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February 09, 2012

Virgin Media Back on Track

Virgin Media (VMED) had a tougher than expected 2011 as the crisis in Europe included the UK economy. In addition, competition picked up as all of the company’s cable, satellite, and telecom competitors responded aggressively to the macro weakness. This environment led VMED to increase capital spending amid discounting form some competitors while its own subscriber growth slowed. Investors worried this was the beginning of period of slower growth and profitless prosperity for VMED as the company would need greater capital and marketing investment merely to maintain the current business model.

I was patient with VMED even as the stock slid from the low $30s to the low $20s because the excellent management team realizes the company maintains a key competitive advantage: the best broadband network in the UK. Earlier in 2012, the company clarified its capital spending plans and the stock appeared to bottom. Coinciding with its earnings report yesterday, management provided a complete strategic update that further explained how the company would sustain growth in operational and financial measures. The plan is to invest in the network by upping broadband speeds and enhancing the cable TV experience with Tivo’s (TIVO) best in class user interface.

This is exactly what I have thought the company should do. It is following a similar approach to DirecTV DTV) by focusing on higher end customers. In addition, VMED is offering a clear upgrade path for its customers to entice them to buy more services and move to higher priced offerings. The focus on broadband is something that is beginning to occur in the US cable industry. Broadband internet is taking over from cable TV as the lead product. Investors do not appreciate this shift or cable’s clear leadership and competitive advantages in broadband.

VMED’s new strategy should produce better growth beginning this year while maintaining the high free cash flow generation that supports aggressive share buybacks. I think the stock can head back to the low to mid-$30s, especially if worries about Europe’s economy begin to recede.

Disclosure: VMED is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a long only registered investment advisor. VMED, DTV, and TIVO are net long positions in the Entermedia Funds. Steve is co-portfolio manager of Entermedia, a long/short equity hedge fund focused on media, communications, and related technologies. Steve also owns a stake in Entermedia’s investment management company and has personal monies invested in the
Funds.

Posted by Steve Birenberg at February 9, 2012 02:41 PM in VMED