Virgin Media, Inc. (VMED) is in the early stages of a turnaround, poised to generate strong free cash flow growth and improved EPS in 2009. A new management team is re-branding the services and rolling out digital services to stabilize average revenue per user (ARPU), reduce churn and slow its market share drain from the onslaught of new entrants into VMED's markets.
The company remained focused on leading in next generation broadband and redefining the TV experience through video on demand (VOD). On the cost side, we expect lower interest expense, capital expenditures and income taxes to increase free cash flow beginning this year. The stock is currently trading at a steep discount to chief competitor BSkyB and its other cable peers, a discount that we think will narrow as profitability improves, or as management gets closer to selling the company.
First quarter 2008 results reflected the nascent turnaround, with growth in net subscribers and revenue-generating users. The company added 4,900 net subscribers in 1Q08 compared to 46,900 net disconnections in 1Q07.
In order to compete with rival BSkyB on broadband is launching superfast broadband speeds to woo customers. In broadband, the company is better placed to compete as it already offers speeds of up to 20 megabits per second to some customers, and has successfully trialed 50 megabits with a view to offer content such as high definition programming on demand. BSkyB currently offers broadband speeds of up to 16 megabits. The company intends to increase broadband speed in 2008.
The UK telecom market is extremely competitive with low barriers to entry. The management indicates competition from BSkyB and Carphone Warehouse is very strong. Virgin's cable subscriber growth is set to remain weak.
Sumit Singh contributed to the report.
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