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Executives

Richard Williams - Director, Investor Relations

Neil A. Berkett - Chief Executive Officer, Director

Rick Martin - Group Treasurer

James F. Mooney - Chairman of the Board

Analysts

David Gober - Morgan Stanley

Jerry Dellis - J.P. Morgan

Nick Lyall - UBS

Steve Martin - Areton Research

Wilson Fry - Merrill Lynch

Thomas Eagan - Collins Stewart

Jay Forman - Bay Street Research

Ivek Conna - Deutsche Bank

Virgin Media Inc. (VMED) Q1 2008 Earnings Call May 5, 2009 8:00 AM ET

Operator

Good afternoon, ladies and gentlemen and welcome to the Q1 2009 Virgin Media Incorporated earnings conference call. My name is Thay and I will be your coordinator for today’s conference. (Operator Instructions) I will now hand you over to Richard Williams to begin today’s conference. Thank you.

Richard Williams

Thank you, Operator. Good morning or afternoon to you all and welcome to Virgin's Q1 results call. I am Richard Williams, Director of Investor Relations and with me today are Neil Berkett, our CEO; Jim Mooney, our Chairman; and Rick Martin, our Group Treasurer.

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.

Now I will turn you over to Neil.

Neil A. Berkett

Thanks, Richard and thanks for joining the call, everybody. Unfortunately our CFO, Jerry Elliott, is currently on medical leave for family health concerns. We expect he will be away for two to three weeks, so today Rick Martin, our Group Treasurer, will be deputizing for him. Richard will also join for the Q&A session.

I am pleased to say that today’s first quarter results show encouraging progress operationally and financially against our key strategic priorities. On my first slide, I set out some key highlights. Financially, we continue to improve revenue trends with the third successive quarter of year-on-year consumer on-net revenue growth. OCF was well within our guidance at £312 million and free cash flow of £62 million was up slightly on the previous quarter.

Operationally, we delivered 1% year-on-year growth in ARPU to well over £42 and churn is down again to a record low of 1.1%. RGUs are up 6% year-on-year at a record £12.6 million and triple play is up to 57%.

Following some price rises from our competitors, we’ve announced some of our own price rises. These will take effect in May and will further underpin ARPU growth and support our investment in improving product quality. We’ve also begun to implement the restructuring plans we announced in November last year to create a fully integrated customer focused organization and we are on track to deliver operational improvements and our targeted annual savings.

Turning to our strategic priorities, which are to lead the next generation broadband market in speed and quality, to lead and redefine the mid-market TV experience through video-on-demand, and to leverage our position in mobile. We continued to make great progress in the quarter. Our broadband tier mix improved strongly and our 50 meg rollout is on plan.

We’ve continued to add content to our BOB services and have delivered a record usage of 55 million views per month in the last quarter. And in mobile, we continued to experience strong contract net adds.

At the end of the quarter, we disposed of our [fit-up] business and as a result, all of our financials reflect this as discontinued operations, with appropriate adjustments of prior period figures.

Before we go into the detailed operational and financial results, I want to touch on some of the other growth opportunities that we see which give us the scope to further enhance ARPU, stimulate customer growth, and improve customer loyalty. We continue to use our strong cash flow to exploit the capabilities of our network, improve our consumer offering, and lay the foundations for future growth.

As I mentioned, we’ve already announced price rises which reflect the success we have had in improving the richness and quality of our products, which will drive further improvements in ARPU. And the third significant extinction to the cable network in over a decade, we’ve identified around 0.5 million homes whose proximity to our access network make them a commercially attractive opportunity over the next few years. We plan to begin by extending our coverage by over 50,000 homes in 2009.

We are working to ensure our TV services stay ahead of changes in the consumer behavior. We expect to increase our HD content steadily to complement our existing linear and on-demand lineup. We are currently negotiating with several broadcasters with a view to launching at least five new HD channels in the third quarter.

We have unique network strengths, so we are working to exploit them further. For example, we’ve recently had some positive results from our video-on-demand advertising trial and this offers the potential for an attractive new revenue stream in the future.

We are also investing in a series of value-added services that take advantage of the power of our broadband product and enhance our proposition. For example, we recently launched a network storage facility that enables customers to back up and store their digital files. We also allow our broadband subscribers toward a free photo prints and we are developing other differentiated value-added services which will exploit our network strengths.

Looking further ahead to the next generation of TV, we are working on capitalizing on technological convergence by developing a prototype next generation screen-based interface that combines traditional broadcast content with on-demand programming, web-based entertainment, and interactive features in a simple and user-friendly format. We believe these elements will enable us to differentiate our offering even further and drive further growth over the coming years.

So let’s go into the detailed results, starting with ARPU, which is up year-on-year for the third successive quarter. This is being driven by selective price rises together with successful cross-sell and up-sell, which has offset declines in telephony usage. The competitive environment also appears to be stabilizing, given that we and others have announced price rises, and some competitors have been having financial difficulty, so we are confident that we will grow ARPU in 2009.

Moving on now to demonstrate other ways that we are improving the quality and value of our customer base -- you can see that churn is down sequentially and year-on-year to a new record low, which is a great achievement. I think it is important to note that in a tough economic environment, non-pay churn is down both sequentially and year-on-year. This reflects the improvements we have made on our credit and collection processes and the underlying quality of our customers and consequently growth in the lifetime value of our customer base.

Voluntary churn is also down, which we ascribe primarily to improving service, quality, and value of our products.

Looking forward to Q2, as usual we do expect churn to seasonally increase, which will mean that we will have negative customer growth in Q2, as we did last year. You can see from the chart that churn rose in Q2 last year due to an increase in [movers] churn. In terms of our cross-sell and bundlings, you can see the triple play penetration continues to rise to a record 57%. Dual penetration has also increased 84%. We also have over 600,000 home customers that have a Virgin Mobile.

This is all helping to drive improvements in customer quality, lifetime value, and continued low churn.

Let me emphasize that we are very happy with the improvements we have been making to the quality of our customer base and growing the value of our annuity stream. As I have shared with you before, we are very focused on growing the lifetime value of that customer base. The type of customers we are acquiring fits right in with our preferred profile in terms of ARPU and churn, and so I am comfortable with our RGU growth and relaxed about the seasonal increase in churn we expect next quarter. I am delighted that we have had three successive quarters of year-on-year ARPU growth and that we will continue to see ARPU growth this year.

So with that, let’s move on to broadband, where we have further evidence of improving mix and customer quality, underpinning what I’ve been saying about the shift of quality and growing value. Here you can see the continued growth in subscribers but more importantly, you can see the improved mix as we continue to upgrade speeds and focus on upselling customers. We have seen a year-on-year slow-down in broadband growth due to our lower gross adds, a possible macroeconomic impact and our deliberate shift to focus towards higher speed and higher ARPU tiers where we are showing good growth and taking revenue and profit share.

In February, we stopped marking our two megabits per second service and focused on our 10-megabit as our lead product.

We live in a world where there is an ever-increasing demand for bandwidth and we have clear evidence that our customers are paying for quality and higher speeds. In Q1, 75% of gross broadband additions were taking 10-meg or higher at the point of sale. That compares to just over 19% a year ago. The 10-meg tier has grown 62% in a year and the 20 and 50 tiers have grown by 48%.

In our marketing messages, we are positioning the superior quality aspects of cable over DSL copper with visible success. As we pointed out last quarter, independent research from our speed tester, Epitiro, showed that average speeds of 10-megabit service were at least double the speeds of up to 8-megabit DSL competitors.

Our customers download over 10-gigabits per month on average, compared to just 10-gigabits at say Carphone Warehouse. That’s over 2.5 times as much. And why do our customers download so much more? Because they can -- there’s general browsing, uploading, downloading video, music, large files, photographs, and use of richer media websites is much easier. Because it is a better experience with Virgin Media, they do more.

We intend to exploit this advantage further and continue to redefine the broadband market by beginning to upgrade our 2-megabit customers to 10 this month. This means that our lead and standard broadband product will typically at least double the actual speed that the average 8-megabit DSL customer receives. That is a huge advantage that our copper competitors will struggle to match.

And finally on broadband, we remain on track to complete the 50-megabit rollout during the third quarter.

Moving on to TV, we’ve had another good quarter and net adds remain strong. We have seen continued growth in the usage of our video on demand service, demonstrating that the steady transformation in the way people watch and interact with their TV is continuing unabated. Fifty-three percent of our TV customers are regularly using VOD with an average of 29 views per month. That is basically an average of 1 VOD view per day.

Usage continues to be boosted by BBCI player, which we added in June last year. We are the only TV platform in the U.K. to carry this service. We had 15 million views per month of BBCI player alone in Q1. As you can see, total average monthly VOD views has grown to 55 million.

We believe our huge library of 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, which has provided another boost.

We also had another good quarter of V-Plus growth, where subscribers are up 68% year-on-year. Our research shows that DVR customers churn less than other customers. Even with such strong growth, we’ve still only penetrated 17% of our digital base, so we feel there is strong growth opportunity here.

All of our 600,000 DVR boxes are HD ready and as I have said, we intend to grow our HD content and capability this year, commensurate with the pace of market demand for HD. Of course, our key competitive TV advantage is video-on-demand and we already have around 270 hours of HD VOD content, which has recently been bolstered by our launch of the HD version of BBCI player on our platform.

Now turning to mobile, where we had another successful quarter with 63,000 net adds. The vast majority of these were sales through our own channels, which helps us to keep our acquisition costs down and profitability up. We’ve grown our contract base by 63% in the last 12 months.

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 customer increases. Contract customers have much lower churn and higher ARPU than prepay customers. This means that the lifetime value of a contract customer is significantly higher than a prepay customer.

Within prepaid, we’ve made a decision not to engage heavily in the extremely competitive low priced handset end of the market, which has resulted in net subscriber losses. We are aiming to attract and retain higher value, longer term customers and have launched a new [edit] tariff to stimulate prepay usage.

Now turning to business, as you can see, revenue was £150 million, which is down £11 million or 7% on Q1 last year -- £9 million of this decline is due to the conclusion of a very lower margin terminal five infrastructure project. Consistent with our strategy, we continue to see a mix shift in retail revenue from voice to data. Retail data is up 14% on Q1 last year and outweighs the decline in retail voice. Wholesale revenue is down year-on-year mainly due to lower service provider customer traffic.

Now turning to our content segment, which now consists solely of VMTV following the disposition of Sit-up on April the 1st -- VMTV revenue was up 15% on Q1 last year, mainly due to the carriage agreement we have with Sky. Revenue was down slightly on the previous quarter due to lower advertising revenue. Turning to U.K. TV, our 50% joint venture with the BBC, our share of net income was £4 million in the quarter and we received £3 million in cash.

Let me now hand over to Rick to run through the financials.

Rick Martin

Thank you, Neil. The first thing to point out to you all is that we have changed our segment disclosure this quarter to reflect our new organizational structure. We now have three reporting segments -- consumer, which consists of on-net, off-net, and mobile; the business segment, and content. We are not disclosing separate OCF for each segment. In fact, as consumer and business are so integrated, it is difficult to make certain cost allocations. We recognize that this means that there is less disclosure than you are used to this quarter, particularly in relation to costs. We are very conscious of this and we intend to give much greater cost granularity next quarter, with a more detailed breakdown of both operating costs and SG&A.

We are still working through some of the accounting changes and U.S. GAAP requirements to allow us to do that.

On my first slide, you can see we have increased consumer on-net revenue year-on-year as a result of the increase in ARPU. On-net revenue has grown sequentially for the third quarter in a row. Mobile revenue is down due to a reduction in our prepaid space being partially offset by contract growth, which is something we are encouraging and results in a much more stable and profitable customer base.

Business revenue is down year-on-year, mainly due to the completion of the low margin terminal five contract. Finally, content revenue is up year-on-year due to the new Sky carriage deal.

Moving now to the cost lines on our income statement, compared to Q1 last year, operating costs are down slightly and gross margin is relatively flat. Gross margin has improved sequentially due to seasonally lower VMTV programming costs.

SG&A was up 2.9% year-on-year due to general cost inflation and £3 million of costs relating to our cost-saving program. SG&A was up sequentially mainly due to higher facilities costs and seasonally higher marketing costs, as we guided last quarter. This results in OCF for the quarter of £312 million, well within our guidance.

After deducting CapEx and net interest, free cash flow was £62 million, which is down year-on-year due to growth CapEx investment, principally in upgrading our network for broadband speed upgrades.

Free cash flow is a key attribute of the strength of this business and it is accordingly the metric we have always focused on the most. So with that, let’s turn to my last slide on net debt, which stands at just over £6 billion, or 4.8 times annualized OCF. We have foreign exchange hedges in place for all of our foreign currency debt excluding the convertible, and so I have shown the debt balances at these hedged rates in the right hand column.

Under this basis, net debt is £5.7 billion, with leverage at 4.6 times annualized OCF. Our cash balance was £140 million at the quarter end and in April, we realized a net cash gain of £72 million on settlements of some foreign currency hedges which at that point expired.

We also have access to our revolving credit facility, of which £79 million is available and un-utilized.

Under the terms of our recent bank amendment, we are required to repay £187 million to our lenders and we have recently exercised our three-month extension option so that we are not required to make the payment until August this year. The decision to extend was purely an economic one, as the £1.3 million pound cost of extending is more than offset by the savings we made on delaying the increase in interest margin on certain tranches for another three months.

As many of you will know, we have been actively pursuing new swap agreements to take advantage of lower interest rates. I can now confirm that we have swapped £3 billion of bank debt into fixed rate arrangements at an average rate of 2.18% until April 2010. Previously, we had swapped £3.2 billion at 5.25% until April 2009.

If we assume that we make the £187 million pay-down in early August, then the net impact of the interest savings resulting from the new swaps partially offset by the higher margin on our bank debt, will result in us saving £59 million this year, or £76 million on an annual basis. We are also in the process of entering into further new interest rate swap agreements beyond April 2010.

So with that, we will be happy to take your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of David Gober at Morgan Stanley. Please go ahead.

David Gober - Morgan Stanley

Good morning, guys. Thanks for taking the question. Two, if I could -- first, I think last year you guys had made a comment following the rate increases that you hadn’t seen a material increase in churn. I was wondering if you could give a little bit of color what you’ve seen in terms of churn post the notifications that have gone out on this year’s rate increases. And also, there’s been some chatter that T-Mobile might be selling its U.K. assets. I was wondering if you guys could give a little bit of color on what impact any sale those assets would have on you guys.

Neil A. Berkett

Sure, David, it’s Neil. I’ll pick up on both of those. So in respect to churn, you are quite right -- when we put the price increase into the market last June, we didn’t see any measurable impact on churn. I think you probably gathered by now my fixation in driving churn down in the organization is the key metric to ascertain the quality of your customer base. I think it’s fair to say we wouldn’t have put a price increase into the market if we felt that it would have had a material impact on churn.

The profiling of both the letters that have gone out advising of the price change and where we are up to in terms of the billing cycle are reasonably consistent with previous experience, David.

In respect to the T-Mobile asset, clearly the arrangements we have with T-Mobile as a wholesaler of our MPNO business are transferable so if that asset was in fact sold, then we are well-protected.

David Gober - Morgan Stanley

Great. Thanks.

Operator

Thank you. The next question comes from the line of Jerry Dellis of J.P. Morgan. Please go ahead.

Jerry Dellis - J.P. Morgan

Yes, good afternoon. Two questions, please -- firstly in terms of what you are seeing today on potential footprint expansion. I remember last November when you unveiled the first step in that process covering 50,000 homes. You talked about a cost per home of around 200 pounds. I just wonder whether the increased scope of the project is consistent with that 200 pounds per sub. And also whether you think this footprint expansion is necessary for you to achieve further subscriber growth from here. Would you be able to achieve incremental subscriber growth in the absence of an expanded footprint in your view?

And then secondly, more quickly, just your updated thoughts on the potential for a secondary listing in the U.K. -- what are the potential timeframes, what are the issues that maybe still need to be resolved? Thank you.

Neil A. Berkett

Sure, so I’ll pick up on both of those. The extinction in terms of the expansion of our footprint is within the guidance we gave on a per homes basis last November. I think £200 is a reasonable guide in terms of an average per homes passed. I mean, you have seen modest growth in the last year or so without network expansion. Clearly the market is tighter than it has historically been but then I go back to the comment I made earlier, and what we are seeing is a significant upgrade in terms of the quality of customer, measured by sort of economic value that we have seen. So we are comfortable that the footprint expansion is incremental to what we would have otherwise seen.

I think as Jerry has said in respect to the secondary listing, we are exploring. We are working our way through what that might look like if in fact we were to proceed, and as soon as we are in a position to announce either way, we will notify the market. What we are keen to do is to do a fully comprehensive review so that when we come back to the market with a yes we are going to or no, we are not going to, we are completely transparent in how we reach that conclusion.

Jerry Dellis - J.P. Morgan

Okay. Thank you. Could I just follow-up on the first question? I guess for this year, you are guiding towards the top-end of 13% to 15% CapEx sales, and the anticipation had been that from next year, that level of capital intensity would decline a bit. Is that still the case?

Neil A. Berkett

Yeah, we’re not making any changes to our capital guidance.

Jerry Dellis - J.P. Morgan

Thanks.

Operator

Thank you. The next question comes from the line of Nick Lyall at UBS. Please go ahead.

Nick Lyall - UBS

Good afternoon. Could I ask a couple of questions, please? There’s no real mention of the economy in the statements at all. I mean, is that because there’s just nothing new to report or is there -- do you actually think possibly you can see the light at the end of the tunnel, at least from your subscribers’ point of view?

And on the wholesale as well, a couple of new stories this morning on the wholesale in the press, but I’m assuming you are going to confirm there’s no change in wholesale policy but could you just answer as to whether you think there’s demand from other operators for a wholesale product from Virgin, or is it just something you’ve -- you know, is this something you just decide not to do as opposed to you’re concerned there’s actually no demand for the product? Thanks.

Neil A. Berkett

Nick, the silence on the economy is really a reflection on no change. We certainly don’t see any strengthening in terms of consumer demand. I think we’ve experienced both in terms of pressure on the portfolio and acquisition of new customers. That experience has been consistent now for the last six months. I wouldn’t expect that to change materially through the balance of 2009. We are constantly keeping our finger on the pulse so that we are managing the business to optimize our free cash flow growth over the next few years. The program we announced last November is in a way a mitigate to that -- to the economic conditions, albeit something we would’ve done anyway.

Yes, there was some speculation in the press. I think it is exactly that. It is speculation. We have had conversations with Digital Britain around what wholesaling might look like on their instigation. We have made no change to our plans that we intend to exploit our network advantage, predominantly through retail. And whilst I wouldn’t put it categorically, not interested in wholesale, it is not on the agenda in the short to medium term.

Nick Lyall - UBS

Thanks.

Neil A. Berkett

I might just add to that, actually, that [OP Comm] has come out on two separate occasions in the last six months and stated that they see absolutely no reason from a regulatory point of view that an involuntary move into wholesale would be forced upon us.

Operator

Thank you. The next question comes from the line of [Steve Martin] at [Areton] Research. Please go ahead.

Steve Martin - Areton Research

Good afternoon, guys. I’ve got three questions, please. First of all, just on HD and Sky in particular, you had a very good quarter on gross adds. Can you just tell us of any sort of specific retention measures you had to put in place this quarter to counter that, and whether those should ease off as maybe Sky’s level of activity on HD drops off for the next couple of quarters?

Secondly on gross adds, where the performance was actually a bit better this quarter year-on-year, been running at sort of minus 14%, minus 15%, just sort of talk us a little bit through that and whether you can see a point at which you can start growing your gross adds again, and that’s anytime in the near future.

And finally just to sort of I guess to simplify the comments you made on your cost of debt, can you just tell us what your sort of blended growth cost of debt will be post the new swap arrangements in April? Thank you very much.

Neil A. Berkett

Sure, Steve, so I’ll pick up on the first two and Rick will answer the last one. We see HD as an evolution in the U.K. It’s not a revolution, and we think it’s appropriate that we enter the market now, so we are making appropriate investments in terms of HD. Priority to date has been to ensure that we can absolutely leverage our network advantage and now we’ll start to, if you like, take application back into content and invest in acquiring HD -- appropriate HD channels. Again, I think it’s important that we acquire HD content where HD makes it different and we won’t be investing in the tile.

In respect to specific retention around Sky’s push in terms of HD, we haven’t had to have any material retention in place. I think more and more we are seeing the market segment around various offerings from ourselves, from Sky, or from BT. You know, this is not a zero sum game and so we haven’t had to do anything material in the retention space against HD and therefore to your follow-up question, Steve, there’s no -- there will be no lessening of that because it’s not in place in the first place.

Gross adds -- I come back to the comment I made earlier about this is a quality game and we are only interested in acquiring customers that create the appropriate returns in terms of economic value, net present value, lifetime value, various ways in which we ascribe and calculate.

I think you are seeing basically the current trajectory around gross adds stabilize. I wouldn’t imagine us being significantly more aggressive or measurably more aggressive through the course of 2009. Again, that’s an economic -- it’s a combination of an economic proposition, what we are prepared to pay in to in terms of [SAC] for the return that we will get, the whole quality argument but also, you end up chasing your tail if you are just chasing RGUs and subs. We are chasing revenue here. So I would have -- you know, having this conversation 12 months ago, I would have seen 2009 as the year that we would start to grow quality gross adds. I am hopeful we’ll start to see that in 2010 but that’s actually not a function of the quality of the product we put into the market or the value for money we put into the market. That’s a function of the economic climate. So all the things that we are investing in, whether it be growing our footprint, investing in HD, some of the work we are doing around bringing the Internet into the home, the likes of BBCI player and other Internet activities are all elements in which we think we can grow the business going forward. And clearly we have given guidance in terms of consumer revenue growth in the second half of the year.

In respect to the -- your question around the cost of debt, I will hand it over to Rick.

Rick Martin

Thanks, Neil. Steve, I think probably the way to do this is just to mention quickly in three parts and we can certainly pick up offline but first of all, we’ll be providing more detail on our hedging program than we have in the past in the Q, which will be filed in the near future. That spells out pretty clearly both the interest rate due from the counter party and the interest rate due to the counter party. Obviously the latter will be more in your interest.

As a rule of thumb, we are working towards hedging somewhere between 85% and 90% of our debt, whether by coupon or swap. Broadly, Steve, that will translate to 75% to 80% of the bank debt being hedged. So we feel that’s a prudent way to add predictability to our cash flows, and I think with those two rules of thumb and the aforementioned more wholesome disclosure of our hedging program in the Q, you’ll be in good to calculate that out.

Steve Martin - Areton Research

[inaudible]

Rick Martin

Sir?

Steve Martin - Areton Research

Great. Thanks.

Operator

Thank you. The next question comes from the line of [Wilson Fry] at Merrill Lynch. Please go ahead.

Wilson Fry - Merrill Lynch

There are a lot of companies out there at the moment basically significantly re-weighting on the back of doing rights issues. Given that you are considering a secondary issue, can we assume you’d be raising substantial amounts of equity? And just give us your sort of high level thoughts on debt versus equity in any capital structure and ideally how you would like to see Virgin in the medium term? Thanks.

Neil A. Berkett

I wouldn’t want to comment in terms of any equity participation. Currently we are exploring the secondary listing. I wouldn’t read into that that we may combine that with any form of equity raising at all, and Jerry’s been on record for -- and becoming a stuck record -- in respect to our focus on delevering our organization. I think it’s fair to say in the current climate we’d like to see our -- well, the market would like to see our debt levels come down a bit, focusing on the free cash flow growth that we are doing, consensus sees that to get into the mid threes by 2010 and I think all of that has been pretty well laid out. Jerry’s also been on record in terms of saying we’re not going to wait until 2012 before we address that issue, so I think you can expect to see us operate both in terms of free cash flow going towards our debt profile, coming down but also any other activity that we may participate in.

Wilson Fry - Merrill Lynch

Thanks.

Operator

Thank you. The next question comes from the line of Thomas Eagan at Collins Stewart. Please go ahead.

Thomas Eagan - Collins Stewart

Great. Thank you very much. I wanted to ask questions on voice -- you know, here in the U.S., we are seeing the rate of wireless substitution ebb a little bit. I’m wondering what you are seeing over there in the U.K. And also, if you could describe the profile of the voice customer, clearly the profile of the broadband customer is high-end. And then just lastly on mobile broadband, what early results you are seeing so far with that launch. Thanks.

Neil A. Berkett

Okay, cheers, Thomas. I’ll pick those up. So the U.K. mobile market is pretty well saturated, both prepay and contract, so you are seeing principally share shift in limited overall growth and as a result of that, the same trend in terms of fixed wireless substitution, at least maturing. We’ve seen over the last three or four years roughly a 15% minutes per home decline, per household. We don’t see any significant shift to that trend. We gave some quite detailed guidance in this space in November of last year and we would expect that to continue.

If you -- your second question in respect to the profile of our voice customer, I mean, clearly we are an incumbent telco in this respect, unlike the U.S. cable operators. But you only need to look at our triple and your penetration into the fixed business at 57% triple and 84% dual, you are creating a fairly common profile amongst your customers -- very few of our customers now are sold as telco. If you go back two or three years ago, that demographic was reasonably pronounced. The demographic we now have across our customer base is pretty consistent, as is driven as I say, by the 84% dual, 57% triple, 600,000 of our homes have got a Virgin mobile, so either a triple or a dual by definition.

Mobile broadband, your last comment, again here our observation is this is a complementary product set rather than a substitution. Our entry into the market is absolutely driven by our desire to ensure that we cover all of the screens, all of the time, and that you will see us as we develop our IP interfaces in the TV space to start to move the -- our entertainment across all three screens.

We are not participating in the sort of free laptop high sec regime, and I guess our share is probably commensurate with that. But that is also a function of the very strong focus we have around economic value. We drive this business for free cash flow growth, not widget growth.

Thomas Eagan - Collins Stewart

Great. Thank you.

Operator

Thank you. The next question comes from the line of [Jay Forman] at [Bay Street] Research. Please go ahead.

Jay Forman - Bay Street Research

Thank you. I’ve got two questions, please. The first one is just if we look at the sequential gains in triple play penetration in the base, the rates of growth would have been slowing for five or six quarters now. Do you kind of see that as approaching some sort of natural cap or would the pricing between singles and triples is a bit out, or is that something you want to address or are you happy with it?

And then secondly, just on your answers to the earlier question on footprint, am I right then to understand that despite the higher CapEx, you think returns would be higher for the 50,000 new homes this year than they would be by perhaps pushing it a little bit harder in the existing areas?

Neil A. Berkett

Yes, I’ll give some clarification around the 50-odd thousand homes that we’ve identified -- in fact, let me pick up on that and then I’ll come back to your question on triple play. So the analysis we’ve done, which is a combination of new build and in-fill, shows that around the £200-odd mark that it is viable and sensible to invest our capital in this space. The pace of that investment will be somewhat driven by the economy. Clearly your cost of build for a new build is lower than it is for in-fill, hence the blended couple hundred pounds. And we think this is very predictable return, so as we’ve started this program, which we did at the back end of last year, our penetration rates following the build are very, very consistent with our modeling -- in fact, slightly ahead of our modeling. And again, stuck record, but our focus on value is all around ensuring that we would continue at that pace, so I think it is a very sensible use of our capital versus some of the other areas in which we can invest.

Jay Forman - Bay Street Research

Sorry, Neil, can I just -- if we sort of look at home, sort of the customers you serve over homes passed, it’s 38%, and so we would assume then that there’s sort of 60% or so that you gave passed but don’t serve, which based on the disclosure you think well they are serviceable -- are we just taking that too literally and is there a lot of CapEx then to serve those customers? Or why is it you just don’t expand at all and just push harder on the 60% you don’t touch?

Neil A. Berkett

Because you -- it’s pretty well untapped territory, so you’ve got a curve where your initial penetration moves very, very rapidly and that is by far the most efficient use of cash. So we happen to be calling it capital -- it’s cash, and whether it’s CapEx or whether it’s OpEx, we treat all cash with the common value and again, I repeat, I think this is a very sensible use of cash. The alternative is obviously to pump higher in terms of stacking to the unpenetrated area. This in our view provides a better rate of return, otherwise we wouldn’t do it.

In respect to triple play, yes, it is just starting to come up a bit but we are moving both triple and dual. You know, we talked about this just over 600,000 mobile that’s in there at the moment. The slow-down in terms of triple doesn’t concern me. I don’t see the glass ceiling yet. It’s certainly not 60. It’s well north of that and whilst we continue to drive ARPU, and ARPU both on-net and with wireless, I think we’ve got a lot of opportunity to continue to grow the value of our individual customers. So we are not really changing the way in which we go to market. We are trying to simplify, part of your question, the way in which we’ve got a step up from single to dual to triple, and you are seeing that flow through the customer. So all in all, I think our triple, our dual, and in fact our quad all support the guidance that we’ve given around ARPU growth going forward.

Jay Forman - Bay Street Research

Thank you very much.

Richard Williams

Operator, we’ve got time for just one more question, please.

Operator

The next question comes from the line of [Ivek Conna] at Deutsche Bank. Please go ahead.

Ivek Conna - Deutsche Bank

Good morning -- sorry, good afternoon. I just wanted a bit of a clarification on a point which you talked about just now with regard to in the new build areas, clearly there’s an element of pent-up demand which leads to attractive growth. What levels of penetration do you aim or do you think you will be able to achieve within the first year, please?

Neil A. Berkett

We don’t give that level of micro guidance. I’m sorry. I just repeat -- we’ve got fairly tight ROE hurdles that we explore as we go through our investment process and unless we’ve got a fairly rapid return on this, then to the point that Joe was making, you’d be better off just upping your SAC. So it’s attractive. We will -- once the program reaches a bit of momentum, probably not the next quarter but maybe the quarter after, we may well come back and give you some actual granularity around that.

So apologies, but that’s a level of guidance we wouldn’t normally give.

Ivek Conna - Deutsche Bank

No, that’s fine.

Neil A. Berkett

Okay, with that, I would like to thank you all for your participation in the call. Obviously we’ll be following it through with a range of one-to-ones over the next few days, but appreciate your support. Thank you very much indeed.

Operator

Thank you for joining today’s call. You may now replace your handset.

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