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July 28, 2011

Mixed Results for Virgin Media

Virgin Media (VMED) reported mixed 2Q11 results. Financial performance matched expectations as revenue rose 2.2% and EBITDA gained 6.1%. The disappointment was on the subscriber side as overall subscribers fell slightly. Losses were seen in video, phone, and high speed data. Gross additions were not too bad but churn picked up. VMED's leading broadband and video platform is constantly improving the customer mix and driving subs to spend more money on services, driving revenue per subscriber higher so that modest growth is achieved even when subscribers are flat to slightly lower.

The big question for VMED is whether the poor subscriber performance is merely a function of the weak UK economy amid strict government austerity. If so, the story has not really changed and VMED's superior competitive positioning will reignite sub growth and sustain long-term financial performance once the economy improves (4Q11 or 1H12). Management is showing great confidence in the company by announcing a much larger and sooner than expected new share buyback program. The share buyback is quite accretive on a per share basis as 12% of the current shares outstanding will be retired in the next 18 months.

I suspect that 3Q11 results will look quite similar to 2Q. Wall Street worries a lot about subscriber numbers for cable companies so I expect the stock to be sluggish for another few months. However, the aggressive share repurchase should support the shares and limit downside.

I have great confidence in VMED's management team. Upgrades to the network and software interfaces give VMED the fastest and most reliable internet offering and the leading next generation cable TV product. Unfortunately, right now, those competitive advantages are only enough to hold the ship steady in stormy economic waters. Calmer seas lie ahead so holding the shares is the best option. Mid-$20s represents an excellent point for those who are not long VMED.

Disclosure: Virgin Media is a net long position in the Entermedia Funds. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the Funds' investment management company, and has personal monies invested in the Funds. Virgin Media is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.

Posted by Steve Birenberg at July 28, 2011 01:16 PM in VMED