It won key CA contracts with Viasat, the largest pay-TV operator in the Nordic region, Galaxy, a new pay-TV operator getting ready to launch services in Hong Kong, as well as platforms wins in China, India and Russia. Despite the slew of new contracts, it still suffered a fall in revenues. For the year ending June 2003, NDS had revenues of GBP237.2 million ($381.9 million). For the previous fiscal year, it had revenues of GBP240.8 million ($387.6 million). However, with tough market conditions, this is a pretty respectable performance on NDS’ part.

NDS also expects to have more success in Italy. The merger of Stream and Telepiu is now complete; the merged company, Sky Italia, has recently launched and NDS is working hard on the CA side of the new platform.

“There is obviously still a lot of work to do in terms of software integration to the existing Telepiu platform and replacing the existing conditional access systems, both MediaGuard and there is still some Irdeto CA. It is going to be a very big project for us over the next 12 months and our expectation is that there will be fairly significant smart card orders coming out of it as the platform migrates,” Medlock said.

–Mark Holmes

(Contact: Margot Field, NDS, e-mail: [email protected])