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November 02, 2007

Good News At CETV Keeps On Flowing

Given the proximity of Central European Media Enterprises (CETV) annual analyst meeting on October 19th to the third quarter earnings report, I figured there would not be much new news or stock reaction to the results. Ooops. As it turns out, CETV reported better than expected results with all six countries where its own TV properties contributing to the upside. The shares responded and traded up $9 following the pre-open earnings report on Thursday.

At its analyst meeting CETV provided detailed, country-by-country guidance for 2007. Given that we now have three quarters of results in the bank, it is quite easy to see the implied guidance for 4Q. And guess what? It looks quite conservative. Based on year-to-date trends, favorable currency exchange, and knowledge of advertising in Central and Eastern Europe, I think the implied fourth quarter guidance is particularly low in Romania and Slovakia and probably has upside in the Czech Republic.

Heading to the analyst meeting I expected guidance to go up, led by these three countries. Instead, management confirmed my estimates (which were above many analysts) and dramatically boosted guidance in Ukraine which had been cut earlier in the year due to weak ratings and uncertainty over the level of political spending. I now think my initial intuition was correct and we will see results at or above the high end of guidance when the company reports its full year results....

....This simple math is available to anyone with a spreadsheet or a sharp pencil so I suspect that it is what was beyond the stock's huge rise against an awful tape. The company may also be getting some benefit from user data on its early forays into the internet business where the company had 10 million unique visitors in October across the sites operated by its TV stations and networks. No revenue yet but on the call management said it was just starting to shift its focus from traffic generation to monetization. There is not a lot of upside in dollar terms. For example, internet advertising in Ukraine is just $10 million for the whole country this year. However, broadband penetration is just perking up in Central Europe and the playing field is still open to determine which sites will ultimately prove to be winners. I have nothing in my model for the internet initiative which will cost $10 million in 2007 but I like the strategy and this management team has almost never failed to deliver.

I am just firming up my 2008 estimates and taking a first look at 2009. If the company remains on track to hit the numbers, plenty of upside remains in the shares. That said, I did trim client positions slightly on Wednesday as part of my usual position size control discipline.

Posted by Steve Birenberg at November 2, 2007 01:24 PM in CETV