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May 02, 2007

Central European Media Enterprises 1Q07 Earnings Preview

I am having a hard time getting a read on expectations for 1Q07 earnings from Central European Media Enterprises (CETV). I expect very strong results driven by the Czech Republic and Slovakia but I don’t have much in the way of analyst reports to get a sense of where street expectations lie. Isn’t it amazing that a stock with a $3.7 market cap that has almost triple since the beginning of 2005 and will produce over $700 million in revenue this year has virtually no coverage? Actually that is one of my favorite things about CETV. It is a lot easier to make money when you are early.

For the record, Yahoo Finance shows one analyst estimate of 5 cents on revenues of $141 million. My spreadsheet calls for revenues of $159 million and EBITDA of $53 million representing growth of 31% and 63%, respectively. Management has not provided guidance so I built my estimate based on my own view of growth and margins by country along with a view to how much the seasonally 1Q has contributed on a country-by-country basis in the past. In other words, my expectations are high but could be way off.

The 1Q call is when CETV historically provides full year guidance. The company has previously provided guidance in the Czech Republic for 2007 and 2008. Based on the sharp jump in 4Q results, very good ratings, and positive management commentary I think that 2007 guidance could jump sharply. Along with continued strong growth in Romania, renewed growth in Slovakia and Slovenia, and lessening losses in Croatia, the stage is set for a good year. Political turmoil in Ukraine and a slight dip in ratings in Romania are the mostly likely areas to provide caution to the guidance. I think guidance will be favorable. My spreadsheet calls for revenues of over $700 million and EBITDA nearing $300 million, representing growth of approximately 20% and 40%, respectively....

Driving growth in 1Q and 2007 will be the Czech Republic where the new strategy at TV Nova is fully implemented. CETV purposefully reset the bar in 1Q06 so that it could use its role as industry leader to establish a modern TV advertising sales market in the Czech Republic. The combination of strong ratings, higher CPMs, higher inventory sellout and stringent expense control, and an easy comparison could lead to revenue and EBITDA growth of 45% and 100%, respectively. I might be too aggressive but I am certain that the growth rates will be very large.

Slovakia is piggybacking on the changes in the Czech Republic and benefiting from CETV having full management control. In 1Q07, growth of over 25% in revenues and a $3 million swing from an EBITDA loss to profits is possible.

Romania should continue to be one of CETV's highest growth markets. I expect some moderation in growth in 1Q from recent gains in the 40-50% range. Ratings are still quite high but have softened a bit but with the overall ad market booming, CETV should still generate revenue and EBITDA growth in Romania of at least 25%.

Slovenia showed signs of life in 4Q06 after new regulations slowed growth for most of the year. I expect another good quarter with revenues and EBITDA growing 15-20%.

Ukraine may show some weakness due to the political turmoil that has engulfed the country. GDP growth remained very healthy so far this year and local economists do not seem too fearful of a slowdown in consumption. Instead, a lull in foreign direct investment is forecast. It is possible that 1Q was fine and 2Q will reveal slower growth. To be conservative, I am assuming that revenue growth in 1Q slowed from the recent range of 30% to just 15%. This would lead to negative operating leverage that could cause EBITDA to drop moderately from a year ago. I could be way off in this forecast or maybe early.

Croatia also showed signs of life in 4Q06 for the first time since the company entered the market a couple of years ago. I am hopeful that 1Q revenue growth will be over 30% following the 60% gain n 4Q. If so, a several million dollar reduction in the EBITDA loss should occur.

Posted by Steve Birenberg at May 2, 2007 01:30 PM in CETV