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November 10, 2006

Good Quarter For CETV But Someone is Unhappy

Despite the extremely negative stock price action, I found Central European Media Enterprises (CETV) Q06 earnings report to be quite good. Good enough, in fact, to use the weakness to add CETV to some brand new accounts. I have spoken with company, several street analysts, and one of the major shareholders and all agree that there is nothing in the earnings that would account for the decline in the stock. I think it is just a "sell the news" reaction to a stock that has risen by 40% since the July lows.

CETV reported revenue growth of 14% and segment EBITDA growth of 23%. EPS were 15 cents, well ahead of consensus but boosted by favorable foreign exchange and a one0time gain. EBITDA margins expanded by 300 basis points to 23%, ahead of my expectations and alleviating one of my few concerns about the CETV story....

Romania was once again the star for CETV with revenues rising 39% and EBITDA rising 50% as margins expanded sharply. Ratings in Romania ticked up in the third quarter and the company's multichannel strategy is allowing the CETV to gain share in a very rapidly growing advertising market.

Slovakia and Slovenia were all quite storng in the quarter and exceed my expectations. Slovakia had revenue growth of 19% with EBITDA almost doubling. New management at this station has been hinting that results had the potential to tick up sharply and it looks 3Q was the inflection point. Slovenia continues to be a steady performer with revenues and EBITDA each growing 19%. Easy comparisons against tax impacted weakness in 2005 and strict cost controls drove the quarter.

The critical Czech market looked good as well. As expected following the reset of ad sales strategy that led to sharply declining revenues in the first half, 3Q saw revenues flat vs. a year ago. Previously promised cost controls and lower programming expenses translated into a resumption of EBITDA growth, which rose 44% vs. a year ago. Management did not raise full year guidance but looking at the nine month results and huge ratings increases in the current TV season, the implied 4Q guidance looks conservative. Management also commented on 2007 in the Czech Republic after a series of tough questions from a single analyst. Previously provided guidance for 20% revenue growth and 40% EBITDA growth was affirmed. Given what I think will be a higher 2006 base, strong ratings, and evidence that cost controls are working, I think the 2007 guidance of $230 million in revenue and $135 million in EBITDA looks conservative.

Results in Ukraine fell short of my expectations and management's budget in 3Q. Management attributed the 18% revenue gain and unexpected $1 million EBITDA loss to advertiser hesitation as the formation of the new government dragged on through the summer. The new government was formed in September and management that there has been a "strong bounce back" and improved CPMs since that event. Despite the weaker than expected 3Q, Ukraine's 9 month results still show 39% revenue growth and 64% EBITDA growth. I expect Ukraine to return to 25-35% revenue growth with margin expansion independent of the continuing investment in startup networks. Given the 50 million population and similarities to Romania, I am pleased that management is continuing to invest in Ukraine. A separate positive in Ukraine is that the company's local partner won a round in a court dispute over establishing his legal standing as co-owner of the station. CETV is not a party to this dispute but would just assume continue working with its current partner. The dispute has no impact on CETV's ownership or license.

The only other negative I see in the quarter that could account for the decline in the stock is the company's announcement that if found some minor problems with stock options that were granted from 1994 to 1998. The company restated its 2005 financials but the impacts was just a $126,000 increase in operating expenses. I don’t see this as material. Furthermore, given my long experience with this company I have no reason to believe that there is anything worse coming given the reassurances provided by management in the press release and on the call.

I remain very bullish on CETV and think that 4Q06 implied guidance and 2007 analyst estimates are too low. If I am correct, I think CETV shares will trade to $90-100 by mid-2007. CETV remains my largest non-ETF position in my client and personal accounts.

Posted by Steve Birenberg at November 10, 2006 10:05 AM in CETV