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February 25, 2010

Virgin Media: Corner Turned, Upside Ahead

Virgin Media reported its best quarter in several years. Mid to upper single digit revenue and EBITDA growth comfortably exceeded estimates and translated to a big beat in free cash flow. Subscriber additions were also good across the board with positive surprises for high speed internet and wireless and wireline telephone. TV subscribers were in line with estimates.

After several years of stumbling about and struggling with the integration of acquisitions, the relatively new, current management team of VMED is finally taking advantage of the company's premier broadband network. Along with today's announcement of financial results, VMED showed again the power of its network with an announcement that beginning in late 2010 it would be offering 100MB internet service.

Three issues have plagued VMED shares over the past few years. All of them are now receding, setting the shares up for a move into the low $20s.

The balance sheet was massively overleveraged with many maturities in the next few years. Through free cash flow and debt refinancing, leverage ratios are now manageable. More importantly, VMED replaced about 2 billion pounds of debt maturing in 2010 thru 2012 with new issues maturing in 2018 and 2019.

VMED was in a weak competitive position in TV competing against Sky on the high end and Freeview on the low end. Freeview remains a difficult challenge but upgraded technology – again a benefit of the network – and an improved regulatory environment have stabilized the business.

With TV no longer a drag, the company has been able to firm up average monthly revenue from its subscribers and exploit its leadership in broadband. As a result, total revenue and EBITDA growth are rising and are now at levels exceeding those of the largest US and European cable operators.

For the next couple of years, the improved financial and operational performance looks locked in. The balance sheet should continue to improve as free cashf low goes toward debt reduction. Eventually a significant dividend should emerge and a major share repurchase.

The risk of promotional and irrational competitive pricing remains but for the time being, as was the case recently, dips in the stock related to competitive fears should be seen as buying opportunities.

Disclosure: Virgin Media is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. Virgin Media is a long position in the Entermedia Funds. Steve Birenberg is co-manager of the Funds, has an ownership stake in the Funds investment manager, and has personal assets invested in the Funds.

Posted by Steve Birenberg at February 25, 2010 03:01 PM in VMED