Thanks goes to Senjaye off of the Raging Bull LDIG board for uncovering this one:
MORNING MEETING NOTE
Liberty Digital, Inc. (LDIG-$3.99-NASDAQ) Current Rating: NT/ LT STRONG BUY
Industry: Entertainment
Risk Factors: Speculative
Statistical Info:
Shares Outstanding.: 240 M
Current Fair Value $17 Market Cap: 957M
12-Mo Fair Value: $23
Upside Potential 400% Avg. Daily Vol.: 200,000
LMGA;LDIG: Liberty Digital Announces First Quarter –
· Game Show Network expects to increase distribution to 38M homes by year-end.
· AT&T access agreement still needs ‘hardening’ – expected at LMGA split-off.
· EBITDA rose 33% to $4.4M from prior-year period – primarily due to DMX music growth.
· Opportunities may emerge in Europe when Liberty closes UCOMA, UPCOY transaction.
· Maintaining STRONG BUY rating and $23 12-month fair value.
Yesterday, Liberty Digital announced the results of its fiscal first quarter. Although we do not feel that the reported numbers are particularly meaningful, given that the company has not launched any interactive channels yet, we do recognize that they are important for the funding of investments in their primary business.
For the quarter, the company reported revenues of $27.7M, a 30% increase over the prior-year quarter revenues of $21.3M. EBITDA was reported to be $4.4M, compared to $.08M in the prior-year period. We expect that the combined DMX/AEI music operation, which recently received Justice Department approval and is expected to close this month, will contribute $33M in cash flow for the year.
We continue to believe that the opportunities for Liberty Digital, both domestically and abroad, continue to expand as cable operators continue to rollout their digital products. In Europe, United PanEurope Communications has said that it expects to aggressively rollout digital set top boxes and expects to have 250,000 additional units in the field by the end of the year (United is majority owned by UCOMA, which Liberty is close to finalizing its majority voting interest in).
A brief list of Liberty Media properties that we believe Liberty Digital may work with at some future time follows:
1) Liberty’s 25% interest in Telewest
2) United Pan-European Communications’ UPC media interactive subsidiary
3) The Klesch joint venture in which they own approximately 10M German cable subscribers
The company also indicated that interactivity data coming from Europe (mostly Britain) has only re-affirmed the company’s original mission and strategies. Gaming, both game shows and gambling, and shopping are real interactive businesses in Europe and point to what the company has been saying all along – interactivity works.
In the United States, it appears all the cable operators are committed to rolling out their digital product. Install rates among the largest MSOs range from 3,000-8,000 installations per week for an average penetration of around 12% of basic subscribers. As the digital product begins to scale, we believe cable operators will become more and more interested in discussing interactive opportunities with companies like Liberty Digital. (We have already seen this with products like Wink, Tivo, and Gemstar).
Although we are not sure when the Game Show Network will go “interactive” or when Discovery and LDIG will launch the Interactive Travel channel, in our opinion the coming months represent a building phase for the company. During this time, we expect new carriage announcements from GSN and DMX/AEI to create operation efficiencies, which will in turn create a stronger base from which LDIG can launch new initiatives.
We advise investors to take a look at this one before the company signs its first major carriage agreement and before the AT&T access agreement is finalized (prior to the Liberty Media Split-Off). In our opinion, cable operators are looking for products that add incremental revenue streams to their businesses and capitalize on the digital products that they have spent so much time and effort rolling out. Interactive channels, we believe, is that next stream. |
