This article has been adapted from our sister site across the pond, Fool UK.
Releasing first-half results on Wednesday, Virgin Media (Nasdaq: VMED) told us it enjoyed its best quarter since it was formed in 2006, when it took over the operations of the U.K.'s only major cable TV operators, NTL and Telewest.
And on the same day, the company outlined its plan to return 700 million pounds to shareholders and lenders, after expressing strengthened confidence about its long-term cash flow.
In the traditionally quiet second quarter, when subscriber numbers were expected to fall, Virgin actually added 9,100 new customers, which is rather better than the net loss of 27,800 customers in the same quarter last year.
Revenue for the quarter grew by 7%, to 964 million pounds, leading to a much-improved free cash flow of 109 million pounds, a 37% boost. In fact, the three months to June made this Virgin's third successive quarter of double-digit percentage growth in operating cash flow.
Television and broadband
The improvement is mainly down to increasing demand for Virgin's high-definition TV services. That World Cup thing must have helped, along with Virgin's plans to start broadcasting Sky Sports 1 and 2 in HD, and so become the only company other than British Sky Broadcasting itself to do so.
Overall takeup of TV services continues to grow, with 25,900 more signing up for services during the quarter, bringing the total to 3.7 million – more than half of whom use Virgin's video-on-demand service.
High-speed Internet services also seem to have been a winner, with 650,000 out of its 4.2 million broadband customers now signed up for Virgin's 20mpbs and 50mbps services. That's 43% more than last year.
Cash back
As Virgin's cash flow and capital structure improves, the company plans to pay down some of its debts, with a target of getting net debt down to three times its operating cash flow within the next three years.
With spare cash, paying down debt seems sensible. But the plan to return cash to shareholders though an accelerated share buyback program may raise some consternation, as the value of such an exercise is frequently disputed.
Many would think a better way to give shareholders some cash would be to, er, just give them some cash -- in the form of a special dividend. Or perhaps pay down more debt before even thinking of it -- after all, covering the costs of its debt and refinancing did leave Virgin with a pre-tax loss for the half, amounting to 67 pence per share.
Still, the market seemed happy with the news, pushing the shares up 2.8% at the time of writing.
Analysts reckon Virgin Media will lose 150 million pounds before tax this year, making its 4.1 billion-pounds valuation look quite pricey. But they also expect it to turn profitable in 2011, with nearly 400 million pounds of pre-tax profits penciled in for 2012, primarily because of a big increase in its operating margins. If that can achieved, then the shares look more reasonably priced.
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