Good Quarter and Great Guidance From Central European Media Enterprises

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1Q07 results and 2007 guidance from Central European Media Enterprises (CETV) are very positive. My bullish interpretation was further reinforced following the conference call and a quick read of the 10-Q. I think the guidance was the primary reason the shares moved up $5 yesterday. I am not done with my spreadsheet yet but I expect my revised target to be $120 assuming 2007 guidance is met and 2008 is a 15-20% up year. The story is very much intact and substantial upside beyond $120 is very plausible in 2008 and 2009.
CETV reported revenue of $148 million and EBITDA of $40 million, representing growth of 22% in both cases. Results were really good in the Czech Republic, Slovakia, and Romania. Slovenia and the start-ups in Croatia and Ukraine were as expected. Ukraine has a significant but well explained shortfall.
Guidance was very strong across the board. The company is no longer providing country-by-country guidance for competitive reasons. The established markets of the Czech Republic, Romania, Ukraine, Slovenia, and Slovakia are being grouped together while Croatia and the Ukraine start-ups are being itemized. Aligning my spreadsheet similarly shows that the established markets are way ahead of street estimates and exceed my most aggressive estimates for revenue and EBITDA. Revenues in Croatia and the Ukraine start-ups are ahead of my estimates as is the EBITDA loss. Foreign currency assumptions are that 1Q07 ending levels are maintained for the rest of the year. The other major assumption is that despite 1Q weakness in Ukraine the country’s primary station will grow in line with forecasted 2007 TV ad market growth of 28-31%….

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Wrapping Up A Busy Week

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I covered eight media earnings calls this week in addition to closing the books on the month of April and getting fresh updates on Northlake’s Market Cap and Style models. Total words written, including this post, are 10,006. I really don’t have much more to say so here are a few tidbits from one very tired money manager:
• Time Warner Cable (TWC) would clearly pay more for Cablevision (CVC) than the Dolan’s latest offer that has been accepted by the Board. Unfortunately for CVC’s minority shareholders the Dolan’s aren’t willing to sell to TWC or anyone else. Knowing that a higher but unattainable is out there will a majority of the minority shareholders voted down the deal? The Clear Channel (CCU) saga suggests using the shareholder vote to extract added value can work. Then again, the Dolan’s already control CVC whereas private equity doesn’t own CCU. I’d be surprised if this deal isn’t approved but with downside limited I’d stay long CVC for a few more weeks to see how it plays out.
• Speaking of CCU, do you think private equity firms need to draw a line in the sand regarding shareholder vote blackmail? If CCU shareholders vote no and then private equity goes even higher, isn’t that setting a bad precedent? The outcome of the CVC is sort of similar.
• Finally, I’d like to point you to my CVC earnings call coverage. I went light on the earnings analysis since it has no relevance to CVC’s stock price. However, I laid out some insights on how CVC’s results impact the debate over cable stocks. It is worth a read if you care about cable.

CBS 1Q07 Earnings: I Am Still A Seller

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CBS (CBS) 1Q07 results were in line with estimates. EPS of 33 cents matched the consensus while revenues very slightly exceeded consensus. EBITDA fell a little short as margins at the TV segment were lower than expected despite better than expected revenue.
I think the quarter will have little near-term impact on CBS shares. The results provide something for the bulls and the bears. CBS remains in a position where operations are growing very slowly as the company supports the stock price with changes to the capital structure. The idea is to use capital structure to transition the company to a higher growth phase where digital initiatives are large enough and profitable enough to drive moderate growth.
Bulls think there is a lot of value that can be surfaced via capital structure changes because the sum of the parts is greater than the valuation presently accorded the company. Bears think that growth in financially dominant TV assets is at risk near-term due to ratings and long-term due to technology challenges. If growth is at risk, aggressively leveraging the balance sheet and creating fixed cash flow requirements via interest expense and higher quarterly dividends is not a good long-term strategy. I stand with the bears with my concerns being more short-term in nature as I fear a significant decline in profits at the CBS TV Network may be coming due to ratings issues especially on the Thursday night.
At the segment level, excluding the benefit of the Super Bowl and the timing of the NCAA basketball tournament, it appears that revenues would be down mid-single digits. EBITDA came in under expectations which supports this analysis. If accurate, it suggest that despite lots of talk from management about the Network, the ratings performance is beginning to take a toll. 2Q will be a good test. Comments surrounding the upfront and current scatter market conditions were very bullish suggesting management has confidence. On the other hand, Les Moonves indicated that CBS might be making some big changes to its primetime schedule. This suggests that the ratings might be of more concern to management than they admit….

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Cablevision 1Q07 Earnings: Going Private But Meaningful

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After listening to the Cablevision (CVC) conference call, my initial impression that the cable bears came away with more ammunition should have been a more balanced view. That said, the sentiment battle facing cable stocks is likely to remain difficult while the stocks do not reflect close to fair value in my opinion.
CVC reported revenue and EBITDA growth of 15.5% and 12.6% in its cable operations. Both figures were below estimates and EBITDA margins fell slightly. Management noted that the company did not take an across the board price increase this year and does not expect to later in the year. With programming expenses stepping up due to annual inflators and new costs for Fox Sports NY, margins were squeezed.
Penetration rates for CVC are very high. Over 80% of basic cable subscribers now take digital cable. High speed data is taken by 46% of homes passed and 67% of the basic cable subscribers. Even telephony, a newer product, is taken in 29% of homes passed and by 62% of current high speed data subscribers. Slowing growth is inevitable as penetration rates approach these levels, especially as competing products from Verizon (VZ) are deployed more widely.
Management did admit, as it had done on the 4Q06 call, that VZ’s FiOS rollout was impacting CVC….

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May 2007 Model Signals

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There were no changes to Northlake’s Market Cap and Style models for May. The Market Cap model continues to flash an extremely strong signal favoring large caps. The Style model continues to flash a weak signal in favor of value. As a reminder, these models are designed to predict relative performance and have minimal predictive ability for the stock market direction. The latest signals leave my exposure in the S&P 500 (SPY) and the Russell 1000 Value (IWD).
There was almost no movement in the factors underlying the two models this month. The only change was a shift to small cap from large in the NYSE Breadth factor reflecting steady, if unspectacular improvement in breadth during April’s market rally. Despite this change the overall model actually moved a touch deeper into large cap territory. The large cap signal has not been this strong since the end of 1995. Since the start of my data in the spring of 1979, there have been only about a dozen monthly readings more strongly in favor of large cap outperformance. The current reading will take several months to switch to a small or mid cap signal even if the underlying factors begin to move in favor of small caps. I think it is a good bet that the model won’t shirt again to small caps without a large move in either the stock market or the economy. It seems most likely those moves would be to the downside as the small caps are favored at extremes rather than in moderate or soft landing scenarios….

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Another Great Quarter For Rogers

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Rogers Communications (RG) reported another very strong quarter, continuing a string of positive news that has led to a double in the stock over the past year. EPS in US dollars looks like 23 cents vs. expectations for 18 cents. Revenues appear to be inline at $2 billion. I am hesitant about those numbers due to the fact the company reports in Canadian dollars.
Getting down to the segment level, it seems clear that the results are quite good. Wireless revenues were at the high end of expectations with dramatically higher margins than expected. Service revenue margin rose by 700 basis points well ahead of estimates that were looking for a still substantial 400 basis point expansion. Margin expansion likely emanates from a big jump in data revenue that led to much higher ARPU than expected. Minutes of use also grew rapidly and cost per gross add was stable. RG may have also benefited from a slight shortfall in net adds which came in at 86,000 vs. some analysts looking for 90,000 to 110,000. Fewer new customers typically helps EBITDA. Net adds were still up dramatically vs. a year ago indicating that growth in the Canadian wireless market continues. It is probable that RG focused on customer retention this quarter since wireless number portability just arrived in Canada. On the call, management said portability was not having any negative impact so far.
In Cable, RG performed very well with revenues rising 14.2% and EBITDA rising 14.9%. Subscriber additions were up vs. a year ago in all products. Telephony subs fell sequentially as RG focused on data and internet in the quarter. Management indicated that RG would refocus on telephony this quarter. Cable growth closely matched street expectations….

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Central European Media Enterprises 1Q07 Earnings Preview

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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….

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Time Warner 1Q07: Stock Looking As Good As It Has In Some Time

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Time Warner (TWC) reported slightly better than expected 1Q07 results highlighted by strong operating profits at AOL and Cable and better than expected performance against a tough comparison in Filmed Entertainment. The shares are reacting appropriately, up 2-3% so far. I think more upside remains with $23-24 being a legitimate target over the next few months.
Revenues of $11.2 billion matched consensus estimates while EBITDA of $3.1 billion was above consensus and equaled the highest estimates on the street. EPS of 22 cents were ahead o the 20 cent consensus. Guidance for revenue and EBTIDA was maintained but EPS guidance was bumped up by 5 cents attributable to lower interest expense, faster share buybacks and the better than expected operating profits.
The conference call Q&A was mostly focused on AOL. Many analysts, myself included, remain skeptical that the year-over-year gains in EBITDA and big increases in advertising revenue are sustainable. The outcome of this debate will be the greatest driver to TWX shares over the next year. In 1Q, AOL revenues fell by $500 million but EBITDA increased by $100 million or about 25%. Lower marketing and networks costs related to the dial-up business and 35% growth in the high margin advertising revenue is driving the EBITDA gains….

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Media Madness

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Time for some mid-week media madness:
• Everyone is talking Dow Jones (DJ) so I don’t believe there is a lot left to say. I think a deal will occur and that News Corp. will be the buyer but I don’t see upside of more than upper single digits in percentage terms (the stock is trading close to $58 as I type this) which is only enough for nimble traders.
• Comcast announced that it has a deal in place with Yahoo (YHOO) to provide display advertising at Comcast.net, a top ten website. The deal is expected to enhanced in a few weeks when YHOO takes over search on Comcast.net from Google (GOOG). I think the combined search and display EBITDA upside for Comcast from these deals is likely in the $50-100 million range annually. Comcast is looking at $12 billion in EBITDA this year so further monetizing Comcast.net is nice but not enough to boost the stock. I’m not complaining….

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Time Warner Cable: First Quarter As Public Company Shows Promise

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Time Warner Cable (TWC) reported good 1Q07 results. Investors will cheer the solid performance at the company’s legacy cable systems and signs of improvement at newly acquired Adelphia systems. The cable business is very healthy for all companies providing a solid foundation for growth at TWC. TWC has the added benefit of bringing its newly acquired systems up to industry standards which will drive above average gains in revenue, EBITDA, free cash flow, and subscriber growth. 1Q07 results indicate that progress at the acquired systems may be a little ahead of schedule and that is good news for TWC shares.
TWC reported revenues of $3.85 billion and EBITDA of $1.31 billion. Revenues were slightly below the consensus but EBTIDA was on target implying that margin performance was good. In fact, margins came in at 33.9% vs. my expectation for 33.5%. On the call management said that further margin progress would be evident in the seasonally weak second quarter (college students and snowbirds disconnect) and that results should accelerate in second half as previous guidance suggested. TWC’s EBITDA margins is running 300 basis points behind Comcast (CMCSA/CMCSK) providing ample and easily achievable upside over the next year or two…..

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