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Virgin Media, Inc. (NASDAQ:VMED)

Q3 FY08 Earnings Call

November 6, 2008, 9:00 AM ET

Executives

Richard Williams - Director of IR

Neil Berkett - CEO

Charles Gallagher - Sr. VP of Finance

Analysts

Nick Lyall - UBS

David Kestenbaum - Morgan Joseph & Co Inc

David Gober - Morgan Stanley

Joe Boorman - New Street Research

Steve Malcolm - Arete Research

Paul Howard - Cazenove

Jerry Dellis - JPMorgan

Ian Whittaker - Liberum

Petri Allas - Redburn Partners

David Hawks - MF Global

Alexander Wisch - S&P Equity Research

Operator

Good morning and good afternoon ladies and gentlemen and welcome to the Q3 2008 Virgin Media Inc. Earnings Conference Call. My name is Wendy and I'll be your coordinator for this conference. Throughout the presentation you will be on listen-only, however at the end of the call there will be an opportunity to ask any questions. [Operator Instructions].

I will now hand you over to Richard Williams of Investor Relations to begin the conference.

Richard Williams - Director of Investor Relations

Thank you Wendy. Good morning or afternoon to you all and welcome to Virgin Media's Q3 results call. On today's call, we have Jim Mooney, our Chairman; Neil Berkett, our CEO and Charles Gallagher, our Senior VP of Finance.

Please can I draw your attention to the Safe Harbor statement on slide two, and remind you that some of the statements made today may be forward-looking in nature and that actual results may vary significantly from these statements. I would also ask you to refer to our latest filings with the SEC for applicable risk factors.

Before we start can I also point out that we will be hosting two investor days in New York and London next week on the 11th and 13th of November respectively. Can I please urge you to register for these events if you intend to attend. Full registration details are available on our website, www.virginmedia.com/investors.

Now I'll turn you over to Neil Berkett.

Neil Berkett - Chief Executive Officer

Thanks Richard, and thanks for joining the call everybody. Today's presentation will be briefer than normal because of the Analyst Day next week, when we intend to go into much greater detail about all aspects of our business.

I'm pleased to say again that we have delivered another set of solid results. As usual, lets start by looking at our strategic progress and how that's fitting with our operational progress. Our strategic priorities are to leave the next generation broadband marketing speed, quality and value-added services, to lead and redefine the mid-market TV experience through video on demand and to leverage our position in mobile.

We continue to make great progress in Q3. Our 4 to 10 megabits per second broadband upgrade is now complete. And our plans to launch 50 megabits later this year or later this quarter in fact remain on track.

In TV BBC iPlayer continues to boost video on demand usage. In mobile, we've got best ever quarter of contract customer growth, mostly through cross sale to our cable buyers. We further leveraged our mobile position with the launch of mobile broadband in October.

In terms of operational progress, targeting low churn remains our top priority, and this is down 20 basis points year-on-year. As expected, the June price increase has not resulted in any increase in churn.

Despite concerns in some quarters about a softening economy, RGU growth has improved from quarter two and as we said last quarter is roughly the same as the level of Q3 last year.

Broadband net adds have improved sequentially and the number of higher tier subscribers is growing very well. So is TV And we are pleased that we are continuing to grow our telephony base through bundling in a more mature market.

We are effectively using cross sell and upsell and mitigate other pressures which along with price rises has led to an increase in ARPU this quarter. Well over half of our customers are now triple play. Again we saw nearly a 2 percentage point increase in triple play penetration and we continue to experience plenty of further growth going forward.

And finally, we continue to focus on rightsizing our business to get the right cost and organizational structure to position us for the long-term cash flow growth. So lets go into the detail. Starting with churn, which is down 20 basis points year-on-year which is a great achievement.

The biggest improvement has been in voluntary controllable churn. We believe there are several contributing factors and I'll highlight three of them. We have achieved substantially improved key touch points with our customers. We now have a single fit-for-purpose billing system covering all of our cables on the customers and that has defeated some of the quality of service issues we used to have.

Secondly, I've restructured the organization to reinforce the importance of product quality and first time resolution. Both our cool answer [ph] statistics and call rates have measurably improved compared to last year.

Thirdly, value for money affects voluntary churn and we've successfully addressed this to effective management of what we term our backlog, revaluing our own incumbent customers. As we said in last quarter churn is up 20 basis points from the previous quarter, mainly due to a seasonal increase in movement of churn. This includes student churn and rental moves.

Targeting churn remains my number one operational objective, and reducing it is the biggest driver of value in this business.

I'm delighted with the 35% reduction in voluntary churn. Happy customers buy more and stay longer. Churn reductions, improve margin and value. So reducing churn in 2008 compared to 2007 should give us greater growth emphasis going into 2009.

Turning now to customer growth, you can see that we've had positive net additions in Q3 which was a clear improvement on the previous quarter. This was driven by increasing gross additions, which were up 28% sequentially, reflecting increased marketing spend.

However gross adds were down 16% on the same quarter last year. We believe this partly reflects the focus on better quality gross additions and our priority of reducing churn. But there is also some impact from the softer, macro economic environment. Whilst it's difficult to isolate where we've said before gross ads is where we would probably see any weakness if we were affected.

Turning to RGUs, we've seen strong sequential improvement. This was driven by an improved style and marketing performance and a strong performance in contract mobile. This was achieved along side the continued success of increasing triple plate penetration, which is now increased to a record of 54.7% with deal penetration of 83%.

On net, we now have 22% fewer single RGU customers than a year ago. This is all helping to drive improvements in product and customer quality, life time value and low churn.

Moving on the cable ARPU, which is up sequentially and year-on-year. As I've mentioned before, we are managing the business for long-term value, not just output, and therefore it might move up or down any new one quarter. This quarter, we've seen our price rises, cross sell and up sell to offset backward pressure and so led [indiscernible] decline.

We've improved the quality of our products and services which enhances our cross selling and up selling ability.

For example, we've increased broadband tier speeds.. We have vastly improved our video on demand offering,. We have been rolling out of our V+ DVR program. Our success is clear from our improved triple play penetration and improved broadband mix.

So with that, let's move on to broadband. Here, you can see about the continued growth in subscribers. And also the improved mix as we continue to upgrade speed and focus on up selling customers. We live in a world where there is an ever increasing demand of bandwidth.

We've now completed our 4 to 10 megabit upgrade and this is having a significant impact on our up sell success. In Q3, nearly half of gross adds were taken in our large or extra large at 15 or our 20 megabit broadband at the point of style. That compares to just 19% in Q1.

A large tier has grown 17% on a year and extra large tier 20 meg product has grown 78%. All this and we only completed the 10 megabit upgrade in September. Customers want and need higher speed and more importantly they are prepared to pay for them.

In our marketing messages we are continuing to position the quality aspects of our business over DSL Copper with success. Broadband is a key element of our many fumbling strategies and we are applauding a reputation of quality and deliver a high-end proportion of advertised speed versus DSL.

Our overall on net broadband net adds was 69,000, up 26% sequentially. Like our competitors, we have seen a year-on-year slow down in the broadband growth due to the overall market slowing.

However, this slower growth is really happening at the commodity end and of course we are more focused at the premium high speed end of the market we are showing strong growth. We are taking a greater share of the revenue pool than we are of the RGU pool.

Moving on to TV, we've had another good quarter. TV net adds remain strong and are both up sequentially and year-on-year. We're seeing increased usage of our video on demands service demonstrating that the steady transformation of the way people watch and interact with their TV is continuing unabated.

Usage has been hosted by BBC I-player... boosted by BBC I-player which is added to our electronic programming guide in June. We are the only TV platform in the UK to carry this service.

We had 11.7 million monthly viewings on BBC I- player alone in September. As you can see from the chart, average monthly VOD usage or views in Q3 have grown to 45 million which is nearly double that it was a year ago.

Our huge library of content and the quality of service are not easily replicable and we believe this is already playing an important role in both customer attention and acquisition.

We also had another good quarter for the V+ growth. We've more than doubled the number of subscribers in the last year. Our research shows that DVR customers churn less than other customers. Even with such strong growth, we've still only penetrated 14% of that digital base. So we feel there is huge growth opportunity here.

Finally, as we announced earlier this week, we have reached an agreement with Sky for the return of its basic channels to our platform for at least $30 million per year which will increase the attractiveness of our TV operating for new and existing customers.

Now turning to mobile, starting with contract. As we've already said, our strategy here is to use our fiber wood economics to cross sell into our cable base. And we had another successful quarter with 78,000 net adds with the vast of majority of sales through our own channels, which helps to keep our acquisition cost down and our profitability up.

Contract is an important element of our proposition, allowing us to offer appealing bundles to the customers or to the customer's homes at a low acquisition cost. A deal with T-mobile, allows us to aggressively push into the brightest base for mobile.

The churn protocol also improves as the number of products taken by our cable customers increases.

Contract customers have much lower churn and higher ARPU than prepaid customers clearly. This means that the lifetime value of a contract customer is significantly higher. Within prepay, we've made the decision not to engage heavily in the low price handset market.

We are aiming to attract and retain higher value churn customers to improve mobile ARPU and profitability. Mobile OCF dipped sequentially in the quarter, partly due to the fact that last quarter had benefited from six months' worth of lower T-Mobile wholesale charges, allowing a successful renegotiation of this deal.

Mobile OCF was also affected by increased advertising and acquisition costs relating to higher growth additions. The new wholesale deal means that not only do we reduce our wholesale voice costs but we can now also be more competitive in mobile data.

Consequently, we launched a mobile broadband product in October, which we see as being complementary to our fixed line broadband service. As of today, we have a couple of thousand subscribers. We can also be more competitive going forward on mobile data rate.

Turning now to business, as you can see, revenue was $153 million, which is down 4% year-on-year. Consistent with our strategy, we continue to see a mix shift in retail revenue from voice to data. Retail data is up 14% year-on-year and outweighed retail voice revenue for the first time.

Other retail revenue is lumpy in nature and the majority of this is from infrastructure projects which are non-recurring in nature, our largest infrastructure project, has been the provision of telecom network equipment for Heathrow Airport's new Terminal 5 which is coming to an end. And revenue is down $3 million sequentially and $4 million year-on-year.

However, this contract is of very low margins, so there is no material impact on OCF. Wholesale revenue was down mainly due to a reduction in voice traffic, ISP subscriber base and contract declines in mobile account.

Now turning to our content division. The MTV revenue was up year-on-year mainly due to resolution of $4 million add revenue allocation negotiation relating to earlier period. Excluding this, advertising revenue was relatively flat year-on-year.

Our performance has been helped by the launch of Virgin1 on Freeview last year. Obviously the market as a whole is declining and the advertising outlook remains weak, however as advertising revenue is less than 3% of our over all revenue.

Also if you have heard, we've been able to successfully renegotiate our carriage agreement with BSkyB and as a result the MTV will receive payments of ₤13 million per year compared to the current ₤6 million plus the performance based adjustment equal to the arrangements on sky basics. Set up revenue was flat on the previous quarter and down 3% on the same period last year due primarily to the impact of a downturn in retail consumer spending.

In September of '08, sit-up received notification that one of its two licenses to broadcast over Freeview would not be renewed in January '09. We're currently reviewing our sit-up business model and considering alternative courses of action. Sit-top currently also broadcasts on cable, satellite and free set of course.

Turning to UK TV, our share of net income was $3 million in the quarter. UK TV has generated good cash flow this year. We've received $26 million in total in the year-to-date stats. UK TV has carried on our balance sheet of $365 million, which includes the outstanding loan to us of $136 million.

Content OCF was ₤5 million loss. This was down to ₤4 million sequentially due mainly to a seasonal increase in the MTV programming cost.

Charles will expand on that in a moment. So, let me hand over now to Charles to run through the financials. Charles?

Charles Gallagher - Senior Vice President of Finance

Thanks Neil. On my first slide, you can see the revenues flip between segments. We are pleased that consumer revenue is up year-on-year as a result of increase in ARPU. This is the first time this year that we have shown year-on-year growth.

As you heard from Neil a moment ago, business revenue is down just to the retail data growth being offset by declines in other areas. Mobile revenue is up sequentially just to increase contract mobile growth which has resulted in an improved ARPU. It is down year-on-year due to lower prepaid subs and overall ARPU partially offset by the strong contract mobile growth.

As you have just heard the MTV revenue is up mainly due to the $4 million ad revenue agreement. And finally sit-up has done slightly year-on-year due to the lower retail consumer spending.

Now lets move to the summary income statement showing Q3 '08 versus Q2 in the same quarter last year. I've already discussed the revenue movements so we'll move on to operating cost. They are down 4% year-on-year and gross margins of 56% was up by 1% this quarter.

Gross margin has improved due to a mix shift from lower margins to higher margins services and products. For example, in consumer we are seeing a mix shift to higher margin broadband revenues from lower margin telephony. And in business we are seeing a shift next to higher margin retail data. In mobile, we are seeing the benefit of the negotiated wholesale rates with T-mobile.

SG&A was up by $6 million sequentially partial due to higher marketing of sales acquisition cost which is driven improved growth. SG&A is up year-on-year compared to Q3 last year containing a number of benefits such as lower bonus costs and the release of bad debt provision which was driven by improved collection performance, partially offset by the returns of certain benefits this quarter.

This resulted in an OTS [ph] of $325 million which as you signaled last quarter is down slightly from Q2. Cash CapEx of $107 million was roughly flat compared to Q2 and then on year-on-year which was due to an increase in the land of fixed assets acquired on the finance leases together with the timing of cash payments related to fixed asset purchases.

During the quarter we acquired 34 million times of fixed asset on the balance leases. Crude CapEx at 147 million was up year-to-year to mainly to increase saleable infrastructure cost related to the broadband speed upgrade.

My next slide shows OCF segment. We can see cable OCR is up slightly sequentially and relatively flat year-on-year with the LTF margin remaining at 39.5%. Mobile OCF is down year-on-year near to the lower revenue, mobile OCF is fixed sequentially in the quarter partly due to the fact that last quarter have benefited from six months worth of lower T-mobile wholesale charges.

Mobile OCF was also effected by increased other pricing and acquisition costs relating to higher gross additions. As a result OCF margins 19.3% compared to the 19.8% last year.

Content OCF was a £5 million loss. This loss increased by £4 million sequentially due mainly to a seasonal increase in VMtv programming cost record. OCF was down year-on-year and partly just a higher programming cost for Virgin was once in October last year. Also last year content had included certain benefits such as the revision from price bonus cost and from contractual settlement benefits. In that result as the whole TF margin has decreased from... to 32.8% from 33.9%.

On my next slide I will discuss our debt position as of the end of the quarter on an actual basis. We had gross debt of £6.2 billion when cash balance of £521 million which is up by nearly 100 million in the quarter due to continued cash generation. Net debt is 5.7 billion which is 4.4 times annualized OCF.

As we announced this morning, the amendment was cut by over 90% of our lenders with at least 70% of the A lenders due to lower amortization payments by 2012 and at least 80% of the B lenders agreeing to roll into these grouches tranches with no pro rata right to any prepayment.

The A roll is effective upon our broadest logging at 20% pay down condition. We expect the amendment agreement to be effective within the next few days.

In the time for approving the amendment and also for agreeing to roll to the new tranches whether we're paying higher interest rates as they can see on the slide. There will also be amendment fees payable upto £70 million; part of which is payable only upon satisfaction of the 20% pay back condition.

My final slide shows new amortization schedule pro forma for 70% A roll and on 80% B roll and to 20% pay bank. As you can see we've successfully shut the bulk of our amortization payments from 2010 and '11 back to 2012. Before we had over 2 trillion times during 2010 and '11, but not being introduce £ 498 million.

As you know that now results a key challenge to the company phase in 2010 and '11 and allows us to focus on continued operational improvements in the business.

That concludes our presentation. As Neil indicated, this been a shorter presentation than usual as we are holding two analyst meetings next week where we will go into much greater detail and we look forward to seeing you all there either in New York or London. Don't forget to register. And with that, let's open it up for questions.

Richard Williams - Director of Investor Relations

Over to you operator.

Question And Answer

Operator

Thank you. [Operator Instructions]. Our first question comes through from Nick Lyall of UBS. Please go ahead.

Nick Lyall - UBS

Hi there. This is Nick Lyall for UBS. I just take two questions, if I could. The first one was on the cost price. I think the one offs from last Q3 '07, was there still 28 million of cost items, did they... or rather the advantages didn't occur this time. Can you just explain how many of those we should expect just to get the run rate in the cost right please.

And then secondly on the amendments, there you remember the terms of the debt and Sky, does it really free to investigate tax assets and savings or the market sis just too tough to allow you to investigate those. Do you think? Thanks.

Unidentified Company Representative

On the cost side, the Q3 '07 items were one-time in nature. So they related to employee related incentives as the stock based compensation, from litigation settlements in the quarter. So all of those were nonrecurring into Q3 '08, if I understood your question correctly.

Nick Lyall - UBS

Yes.

Unidentified Company Representative

Second question, I'm sorry?

Nick Lyall - UBS

Yes sorry the one bid was on the amendments that have done the sky deal. Are markets too tough for you to investigate things like tax assets and other changes at such a restructuring and or do you think now that the management time is freed up to watch your investigation of those?

Unidentified Company Representative

No what the amendment process has done for us is given us a flexibility to go off and work on these things. That's the best timing for the company. We'll continue to pursue the tight process monitorization as we've discussed in the past.

And we are making progress on several fronts on that and we will continue to pursues our over the coming month. And from a restructuring perspective we have talked in the past that we continue to look at our cost structure for... continue the efficiencies and we will request that further we'll see you at the appropriate time.

Nick Lyall - UBS

Okay that's great. Thank you

Operator

Thank you. Our next question comes through from David Kestenbaum from Morgan Joseph. Please go ahead.

David Kestenbaum - Morgan Joseph & Co Inc

Hey great. You didn't give any guidance this quarter, so I'm wondering are you still sticking with the things that you've said in the past about stronger customer and ARPU RGU growth in the back half of the year.

Neil Berkett - Chief Executive Officer

Yes David. I'm quite comfortable with our progress in the fourth quarter. There is no change to the position that I've given historically. We'll obviously go into some detail next week about performance in various aspects, but I please don't read anything, unfortunate or negative into my silence on guidance. I'm very comfortable with that performance

David Kestenbaum - Morgan Joseph & Co Inc

Okay. So we can count on some of that at the analyst day then.

Neil Berkett - Chief Executive Officer

You can indeed, yes.

David Kestenbaum - Morgan Joseph & Co Inc

Okay. And can you just talk about what's going on the data clients, I mean I thought when you changed the systems that will be passed that. But it seems like its still going.

Neil Berkett - Chief Executive Officer

No this is it. We did a conversion for all of the fixed NTL broadband customers in the quarter which... sorry in the previous quarter. This is the final cleansing of that where as you can imagine you had some customers that were effectively provisioned for television and telephony on one system and broadband on the other, and they will pick up a double count. So that's it.

David Kestenbaum - Morgan Joseph & Co Inc

This will be it. Okay. And then finally can you talk where you are... talk to us about where you are with the backward re-pricing. I think in the past you said you'll probably get that done by year end. Are you still on target?

Neil Berkett - Chief Executive Officer

Yes. We are on target such that by year end, it will not have a, the material impact it had in 2007 and 2008. And again we'll probably go on into a bit more detail on that next week.

David Kestenbaum - Morgan Joseph & Co Inc

Okay, thank you.

Neil Berkett - Chief Executive Officer

Once again on target.

Operator

Thank you. Our next question comes through from David Gober from Morgan Stanley. Please go ahead.

David Gober - Morgan Stanley

Thanks for taking the question guys. Just on a couple, kind of inter-related to the economic situation that we're in right now, in terms of you guys have talked about gross additions being where you would see most of the economic weakness but I was wondering if you could give a little bit more detail in terms of what you've seen in terms of tier changes particularly on the video side, whether or not you've seen any spend down from the L and Excel peers down to the medium tier.

And how that's trending in terms of the sale in going forward and also on the broadband side, just curious have you seen any reacceleration or acceleration of mobile substitution and how the initial launch of your mobile broadband product has impacted your wireline product in the fourth quarter.

Neil Berkett - Chief Executive Officer

Sure. Let me try and cover most of those for you David. So yes as we've said historically we think that no stocks recessions prove that we think that we are pretty defensive and really the cost stickiness comes from you are seeing a lower churn 54.7% triple plate penetration, £42 subscription on a monthly basis, at all August pretty well for managing '08 through what going to be a pretty tough year or two.

But yes you will see a reduction in gross ad when you are seeing that. But the net position really haven't altered and for me the key is what you do with your product sales. So in the quarter we did a 185,000 compared to roughly I think its 187,000 or something in the quarter of 2007.

More importantly I think if you look at the data that we've given on broadband mix. So this is... and this is gross. So nearly half of the customers that joined us for broadband in the third quarter came on even at 10 or 20 meg product.

Another fit in the little script there that that compares to only 20% in the first quarter of 2008 when we were all in 20. That shows that our strategy about moving up and with surrounding net broadband with value added services which will, you'll see more and more of up doing. It's working.

Customers are buying upscale. So similarly when you look at what's moving, the outlook movements, clearly up sell, cross sell overrated any down spend in the quarter. So we're not really seeing anything dramatic and I remind everybody that only 600,000 of our customers take premium, i.e. Sky Sports and movies and then will go away. We don't make any money on that anyway.

So even if they was some damps from premium I mean ironically we would probably make more money, given the loss we make from Sky at the moment.

The last point you made was mobile substitution. I believe to date that the mobile broadband size is by a fit add book complimentary. Because the quality of our mobile broadband is just nowhere near the quality of cable, may will be impacting some of the lower big DSO fixed line. But to-date, our view is that it is substitution, regardless we are not in the market. Hope you like it assure a good surround, David.

David Gober - Morgan Stanley

Yes. That was good. The only thing just to clarify the second part of the question there. Have you guys seen any initial data points in terms of I think you mentioned you got about 2000 mobile broadband sets, has that benefited either the churn makes or just sell through of data thus far in November?

Neil Berkett - Chief Executive Officer

You mean from a fixed point of view?

David Gober - Morgan Stanley

Right. So I mean are you selling more fixed broadband because you have the mobile broadband add on as well?

Neil Berkett - Chief Executive Officer

I think we'll start to see that as we bundle our mobile and fixed, which shows sort of our next move.

David Gober - Morgan Stanley

Great

Neil Berkett - Chief Executive Officer

And again you'll see that in a positive thing.

David Gober - Morgan Stanley

Great, thank you

Neil Berkett - Chief Executive Officer

Okay. Pleasure.

Operator

Thank you. Our next question comes through from Joe Boorman New Street Research. Please go ahead.

Joe Boorman - New Street Research

Thank you, two please. Can you confirm I think last year, the MTV the total release of 2007 was a total on one-of was a 12 million positive. And second question connected to that; if you sort of had an incremental 24 million revenue this year, how much should we expect to that fall to margin ? Thanks.

Neil Berkett - Chief Executive Officer

On the first point, you're about right. On the prior year adjustment. Could you repeat the second question again please?

Joe Boorman - New Street Research

With the net kind of increment in the revenue line from the new deal with Sky, we have 24 million higher revenue on an annualized basis.

Unidentified Company Representative

Joe, that will just drop to the bottom-line. But you are... I mean, clearly VM TV like every other media business that is our there relying on advertising revenues is getting increased pressure on advertising revenue. So it'll be offset somewhat by what is definitely a bloody tough market out there.

Neil Berkett - Chief Executive Officer

Joe, rollouts being equal and 24...

Joe Boorman - New Street Research

That would be correct. Yes. Tough, whatever we would give on the [indiscernible].

Neil Berkett - Chief Executive Officer

Sure, sure. Thank you.

Operator

Thank you. Our next question comes through from the line of Steve Malcolm from Arete Research. Please go ahead.

Steve Malcolm - Arete Research

Yes, good afternoon guys, I'll go for three, if I can. First of all on churn, I guess the voluntary number is very good, but as the basic price the housing related churn would sort of add up similar levels to last year given what's going on the UK housing market. Now, I appreciate not every house is an owner but maybe you can give us a bit of your thoughts on that. But particularly going on there, whether that should come going forward.

Secondly, on programming cost, so you will be paying more to Sky and when you lost Sky programming nearly a couple of years ago I guess you have put that money and it's the time to, in your sports packages and I know that after your deal but in going forward, I guess there will be some savings here on the programming types and other providers. Can you talk us through when those rights come up and your thoughts on the [indiscernible] time to deal getting to start basic pack and finally on mobile broad band, you got some pretty aggressive prices out there I mean

are you actually seeking to make money out of my broadband or should we just think of it as a kind of wash product that helps your churn. Thank you.

Neil Berkett - Chief Executive Officer

Okay. I'll cover all three Steve. You're right. We're not seeing a significant movement in terms of housing, the 35% reduction we've had in absolute churn year-on-year has all come from voluntary which is positive. The reason is that is we do have a material. We have a broadband of choice for students. And so, you will see students comes on and off. This year they all came on 10 meg which is good. And is also of a reasonable proportion of our... some of their customers are in the rental market. So you're not getting the same shift, as you do in terms of home owners.

Unidentified Company Representative

In respect to program costs, I mean clearly we will always look at our total portfolio and look for value for money for our the tradeoff between what our customers want and what we can afford and get that balance right does that means that its a result sky basics coming back we think we can trim some other programming costs and we will do so, but it's a value judgment and we'll liquidize the market as and when. Mobile broadband we do believe we will make money but we are not after, we are not hungry, we are not greedy should I say and we see a very much as a complementary product and very clearly as you go upstream to 20 meg and certainly the 50 meg we would be very happy to be able to provide that as complementary type product to our customers.

Steve Malcolm - Arete Research

Okay. Thanks a lot.

Unidentified Company Representative

Sure, Steve.

Operator

Thank you. Our next question comes through from the line of Paul Howard from Cazenove. Please go ahead

Paul Howard - Cazenove

Thank you for that. And just a couple of questions, firstly on broadband, the key just remind us the rollout time table for the fifty meg product. And then secondly on premium content what's your current source to post the latest regulatory document on the page we review. I guess both in terms of you owning premium content and potential investments in any company like Setanta.

Neil Berkett - Chief Executive Officer

Okay. Let me pick those up Paul. We're on schedule for 50 meg rollout. We'll have 50% of homes pass by the end of this calendar year by December 31, and complete that by roughly June 2009. We will launch as and when we think we have critical market and when we think the market is right but operationally we're absolutely on schedule.

I think more importantly because obviously that underpinned opinion by DOCSI 3 is it will give us the ability to start migrate our 20 meg customers across to that platform as well which means they'll get quality of service which means that the 10 meg and the 2 meg will get improved quality of services is a good shift. So absolutely on schedule. The team have done a super job.

In respect to premium content, couple of avenues here, clearly the market investigation continues, and you would have seen off commerce current thoughts around premium pay TV which is really saying yes there is abusive market position here and that their remedy is in the respect to wholesale pricing. We along with the other players will lodge apples on that early in December. And we'll look to see the remedy which is appropriate economic access to premium content including high definition from Sky.

But it doesn't really open until we get clear what that is. It doesn't alter the position that we stated last summer in the current environment, it is making those things rough to look to go in own or acquire premium content, that's all. For a whole bunch of reasons, not least of which the premium Pay TV market is not growing. So we will look to play in the premium space with a premium broadband product.

Paul Howard - Cazenove

So I guess that rules out any involvements in the premiere league auction.

Neil Berkett - Chief Executive Officer

We'll leave that until when the auction arrives, but I think that's a reasonable...

Operator

Thank you. Our next question comes through from Jerry Dellis from JPMorgan. Please go ahead.

Jerry Dellis - JPMorgan

Yes, good afternoon, a couple of questions, please. Firstly on the mobile side, I guess you invested margin quite heavily in contract customers, this quarter, I wonder when we start to see that benefit coming through in terms of high growth, if you could quantify the positive impact on the margin of the lower wholesale rates, and then just in terms of churn, I wonder how much scope there is for you limit your churn further in order to keep net assets up is the growth additions number with the later end of the year. Thank you

Unidentified Company Representative

Jerry, clearly, 78,000 of contract mobiles, we were pleased with last couple of quarters moving running in the mid 50s. That has a required an appropriate increase in terms of fact. We are very, very disciplined in the way in which we go to market whether that be for fixed products or mobile products, always looking and measure on our weekly basis the lifetime value of customers rather than just the stat or just the entry ARPU or whatever so. You can be rest assured that those 78000 mobile contract will pass that economic criteria which means that clearly that's that service revenue will flow through and we will be looking to participate in the market in the fourth quarter as well in terms of contract and in respect to the whole sale rising, its £1 million a year improvement that quarter by quarter; so 2 or £3 million to quarter.

Your second question around churn, it's difficult to predict I am very comfortable that we now have churn at a sustainable level and we will continue to drive turn down with all of the techniques that we've employed over the last 12 months, principally through quality of service and as you've seen in the quarter the way in which we are managing the business means that we've achieved the volume of products sold in this quarter, the same as we did in Q3 of 2007 and we've done and increased ARPU. So I am comfortable that we have the tools that are available to us to be able to continue to run with revenue growth. You would have noticed that we basically year-on-year consumer's revenue is slightly up. So I think that's quite an inflection point in our overall strategy of managing the back book, managing churn down, revaluing the business, getting RGUs in place and hence that's flow in through the revenue.

Jerry Dellis - JPMorgan

Thank you. Could I just ask one more please. Can you just remind me what the ARPU trend would have been if it wasn't for the 1st of June price increase. And I wonder whether you think you've got further scope to sort of lift prices maybe over the six to nine months.

Neil Berkett - Chief Executive Officer

We'll leave to your modeling to work through what you think is happening on ARPU. We'll give you a bit of granularity on that book and stuff next week. But as I've said at the last earnings release, I think if you can put a price increase in place in the current market, then it signals that we have been we got the capability to do it again. As and when that will depend on market condition.

We all know that they are getting a tougher. But our product is getting better and better. So we'll make that judgment as and when.

Jerry Dellis - JPMorgan

Okay, thank you.

Unidentified Company Representative

Thanks Jerry.

Operator

Thank you. Our next question comes through from the line of Ian Whittaker from Liberum. Please go ahead.

Ian Whittaker - Liberum

Thanks very much. Two questions actually. First of all, in terms of what you're saying, in terms of gross additions that's really why you see the impact of the economic downturn. I mean you could argue that basically where you'd all see as well is in terms of bad debt non-payment, you just look at this quarter for example in terms of the non-payment, and just look at this quarter for example in terms of non-payment, and on the churn its actually gone up after a couple of quarters decline. So I just wonder if you could talk a little bit more about that, what potential your seeing in this quarter and what you think about the trend moving forward.

The second thing is just in terms of you signed with Sky, when you actually lost the Sky channels obviously use of a churn then, people moving across or moving down to new service. Are you actually going to make a concerted effort to try and get those subscribers back? Is there going to be any sort of specific targeted campaign at those subscribers and when you could just possibly talk about where those subscribers actually went, did they just go down Freeview, did lot go in Sky. If you could just talk a little about, that would very helpful. Thanks.

Neil Berkett - Chief Executive Officer

Sure. So, we'll answer that [indiscernible]. So, Charles will just pick on the bad debt trends and I'll answer the question around Sky.

Charles Gallagher - Senior Vice President of Finance

Sure. As we look across the portfolio, we are not answering very closely outside that performance in content business and consumer. As of yet, we have not seen any negative worrying trends in terms of having to increase our provision rates to accommodate that. But I, it's something that we're monitoring very, very closely and we'll adjust accordingly and interfere at the required time.

We take very stringent steps upfront in the qualification process so the profile of customers that we've added over the last several quarters or year across we feel very high quality.

Ian Whittaker - Liberum

And just a quick answer... so, in terms of the increase that you saw sort of in Q3 quarter-on-quarter. Is that seasonal thing? Are there one-off factors? Is there anything to maybe be explain that

Unidentified Company Representative

Again it does change quarter-to-quarter, most of all we still have a fairly high student population that entice that in any given quarter so, its not attractive, there is no specific thing as I will point to the we both bid [ph] should be conjoining us.

Ian Whittaker - Liberum

Okay.

Unidentified Company Representative

How about pick up in on the Sky as you recall we saw this approximately 40,000 customers in the second quarter of 2007, that lift up and maintain join stock I mean the reason believing us was the withdrawal of Sky basis and any you could get that its just a joint sky and we've invested in whole range of telephony to which video on demand had allowed us being for the third quarter and the three quarters of this year to on a home path basis to acquire it roughly the same if not slightly better than what Sky has got. So we have a competitive product, nonetheless we're pretty pleased to have Sky Basics back on board and our customers wanted, it's a quality product and the deal that we've made with Sky I think is in good sports jog and it's a good thing for Pay TV. It's a good thing for us. It's a good thing for Sky. And yes we will be running a campaign, this part of breaking up is making up -- Sky coming back to Virgin.

Ian Whittaker - Liberum

And is that just going to be talk to specifically those customers who have left were they just going to be general marketing campaign.

Unidentified Company Representative

I think it's fair to say we'll have a variety of ways in which we go to market with it.

Ian Whittaker - Liberum

Okay. Good. Thanks very much.

Unidentified Company Representative

Thank you.

Operator

Thank you. Our next question comes through from the line of Petri Allas from Redburn Partners. Please go ahead.

Petri Allas - Redburn Partners

Well, hello its Petri Allas from Redburn. Thanks for taking the question. Couple of different aspects really to broadband acquisition cash impact if I may. First in the quarter where do the new ads come from are they new to broadband movers or indeed are they houses that you have homes here or are wired don't you need to wire them up and therefore how does the sort of fat [ph] how is that subscriber acquisition cash cost looking. And related to that as you start moving and roiling out to 50 megabit product, is there any sort of change or prediction around CapEx both in terms of and cash otherwise, both in terms of the fixed infrastructure CapEx but also variable costs as it relates to acquiring new customers and if you have anything you can share on the plan so how much the company is going pay upfront about the variable cost. So, if there is customer upfront charge for upgrading and migrating to the new product.

And finally, if you have any new plans around distribution partnerships or wholesale of the broadband adds. Thanks very much.

Neil Berkett - Chief Executive Officer

Okay. Petri, there is a lot of it stuff we will go into some detail next week. Mark Schweitzer will be with me in New York and in London with our TCO. He will take you in just quite some detail here. But let me answer your question nonetheless.

So if you look at quarter's broadband acquisition, as we've said half of it is being in 10 and 20 meg by definition, that are not new broadband customers. So, more and more we are taking revenue share if we are not taking market share in that space. In respect to where those customers are I mean we roughly 80% of customers that would joint us ROE pretty wide.

And so that had not materially changed in the quarter and in respect to 50 meg again our pricing will become clear as we go to market. And we are pricing such that we don't carry any spice or variable costs or increased debt that is offset by installation revenue etcetera as we bring the 50 meg on board.

So as we know either the 50 meg event they are going forward or the shift that we have seen in terms of acquisition, the value, the lifetime value formula is going up not down.

Petri Allas - Redburn Partners

Very helpful, thank you.

Unidentified Company Representative

Operator, we've got time for two more questions.

Operator

Thank you. In that case our next question is from the line of David Hawks from MF Global. Please go ahead.

David Hawks - MF Global

Hi guys, I think most of my questions have been answered so I just have one data point question, I just wondered for the quarter ended September, your average monthly usage for broadband customer was. I think for the quarter to June, you said it was 8.5 gig line. I just wonder what it was for the quarter to September, please?

Unidentified Company Representative

Yeah, it's just under 9.

David Hawks - MF Global

Just under 9. Excellent. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Alexander Wisch S&P Equity Research. Please go ahead.

Alexander Wisch - S&P Equity Research

Hi gentlemen. It's a question on... I've got a couple of questions, one is on the deal with Sky, I wanted to spend a moment that you saved not having the channel for the last two years. But I'm not aware of when to use the T-mobile or to Virgin1 your own programming.

Now, [indiscernible] where you're going to get the extra money to pay at that now. Are you going to make us self where or am I wise to expect margins to be compressed. In my estimate this will be around $40 million a year. The next question is on the debt level, on what are the covenants you have on the debt expiring in 2012. Thank you.

Neil Berkett - Chief Executive Officer

Sure, we'll slip that between Charles and I. So the Sky transaction is pretty well articulated in the queue. We paid £30 million of subscribed by plus a ratchet [ph]. They pay £30 million from Virgin Media TV plus a ratchet. Historically, for the last 18 months the payment for Virgin Media TV has been £36 million. So the delta is £6 million on OCF and we're more than comfortable that the quality of Sky Basics we'll be able to manage in terms of additional revenue that will more than offset that delta

Alexander Wisch - S&P Equity Research

And the pick up on the debt front [ph]?

Charles Gallagher - Senior Vice President of Finance

Yes, the detailed covenants will be published when we finalize the amendment process about say, they are typical covenants ratios that you would expect those at those point in process. So, we'll get you the details as we make those public.

Alexander Wisch - S&P Equity Research

To be more specific, is debt for 2012 which would stay the same and not rolled out in 2013 and 14 due course which will be able to meet commitments?

Charles Gallagher - Senior Vice President of Finance

Yes. That the whole life of cycle we've just undergone obviously with a push to amortization's schedule in 2012, we will be drilling in our. We would expect to continue to de-lever over the course of the period as we continue the strong operational cash performance and then at some point, some appropriate point when conditions arrive, we would look to refinance and reset covenants and reset the agreements until 2013 and beyond.

Alexander Wisch - S&P Equity Research

I see. Thank you.

Richard Williams - Director of Investor Relations

Okay. So we don't have any time for any more questions. So thank you all and can I please again urge to register for the Investor Day if you plan on coming.

Neil Berkett - Chief Executive Officer

Thank you very much for your time. Look forward to spending more time with you either in New York or London next week. Thanks very much for your support. .

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Source: Virgin Media Q3 2008 Earnings Call Transcript
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