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Virgin Media Inc. reported solid financial results for the second quarter of 2012, beating the Zacks Consensus Estimates. In the previous quarter, average monthly churn rate was 1.4%, remaining same year over year. However, those who still opted for Virgin Media’s services have shown their preference for the company’s high-margin bundled services with super fast broadband offerings.

Another major growth area is the company’s next-generation TV services. At the end of the second quarter of 2012, Virgin Media installed TiVo Inc. (TIVO - Analyst Report) developed next-generation Internet-connected TV platform for approximately 938,800 customers, which is 25% of the company’s total installed TV base. This figure is expected to cross 1 million by the end of this month. In the second quarter, the company added net 261,700 Internet TV customers. Paying TV customer base grew by 37,800 in the last quarter. The company is gradually rolling out 100 Mbps broadband services.

Net income from continuing operations, in second-quarter 2012, was approximately $100.5 million or 34 cents per share compared with a net income of $161.3 million or 49 cents per share in the prior-year quarter. Quarterly earnings per share of 34 cents beat the Zacks Consensus Estimate by a penny. Second quarter total revenue of around $1,595 million was up 4.2% year over year, slightly above the Zacks Consensus Estimate of $1,591 million.

Quarterly cost of sales was $626.3 million, up 3.4% year over year. Selling, General, and Administrative expense was $328.7 million, up 3.8% year over year. Quarterly operating expense was $1,316.2 million, down 0.4% year over year. Quarterly operating income was $279 million, up 33.1% year over year.

During the first half of 2012, Virgin Media generated approximately $688.3 million of cash from operations, down 20.6% year over year. Free cash flow in the first half of 2012 was around $335.5 million, down 3.2% year over year.

At the end of the first half of 2012, Virgin Media had approximately $296.6 million of cash and cash equivalents compared with $472.4 million at the end of 2011. Total outstanding debt, at the end of the first-half 2012, was around $9,240.4 million compared with $9,206.6 million at the end of 2011. At the end of the first half of 2012, debt-to-capitalization ratio was 0.92 compared with 0.90 at the end of 2011.

Consumer Products

During the second quarter of 2012, Virgin Media lost 2,900 net new consumer products, which reduced its total consumer product base to 12,068,600. Net consumer product addition for Broadband segment was 4,000, resulting in total subscriber base of 4,152,600. Within the Broadband segment, over 1.3 million customers subscribed to either 30 Mbps or higher services. Currently, this figure constitutes 31% of total cable Broadband subscribers. More than 590,000 customers are using 50 Mbps tier or100 Mbps tier services. In the previous quarter, Virgin Media added a net 459,800 customers using superfast (30 Mbps or higher tier) broadband services.

Net consumer product deletion for Non-Cable segment was 23,000, resulting in total consumer product base of 365,300. Net consumer product addition for Mobile segment was 53,900 and total consumer product base of 1,641,900. The company’s bundled service offerings received increasing market traction. At the end of the previous quarter, triple-play and quad-play penetration climbed 64.6% and 15.4% respectively of the total customer’s base.

Subscriber Statistics

During the second quarter of 2012, Virgin Media lost a total of 14,700 Cable subscribers. Total Cable subscriber base as of June 30, 2012 was 4,812,100, up 0.6% year over year. Net subscriber deletion for the non-Cable segment was 14,400. Total non-Cable subscriber base as of June 30, 2012 was 218,600, down 18% year over year. Net subscriber addition in the Mobile segment was 53,900. Total Mobile subscriber base as of June 30, 2012 was 1,641,900, up 21.9% year over year.

Consumer Segment

Quarterly total revenue of the Consumer segment was approximately $1,337.3 million, up 3.2% year over year. Within the segment, Cable revenue was $1,097million, up 3.5% year over year. ARPU (average revenue per user) of Cable services increased 3.1% year over year to $75.84 in the reported quarter. Mobile revenue was around $211.9 million, up 2.9% year over year. ARPU of Mobile services surged 4.1% year over year to $23.1 in the reported quarter. Non-Cable revenue was $28.6 million, down 6.6% year over year.

Business Segment

Business segment revenue, in second-quarter 2012, was nearly $257.9 million, up 9.8% year over year. Within this segment, the high-margin Retail data revenue was $115.6 million, up 8.3% year over year. Retail voice revenue was $54.8 million, down 6.6% year over year. LAN solutions revenue was $13.2 million, remaining same year over year. Wholesale data revenue was $66.3 million, up 33% year over year. Wholesale voice revenue was $8.1 million, up 153% year over year.

Recommendation

We maintain our long-term Neutral recommendation on Virgin Media. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.

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