In a new and close partnership with the giants of the cable television industry, Chicago’s NextLevel Systems Inc. said Wednesday it entered a long-term contract worth at least $4.5 billion to supply about 15 million advanced digital set-top boxes to nine cable companies over the next three to five years.
In addition, the company, which plans to move to Horsham, Pa., early next year, said that it is changing its name back to General Instrument Corp. and naming Edward D. Breen, now president and acting chief executive, its chairman and chief executive officer. It also restated its earnings expectations for 1998 and indicated it is likely to spin off its telephony unit.
“For NextLevel, this deal really impacts their top line and their bottom line,” said Theodore Henderson, a cable-industry analyst with Janco Partners Inc. in Denver. “At $300 a box, this is $4.5 billion in revenue for a company that has traditionally generated revenue of about $1.7 billion a year. I think it bodes well for their earnings and their stock price.”
NextLevel stock was up $2.87 to $17.87 Wednesday in New York Stock Exchange trading.
As part of the contract, the nine cable providers will receive warrants to purchase about 16 percent of NextLevel’s equity at a price of about $15 a share, the company said. These warrants will vest only as set-top orders are actually shipped in 1998 through 2000.
NextLevel said it will also acquire the digital transport and authorization functions of TCI-Communications Inc.’s Head End in the Sky, a digital programming satellite that provides digital television to other cable operators, in exchange for 10 percent of NextLevel equity.
Time Warner Chairman Gerald Levin called the announcement “a continuing indication that the computer industry recognizes that its future is in the network itself and not just in the box.”
“What this all means is that it’s just another statement of the pursuit by the cable industry of expanded digital services and setting a volume order that indicates how substantial this is going to be,” said Levin, who was in Chicago to speak to the Executives’ Club of Chicago.
“The most important thing is that everybody is following the same architectural standards so that these boxes, regardless of the company or the geography, can communicate with one another,” Levin said.
Henderson, the analyst, said the deal means cable providers can finally start to deliver on the promise of next-generation digital boxes, which can provide Internet access, e-mail and a broad range of voice and data services.
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“All of these products that have been overpromised and undelivered will finally be coming out,” he said.
The deal could hardly come at a better time for NextLevel. The company’s stock hit a 52-week low of $12.62 on Sept. 10 after the company said it would fail to meet revenue and profit expectations through next year and its chairman and chief executive officer, Richard S. Friedland, abruptly resigned.
As a result of its ongoing restructuring plan, NextLevel said it expects to record after-tax charges of $65 million to $100 million, or 42 to 64 cents a share, in the fourth quarter of 1997 and the first quarter of 1998.
The company said it now expects to report 1998 profits of 65 to 75 cents per share, excluding after-tax losses in its Next Level Communications telephony unit. NextLevel projects the unit to report losses of $23 million to $28 million, or 15 to 18 cents a share, in 1998. The unit is expected to record an after-tax loss of more than $30 million, or 20 cents a share, in 1997, NextLevel said.
Wall Street was expecting NextLevel to report fourth-quarter earnings of 10 cents a share, full-year profits for 1997 of 44 cents a share, first-quarter results of 8 cents a share and full-year earnings for 1998 of 49 cents a share, according to a survey of analysts by First Call.
NextLevel said its cost-cutting measures will improve annual earnings, beginning in 1998, by 5 to 7 cents a share.
Last week, the company said it would close its principal satellite-dish plant in Puerto Rico, eliminating 1,100 jobs. And last month, it fired about 225 employees at its San Diego-based Satellite Data Networks. It also announced it would consolidate operations at its cable TV facility in a Philadelphia suburb.
In efforts to improve profits, NextLevel said it continues to explore the possibility of spinning off its telephony unit. The company said the unit “has created significant value that has not been recognized in the company’s stock price.” An “eventual spinoff” as a public company may be the best way to grow this business and increase shareholder value, the company said.
As for changing its name back to General Instrument after only a few months as NextLevel, analysts said the move was designed to return to the name NextLevel’s cable customers have long recognized. But there could be another reason. “It might be one of those things where they said, `Ever since we changed our name to NextLevel, our stock has” gone south, Henderson said. “But it also seems to me that nobody knows who the hell NextLevel is.”