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August 03, 2006

Central European Media Enterprises: Good News From Czech Republic

Central European Media Enterprises (CETV) reported solid 2Q06 results, comfortably matching my expectations. As usual, the composition of results was a little different than what I expected but the bottom line is that the quarter affirms my enthusiasm for CETV, especially relative to current expectations for 2007.

CETV shares are quite weak despite what I see as good results. I found one Reuters story quoting a Czech-based analyst which said that results “lagged forecasts.” I disagree. Additionally, on the call, CEO Michael Garin took the unusual step of calling out a negative report from DB Securities that came out before the call. Garin noted that the report had factual errors regarding 2Q06 guidance for the Czech Republic. I have not seen the report but based on what Garin said, I would have to agree. I think that these two factors are coloring the initial reaction to CETV’s results. I strongly believe the downdraft is wrong and will be reversed in coming days and weeks....

Overall, CETV reported segments revenues of $157 million and segment EBITDA of $63 million. I had been expecting revenues of $141 million and EBITDA of $58 million. I am aware of one other analyst who was higher but the Reuters story quoted an EBITDA consensus of $63 million, so I don’t really see any miss.

Looking deeper, the results in the Czech Republic were much better than expected, revenues at the four core stations were in line, and margins at the four core were a little light. As far as CETV’s share price performance over the next year is concerned, I think the good news in the Czech Republic far outweighs any possible shortfall in margins at the core four.

In the Czech Republic, CETV is repositioning TV Nova. The strategy caused a near-term hit to revenues and EBITDA but management provided detailed guidance for 2H06, 2007, and 2008 which showed major growth off the lower base. Meeting this guidance was the primary risk to the CETV story, so the fact that 2Q saw revenues and EBITDA of $56 million and $28 million vs. guidance of $42 million and $21 million is extremely comforting. Management chose not to raise guidance for 2006 in the Czech Republic pending a look at the seasonally large 4Q, but I am quite confident numbers will go up at Nova. Nova accounts for about 40% of CETV so any positive news here is significant.

The core four of Slovenia, Slovakia, Romania, and Ukraine met revenue expectations with growth of 22%. Margins contracted slightly in all four countries, however, so EBITDA grew 16% vs. my expectation of 21%. 1Q results in these markets were unusually strong so 1H results remain on track toward meeting full year guidance which was affirmed on the call. Management again reminded investors that quarterly results are quite volatile due to the timing and success of programming and cost initiatives. There have been many instances in the five years I have owned this stock when individual quarters in individual countries were unusually weak or strong . Extrapolating any individual quarter is a mistake.

There was some bad news in Croatia which is less than 5% of revenues. This start-up will see its EBITDA breakeven pushed out until 2009 from prior guidance of 2008. Ratings have been good but translating ratings to revenues is proving more difficult than expected.

Lastly, CETV announced that COO Robey Burke is retiring. There is nothing sinister here. Robey is an excellent person and can be trusted when he says being a London-based COO for a company with operations scattered throughout Central and Eastern Europe requires more travel than he desires at this stage is his life. Robey had informed the company of his plans early in 2006 and in hindsight many of the management changes and promotions announced since then now make total sense.

I stand by all my expectations for CETV’s financial performance and stock price following the 2Q results and have increased confidence in corporate targets for 2007 given the turnaround in the Czech Republic is proceeding so well.

Posted by Steve Birenberg at August 3, 2006 12:05 PM in CETV