Good afternoon, ladies and gentlemen, and welcome to the Virgin Media Fourth Quarter Results Earnings Conference Call. My name is Maddie, and I'll be your coordinator for today's conference. For the duration of the call you'll be on listen-only. However at the end of the call you'll have the opportunity to ask questions. (Operator instructions)
I'm now handing you over to Richard Williams to begin today’s conference.
Good morning or afternoon to you all and welcome to Virgin Media's Q4 results call. On today's call we have Jim Moony, our Chairman, Neil Berkett, our CEO and Jerry Elliott, our new CFO. I draw your attention to the Safe Harbor statements on Slide #2 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.
Now I'll turn you over to Neil.
Thanks, Richard, and thanks everybody for joining the call. I'm pleased to say that today's fourth quarter results continue to show encouraging progress, operationally, financially, and also against our key strategic priorities.
Before we go into the results, let me give you a brief view of how I think Virgin Media is positioned as we begin 2009. I've discussed before how consumer trends are playing to our advantage. People are consuming increasingly more data and are becoming more demanding about how, where, and when they access information and entertainment.
The increasing focus on the next generation technology apparent in the government's Digital Britain work emphasizes the importance of a future proved Digital Britain in both networks and content and therefore is playing to our strengths.
Quite simply, we have the best network and high quality content to exploit these trends. We deliver our residential customers a next generation capability today. We have a superior broadband product, most recently reinforced by our 50 megabit per second launch and our plans to upgrade all 2 megabit customers to 10. And video-on-demand is becoming a more mainstream product as we expand content and drive usage.
We are delighted with the way customers are responding to our products and most importantly, we have increasing signs the customers are willing to pay for this improving quality. You will see in a minute that our broadband tier mix is improving and ARPU is growing again. We expect 2009 ARPU to show growth on 2008.
We have the platform in place for growth. Our broadband products are winning awards for the speed and quality as consumers are starting to experience and understand the differences between cable and DSL.
We intend to continue to promote and enhance our VOD service to achieve the same halo effect there. We are continuing to leverage our mobile business through contract cross sell and digital penetration.
We have improved service and product reliability to stay and consistent with the Virgin brand. That is no small achievement when you think about where we came from with the legacy reputation of UK Cable. And we continue to reengineer our business to improve efficiency and execution to make us even slicker. We are building a real “Can Do” culture at Virgin Media.
Finally, of course, we're not complacent about the wider economy. It is tough out there and there are challenges, but our results have demonstrated good resilience to the tough conditions. Nevertheless, we remain alert and continue to manage the business and costs proactively to mitigate any effects from the downturn. At the end of the day, the (inaudible) against such conditions will be the compelling products and an efficient cost base and we are working to ensure Virgin Media has both. So with that, let's get into the results.
My first slide, I set out some key highlights. Financially, we continue to improve revenue trends with the second successive quarter of on-net consumer revenue growth. We're very pleased with this milestone. We demonstrated strong cost control with a 10% decrease in SG&A on Q4 '07 and we generated strong free cash flow of 357 million pounds for the year, up an impressive 41% year-on-year. We used a portion of this cash to pay down 300 million of bank debt in December following our successful bank amendment.
Operationally, we delivered strong sequential growth in ARPU which is also up on Q4 '07 of 42.30, RGUs are up 6% at a record 12.4 million and we had a good growth in broadband, TV, phone and contract mobile subs during the quarter. Churn is down again at 1.2% compared to 1.4% a year ago and triple play is up to a record of 56%.
We've also begun to implement the restructuring plans we announced at the Analyst Day in November to create a fully integrated customer focused organization and we're on track to deliver our targeted annual savings of over 120 million pounds by the end of 2012.
Our strategic priorities are to lead the next generation broadband market in speed and in quality and therefore value-added service to lead and redefine the mid-market TV experience through video-on-demand and to leverage our mobile proposition.
We continue to make great progress in the quarter. Our broadband tier mix improved strongly. We have recently launched 50 megabits per second. We are continuing to add content to our VOD service and have delivered record usage.
And in mobile, we experienced strong contract growth and have launched mobile broadband, a new data pricing to catch a growth in this area. While the broader economic environment in the UK remains challenging, we've been able to grow our customer base and our ARPU.
So let's go into the detail starting with churn, which is down 20 basis points on Q4 last year which is a great achievement. I think it is important to know that in a tough economic environment, non-paid churn down both sequentially and year-on-year.
As I've said before, the economy probably contributed to a year-on-year decline in gross ads. But because of our success in reducing churn we were still able to grow our overall customer base by 15,000 net ads. More importantly, RGU growth remained solid at 186,000 products and was achieved alongside the continued success of increasing triple play penetration which is now increased to a record of 56% with dual penetration of 84. This is also helping to drive improvements in customer quality, life time value and low churn.
Moving on to ARPU, which is up both sequentially and year-on-year for the second successive quarter, this has been driven by selective price rises together with successful cross sell and up sell which is offset, back book pressure and declines and telephony usage.
As we explained at our Analyst day, back book pressure has now substantially subsided compared to the significant impact we felt in 2007 and 2008. Competitive environment always appears to be easing, given that we have recently seen some of our competitors raise price and so our ARPU outlook for 2009 is promising.
So with that let's move on to broadband. Here you can see both the continued growth in subscribers, but more importantly, the improved mix as we continue to upgrade speed and focus on upselling customers.
Like our competitors, we've seen a year-on-year slowdown in broadband growth due to the overall market slowing. However, this slower growth is really happening at the commodity end and of course, we're more focused on premium, high speed end of the market, we're showing good growth and good value – good value creation.
We live in a world where there is an ever increasing demand for bandwidth. We have clear evidence that our customers are paying for quality and higher speeds. We completed our 4 to 10 mega upgrade at the end of Q3 and this is having a significant impact on our upsell success.
In Q4, 54% of gross broadband additions were taking 10 megabits per second or 20 megabits per second broadband at the point of sale. That compares to just 17%, a year ago. 10 meg tier has grown 37% in a year and the 20 meg tier has grown by 66%.
And our marketing messages, we're positioning the superior quality of aspects of cable over DSL copper with visible success. In fact, recent independent research from the speed test at Epitero showed the average speeds of our 10 megabit service or at least double the speed of our 8 megabit DSL competitors.
We intend to exploit this advantage further and continue to redefine the broadband market by beginning to upgrade our 2 meg customers to 10 megabits per second from May this year. We've already largely withdrawn the 2 megabit service from our sales channels. This means that our lead and standard broadband product typically at least double the actual speed that the average up to 8 megabit DSL customer receives. That is a huge advantage that our copper competitors will struggle to match.
And finally on broadband, we launched our market leading premium 50 meg service just after Christmas or just before Christmas. Initial response and demand has been encouraging and we're rolling out availability across our network. We remain on track to complete the rollout during Q3.
Moving to TV, TV had another good quarter and net ads remain strong. We are seeing increased usage of our video-on-demand service, demonstrating that the steady transformation and the way people watch and interact with their TV is continuing unabated. 52% of our TV customers are regularly using VOD, an average of 30 views per month. Usage has been boosted by BBC iPlayer, which we added in June.
We are the only TV platform in the UK to carry this service. We had 15.7 million views per month on BBC iPlayer alone in Q4. As you can see, total average monthly VOD views has grown to 53 million.
We believe our huge library and content and quality of service is playing an important role in both customer retention and acquisition and helping the TMX. We've also recently added ITV catch-up content to the platform.
We also had another good quarter of V plus growth. We've doubled the number of subscribers in the last year. Our research shows that DVR customers churn less than other customers. Even with a strong growth we still only penetrated 15% of that digital base so we feel there is still a strong growth opportunity here.
All of our half million DVR boxes are HD ready and we intend to grow our HD content and capability this year. Clearly, our competitors have indicated that this is an area where they intend to invest and grow and we are determined that we are not going to allow them to build competitive advantage in this area. Of course, our competitive TV advantages in VOD and we already have over 100 out of HD video-on-demand content and we will be expanding this.
The key HD content that we do today are premium sports and movie channels that Sky will not hold (inaudible). As you know, Ofcom is conducting a market investigation into pay TV and that's our last consultation paper proposed a wholesale regime that would oblige Sky to wholesale its premium content including HD to us at economic rates. We are proactively engaged with Ofcom and we hope to hear the next steps in May or June.
Now turning to mobile. Our strategy here is to use our favorable economics to cross sell mobile contracts into our cable base. We had another successful quarter with 71,000 net ads, the vast majority of sales through our own channels which hopes to keep our acquisition costs down and our profitability up.
We're growing our contract base by 73% during the year. Contract is an important element of our proposition allowing us to offer appealing bundles to our customers at a low acquisition cost. We believe the churn profile also improves as the number of products taken by our cable customers’ increase.
Contract customers have much lower churn and higher ARPU than prepaid customers. This means that the lifetime value of a contract customer is significantly higher than a prepay. Within prepay we've made a decision not to engage heavily and the extremely competitive low price handset into the market which has resulted in net subscriber losses. We are aiming to attract and retain higher value, longer term customers.
As a result of the shift towards contract and our own lower cost sales channel, mobile OCF was up 40% on Q4 last year. During the fourth quarter, we launched mobile broadband and new data pricing to drive data usage and capture the significant potential there.
Turning now to business. As you can see revenue is 155 million which was down 5% on Q4 last year, consistent with our strategy we continue to see a mix shift in retail revenue from voice to data. Retail data is up 15% on Q4 last year and outweighed retail voice revenue for the second quarter in a row.
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 at Heathrow Airports Terminal 5 and revenue is down 8 million on Q4 last year checked the accounts for the entire year-on-year decline in business revenue. However this contract is a very low margin so no material impact on OCS.
Now, turning to our content assets. VMTV revenue was up 25% on Q4 last year, mainly due to the new carriage agreement we have with Sky and also a strong advertising revenue performance. We're particularly pleased with the relationship we developed with Sky in bringing this back to our customers.
Sit-up revenue was down 3% on the same period last year due primarily to the downturn in retail consumer spending. In January, Sit-up ceased broadcasting on one of its two preview channels following its unsuccessful bid in the auction process of the renewal of its license. Taking into other factors will undoubtedly impact Sit-up's revenue and profitability next quarter. We're currently reviewing these developments in our business model and considering how best to address these.
Turning to UKTV, our 50% JV with BBC, our share of net income was 4 million in the quarter and 19 million for the full year. UKTV has generated very good cash flow this year. We received 47 million in total for the year. Content OCF was a 2 million pound loss reflecting a seasonally high programming investment made in VMTV. This is an improved result compared to last year due mainly to high Sky subscription revenue and strong advertising revenue partially offset by weaker Sit-up performance.
Now I'd like to introduce Jerry Elliott to you all. Jerry joined us in January of this year. We spent the backend of last year nearly six months getting to know each other and I'm delighted that he has joined us. Over to you, Jerry.
Thank you very much, Neil, and thank you everybody for joining us today. It's very good to be with you. I'm going to start with the summary income statement and then we'll go through the details and next few slides.
You have already heard that we had a very good finish to the year and revenue was up 4% sequentially, as the ARPU increased for the second consecutive quarter. Compared to the year ago quarter, SG&A was down 10% so that results in OCF for the quarter of 320 million pounds and the OCF margin improved 40 basis points to 31%.
On the second slide you can see we've increased consumer revenue sequentially as a result of the increase in ARPU and our continued subscriber growth despite the economy. The on-net consumer revenue has grown for the second quarter in a row in a tough macro environment.
Business revenue down year-on-year as Neil just talked about due to the retail data growth being offset by declines in the lower profitability parts of that business, so the shift to a better mix of revenues continues there. The mobile results reflect an intentional reduction in the prepaid base being partially offset by contract growth which is something we're encouraging and results in a much more stable and profitable customer base.
On to Slide #16, you can see the total operating costs are roughly flat year-on-year. The cable operating costs are up because of the new carriage agreement we've been talking about and some increased facility cost because of higher year-on-year energy pricing.
And on the new carriage agreement we have a partially offsetting benefit in the content part of our business for the other side of the carriage deal because VMTV is now receiving more revenue for its carriage and that's reflected in the higher content margins versus a year ago. The mobile margins improved the ongoing shift toward the better contract subscribers and much more use of our own sales channels.
Turning to the SG&A Slide #17, SG&A down 10% or nearly 200 basis points of better margin year-on-year demonstrating ongoing very strong cost control. Again, the main movements were in the cable segment where SG&A is down 20 million pounds year-on-year and 17 million sequentially.
The year-on-year decline reflects lower bad debt expense reflecting lower non paid churn, again, very impressive in this economy, as well as lower employee costs. The sequential decline in SG&A reflects some seasonally lower marketing costs as well as lower employee costs.
If we go to the next slide on OCF, it really summarizes all of these revenue and cost movements to show OCF by segment. Total company OCF is about the same number as last year, but the margins better by 40 basis points to 31%.
Just a quick comment on the press release where we gave some thoughts about Q1 OCF. We're certainly not about to start providing guidance or projections so I don't want anybody to take this as the new CFO starting to provide guidance because I'm not, but we did want to give you some thoughts about Q1 OCF compared to the fourth quarter.
We are expecting Q1 OCF to be affected by some seasonally higher marketing costs, the sit-up business as well as the implementation of our cost savings program which is really now just starting to accelerate and take hold and I'll talk about that more in a minute.
So if you take into account all those puts and takes we're currently expecting OCF in Q1 to be about 5 million to 15 million lower than Q4. I would not, however, straight line that number for all of 2009, because as Neil's talked about already, we remain very optimistic and encouraged for the full year 2009.
Moving on to free cash flow on Slide #19, it's a new metric we started to provide this quarter and I wanted to add it because I think it's a key strength of this business. And for those of you who know me from my past it's the metric that I've always focused on the most and which in our case I think is often quite overlooked and underappreciated.
We generated 357 million pounds of free cash flow this year, up 41% compared to the year before, which again is an impressive performance in this environment. We're intensely focused on continuing to drive free cash flow higher not only by reducing costs, but also by growing revenue. We'll then use that free cash flow to provide solid returns to both our debt and equity holders.
Alright. So let's go on to an update on the cost savings program. If you remember at the Analyst day in November we announced plans to reengineer our business and create a fully integrated customer focused organization it's going to take about 120 million pounds of annual cost out of the business by 2012.
We also announced that we would be spending between 140 million pounds and 160 million pounds to achieve this and in 2008, total year, we incurred about 21 million of costs, 16 million of that 21 was included below OCF and the restructuring and other charges line in Q4, mostly relating to contract terminations. Those are accrued costs and will make the payments for those amounts during the course of 2009.
We try to give you a little more help in understanding sort of how the benefits and costs of this program are going to layout over the next several years and that's you can see the expected phasings of costs and savings on this chart, which shows the impact on OCF from 2009 to 2012. The line on the chart there is OCF, so the bar above the line or increases or benefits to OCF and the bar below the line is reductions in OCF.
So you can see in 2009, we'll be spending between 35 million pounds and 40 million pounds in operating costs and SG&A, but there's also going to be about 60 million of offsetting cost savings so that net-net, the benefit to OCF during 2009 currently expected to be between 20 million pounds and 25 million pounds. 2010, the implementation costs above the line are expected to fall to around 20 million pounds to 25 million pounds and the net savings are expected to increase to around 80 million pounds to 95 million pounds. In 2011, we've targeted savings of 100 million to 115 million rising to over 120 million in 2012.
Now in addition to the costs that affect OCF that was shown on the chart you can see the note below there, we do expect to incur severance, lease exit and contract exit costs of about 35 million pounds to 40 million pounds in 2009 and 30 million to 35 million in 2010 and you'll see those costs show up in the P&L and the restructuring and other charges line again below OCF.
I've already talked about the 2009 cash impact of the fourth quarter contract terminations. The other main item where cash flow doesn't always match the accounting is vacant property charges where we'll be making up front accruals from a bookkeeping standpoint to cover ongoing rent on a building we are vacating. For 2009, the accounting accruals and the cash payments roughly offset, so, we're expecting those to be about equal this year.
Alright. So let's go to the last slide on net debt. I saw in many of the notes this morning people were trying to figure out what's really going on with our debt, taking into account the swaps. I'm glad we anticipated your questions and need for clarification there so we had already put this slide together a few days ago. So this really walks you through reported amounts versus kind of the net cash amount of debt so. Reported debt this quarter obviously affected by significant ForEx movements and we tried to give you some detail in the press release, but I think this slide tries to make it very simple for you.
So reading from the left, you can see the net debt position at the end of Q3 5.7 billion or 4.4 times. And as you start walking to the right, the next column you can see that following the successful bank amendment we repaid 300 million of bank debt in December.
The next column then shows you the negative impact of the movements in dollar and euro exchange rates versus Sterling and just to give you an example, there is a reminder, the dollar/sterling exchange rate fell from 1.78 at September 30 to 1.46 at the end of 2008, so that means the as reported amount, the amount you can pull off the face of the financial statements of the non-sterling debt increased by 410 million pounds in the quarter which was then offset by the $300 million repayment we made so that gives you the reported net debt of 6.1 billion from a GAAP standpoint.
However, the other part of the story is that except for the principal amount on our converts, all of our non-sterling debt has been hedged for ForEx movements. So the real story is in the next column which shows the offsetting movement in the fair value of our swaps which increased 288 million pounds in the quarter so if you apply that 288 movement to the reported debt, you can see that net debt after taking into account into the swaps, in other words, on a net cash basis, is 5.8 billion or 4.6 times.
So with that, Maddie, I think we are ready to take questions.
Thank you. (Operator instructions) And the first question comes from the line of Nick Lyall from UBS. Please go ahead, Nick.
Nick Lyall – UBS
Hi there. It's Nick Lyall from UBS.
Nick Lyall – UBS
I just wondered – can you go back to Slide #20 on the restructuring charges. Is that increased restructuring charges in the November presentation are we by in line? I thought I remembered and I maybe wrong, I thought I remembered a total of 40 million restructuring at both below the line for '08 plus '09 so could you just explain that change at all?
Nick, we knew – oh sorry.
No, it was never that specific in November. This is exactly in line with the prior guidance, so I'll be happy to follow-up with you and walk you through the details, Nick, but there's no change at all here from November.
Nick Lyall – UBS
Okay. That's great. And on the – also on the triple play, because of the economy and other items do you think triple play is starting to slow a little bit? It was still impressive a tiny bit slower than Q3 and Q2, but are you still happy that your customers are going to continue going on a triple play basis from say 60% upwards?
Yes, look, I, I don't think the economy is having a significant impact on triple play penetration. You may start to see some slight slowing down of the 2% growth we were getting per quarter. I think that's just naturally happening as you approach on a 65%, 70% whatever our natural sort of position is. I'm not really sure, but it doesn't, we don't see any sign of slowdown in terms of cross sell in particular, Nick.
Nick the only thing that I'd add to that is frankly my experience in challenging economies is consumers actually like to bundle more rather than less, and look for kind of best value for money and for all of the reasons, Neil's been talking about we think we've never been in a stronger position in that regard so.
Nick Lyall – UBS
And on that point any update yet on your plans just why the market share or pricing rise from April and Sky's prices rise from March?
We wouldn't want to talk to you about that before we spoke to our customers. There's no – currently, no plans to immediately make any movement, but we will continue to monitor our portfolio whether that be a reaction to, in this case, BT's price movement or our view of the value of our broadband in particular proposition given our upgrades, so we are comfortable in the guidance we've given that ARPU for 2009 will be higher than 2008 and we'll just leave it at that.
Nick Lyall – UBS
That's great. Thank you.
Thank you. The next question comes from the line of David Gober from Morgan Stanley. Please go ahead, David.
David Gober – Morgan Stanley
Good morning. Thanks, guys. Jerry, I was just wondering if you could talk a little bit about the debt profile and just remind us when the rest of the prepayment on the bank debt is due and how you guys are planning on hitting that maturity and then a little bit on the interest rate hedges. Given the decline in UK LIBOR, could you just give us a little more detail where your interest rates are hedged now? When those hedges expire? And if there is any potential upside for you guys in terms of reducing your interest rate cost?
Yes, David. Great questions. Thank you. Let me take your second one first if I could on the interest rate swaps. You're right. There is a significant opportunity we have there because today we're locked in at an effective LIBOR rate of 5.25, so everybody knows that LIBOR is quite a bit lower today. Those run-off in April of this year, so we've already been quite active in recalibrating our swap portfolio to the much lower LIBOR environment that exist today and we're definitely going to be able to capitalize and take advantage of that.
I'm not going to today talk about exactly, quantify the exact benefit as we've actually locked in those much lower LIBOR rates and how that nets off against the somewhat higher rates on the bank debt that came out of the amendment process. We'll certainly talk about as those things are actually accomplished and locked in, but yes, there is a very significant opportunity from April forward, no question about it. In terms of the debt profile, we've got 187 million pound payment remaining to be made as part of the amendment process. We've got two choices, we can either pay that in May or for a 1.5 million pound fee we can extend that to August 10.
If you look at the economics of that extension payment versus the increased rates that will kick in when you finalized that amendment by making that payment, the math's pretty simple, which tells you to take the extension and make the final payment in August. We will make that 187 million pound final payment out of cash flow and cash on hand. There's absolutely no need to do anything externally or inorganically or unnaturally. The business, as you've seen, continues to deliver very strong free cash flow growth. We expect that to continue into 2009 and so we're going to have more than enough money in the checking account to make that payment.
You then go on to 2010, we've got 205 million pounds we need to pay, again, that's a fraction of the free cash flow this business generates. You've got 288 of payments due in 2011 and again, not a problem given the strength of this business and the cash flow generation. Then we do have a significant sum coming due in 2012. The amendment bought us a number of years to deal with our 3 billion or so maturity that comes due in 2012. If you followed at least my history, I don't wait for big bangs to happen. I don't wait for one-time large events. You think you can expect us to be opportunistic and realistic about the financing windows that I think will come and go this year, but I think you can expect just to start chipping away at 2012 and then by the time we get to 2011, our capital structure is set up for the very long-term and there are no issues that we have to deal with of any significant size even in 2012 at that point.
David Gober – Morgan Stanley
Great. I just had one quick question for, Neil. I think you've said in the past that the number one metric you guys look at in terms of health of the business is churn and it's continued to show improvement over time and the fourth quarter results are very strong. Just curious how you're looking at that for '09 and if you think that there is a natural kind of uptick there or churn can remain relatively low and kind of in the range that it's been?
No, current views, David, are that it will continue in the range that it is. We're not seeing any pressures on churn that would alter that guidance.
David Gober – Morgan Stanley
Great. Thanks, guys.
Thank you. The next question comes from the line of Jerry Dellis from JPMorgan. Please go ahead, Jerry.
Jerry Dellis – JPMorgan
Yes, two questions, please. Neil, in the past you've said that the competitive advantage of the Virgin Media business is the provision of bandwidth rather than the ownership of content. With an eye on this Friday's Board meeting, does that fundamentally remain the case?
And then just secondly on the cable margin, I noticed that the cable margin was down around about a percentage point in this quarter. I know there were a number of things going on there, but I think you offset the higher Sky programming cost on premium content with a price increase of your own. So, I just wondered really why the margin came down and whether you think that further declines in that cable margin are on the cards. Thank you.
Sure. Jerry, I won't comment on your first question as you would expect. In respect to the cable margin, you had an impact in the fourth quarter with Sky basic which obviously hits our margin. There was also an impact from facilities. There was an equal, (inaudible) equal and opposite benefit that set in the margin of Virgin Media TV that offset the Sky basic, so, we would foresee over the medium to long-term our margins in the cable business improving, not deteriorating.
Jerry Dellis – JPMorgan
Thank you. And the next question comes from the line of Steve Malcolm from Arete Research. Please go ahead, Steve.
Steve Malcolm – Arete Research
Yes, good afternoon, guys. I'll go for standard three questions. First of all, I just – I don't want to ask you about the sale of content, but I do want to understand that if large proceeds from (inaudible) come in, are you able to use them to pay down, make a prepayments on your large amortizations immediately, first question.
Second, just on that churn question again, did a great job on non-pay disconnects, but I'm sort of quite surprised that the movers elements of your churn hasn't come down more given the lack of housing activity in the UK. Can you just sort of give us an idea of your thoughts on why that's happening and whether you can push down further on that from here?
And finally on Sit-up, can you give us some sort of sense of a sort of best case, worst case in terms of the cash envelope of moving forward Sit-ups, whether you shut it down, sell it, where we go from here, what we should think about in our numbers in terms of cash impact in 2009? Thank you.
Sure. I'll pick up the last two and I'll get Jerry to talk to the former. The main reason you're not seeing a significant movement in movers, i.e. directly related to the movers market is because of renters. So we do have – we got pretty even mix, I guess, of homeowners and renters in our base, but renters are not impacted in terms of moving from the economic climate. So I wouldn't see it moving materially from that position, Steve. Obviously, we also carry our percentage of students. In fact, increasingly so, particularly, as we've increased our speed to broadband, we're attracting very, very profitable students into the base. In respect to Sit-up, we haven't completed our strategic review yet. I wouldn't see any mitigation to Sit-up being material in the overall scheme of things. Jerry, do you want to pick up?
Yes, absolutely. So the short answer to your question is, yes, there is flexibility. One of the many benefits that were – came out of the bank amendment process is flexibility to make prepayments of debt, not on a pro – bank debt, not on a pro rata basis and at less than par. So there is a lot of technical things we can walk you through that offline, but the short answer is, yes, we do have significant flexibility if we did that to, I would say, on the – capitalize on the dislocation in the credit markets in that respect.
Steve Malcolm – Arete Research
Okay. Is that sort of equally split between tranche A and tranche B and the C facility?
Yes, the old ones, yes.
Steve Malcolm – Arete Research
Alright, thank you very much.
Thank you. And the next question comes from the line of Joe Boorman from New Street Research. Please go ahead, Joe.
Joe Boorman – New Street Research
Thank you. First question, I have is do you think there is much elasticity in line rental pricing or do you think they just kind of get lost in the noise? Secondly, you spoke about ARPU growth now in '09, is that mostly driven do you think and your kind of forecast at least by broadband TMX? And then, lastly, could you just give us kind of some kind of idea as to how the response has been for the three month free offers this year?
Yes, I'll pick those up, Joe. So I think there is – as we demonstrated in June last year, reasonable resilience in terms of pricing for the bundle when the bundle has quality in it. So rather than just looking purely at elasticity within the line rental market, I'm increasingly getting comfortable with being able to charge an appropriate return for a quality product. In respect to ARPU growth, I think that can be driven, in terms of upwards, I think TMX on broadband and, in fact, on TV will be a significant contributor to ARPU growth offsetting the small decline on back book and the reduction in usage. But I think there is per my hint on the first line, I think there's an opportunity potentially for some pricing movement as well as we suggested last year. We'll have to wait and see though.
In respect to marketing activity, I read the note this morning. The three month free offers that we put into the market are for higher tiered bundles, particularly our recession buster. We measure the value of products or customers that are entering the organization both on an inbound ARPU basis and on an MPV basis on a weekly (inaudible) and there has been no deterioration in that. So we will from time to time put various changes and mixes into the market, but we measure it on both an individual channel basis and a portfolio basis and I repeat, the inbound ARPU over the last month is no inferior to the inbound ARPU of two months or three months ago.
Joe Boorman – New Street Research
So on a value approach then really just saying three months free is more marketing and spreading over the 18 as opposed to lowering kind of revenue per RGU for these customers?
That's correct, yes.
Joe Boorman – New Street Research
Operator, we've got time for one more question.
Okay. Thank you very much. And the next question comes from the line of John Karidis from MF Global. Please go ahead, John.
John Karidis – MF Global
Congratulations on the Q4 results. I just wanted to ask two questions, please if I may. Firstly, I'm trying to understand the difference between the take up of the V PLUS product versus the Sky PLUS product. It seems to be quite a big difference. Am I comparing apples with apples or for example, is video-on-demand service too successful to holding back the take up of V PLUS? And then secondly, completely separately, assuming that Ofcom does oblige Sky to wholesale primary league football, if you factor in all of the appeals from Sky, when would be the earliest that this system might come into operation? Is it end of next year or further out do you think?
John, let me just handle that sequentially. We entered the DVR market much, much later than Sky. Sky launched their DVR about four years ago of that order. We only launched DVR two years ago. We took the decision to launch VOD first. I don't see VOD being in anyway anything but complimentary to the DVR. In fact, we're looking at some analysis the other day where the combination of VOD usage and V PLUS usage has performed some of the highest value customer segments for us so. As per my notes, we don't, we would see V PLUS continuing to grow to the same levels of penetration that is enjoyed by our competitors whilst we see advantage of video-on-demand, which clearly our competitors cannot.
In respect to Ofcom, John, how long the piece of string? I've expressed my frustrations on several occasions, publicly and privately at the complexity and opaquely of the regulatory environment of which Ofcom and the Competition Commission needs to work within. We are hopeful that Digital Britain itself will start to address some of the deficiencies in the process such that when a regulator can come out and say there is some fundamental things that are wrong in this market that it could still take months and, yes, it could take years. So – unfortunately, we will continue to work with the regulators and with government to ensure that the whole of the market get access to content that is withheld by a dominant player and hopefully, UK consumers can reap the benefit of it.
John Karidis – MF Global
That's very fine. Thanks for taking my questions.
Thank you. Look, thank you very much, everybody, for attending the call. I hope you'll agree with Jerry and I, we're very pleased with the performance operationally, financially and strategically. Look forward to talking to some of you again over the next 24 hours and look forward to talking again at what we hope will be another strong performance for our first quarter. Thank you very much indeed.
Thank you, ladies and gentlemen for joining today's conference. You may now replace your handsets.
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