Virgin Media Inc. (VMED), the UK ‘s leading entertainment and communications company, has entered into a strategic agreement with TiVo Inc. (TIVO) under which the latter will develop next-generation TV platform for Virgin Media that will support broadband video services and applications. However, financial term of this deal has not been declared so far.

Virgin Media is systematically upgrading its content delivery network to support large-scale IP traffic. For that the company is desperately trying to introduce hybrid transport gateways that can manage RF and IP-based video content. TiVo will develop a converged television and broadband interactive interface for Virgin Media’s upcoming next generation high definition set top boxes. Virgin Media will introduce the new set top boxes in mid-2010.

Under the mutually exclusive agreement, TiVo will become the exclusive provider of middleware and user interface software for Virgin Media’s next generation set top boxes. On the other side, Virgin Media will become the exclusive distributor of TiVo services and technology in the U.K.

In our view, Virgin Media is in the early stages of a turnaround, poised to generate strong free cash flow and improved EPS in fiscal 2010.  A new management team is re-branding the product, formerly notorious for poor customer service, and rolling out digital services to expand ARPU, reduce churn and slow its market share drain from the onslaught of new entrants into the company’s markets.

Recent financial results reflected the nascent turnaround of Virgin Media, with growth in net subscribers and revenue generating users. The company had 37,000 net new additions to its television service, and 39,000 net new additions to its broadband offering.  It added a net 8,100 cable customers.  We believe collaboration with TiVo will enable Virgin Media to offer next-generation high-speed TV and broadband services in the U.K.

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