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Executives

Richard Williams

Neil A. Berkett - Chief Executive Officer, Chief Executive Officer of Virgin Media Investment Holdings Limited and Director

Analysts

Paul Sidney - Crédit Suisse AG, Research Division

Timothy Boddy - Goldman Sachs Group Inc., Research Division

Bryan D. Kraft - Evercore Partners Inc., Research Division

David-A Wright - Deutsche Bank AG, Research Division

Nick Lyall - UBS Investment Bank, Research Division

Adam M. Rumley - HSBC, Research Division

Stephen Paul Malcolm - Arete Research Services LLP

Laurie Davison - Deutsche Bank AG, Research Division

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Virgin Media (VMED) Q1 2013 Earnings Call April 24, 2013 8:00 AM ET

Operator

Good day, and welcome to the Virgin Media Q1 2013 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Williams, please go ahead, sir.

Richard Williams

Thank you. Good morning or afternoon to you all, and welcome to Virgin Media's Q1 results call.

Today's call may make reference to the proposed transaction with Liberty Global, which we announced in February. Please, may I direct you to the statements on Slide 2, which tells you where you can get more information about the proposed transaction and which should be read in conjunction with any statements made on today's call about the proposed transaction.

In addition, please let me draw your attention to the Safe Harbor statement on Slide 3, where we set our cautionary disclosures, which should be read with any forward-looking statements we make today.

I'll also point out that we will be mentioning certain non-GAAP measures today. The required disclosures with respect to these can be found in the slide appendixes. And now, I'll turn you over to Neil Berkett.

Neil A. Berkett

Thanks, Richard, and thanks for joining the call, everybody. As in all probability, this will be our last set of results as an independent company. We're deliberately, and I think quite appropriately, going to give a fairly short actual presentation. I'm going to run through about 6 slides and then Eamonn will join me for the Q&A.

So we've had a good start to the year with accelerated revenue growth and improved churn and very strong free cash flow growth. Importantly, we put through a 5% price increase without any noticeable adverse effects.

I'll quickly run through the highlights. Firstly, we delivered revenue growth of 3.6%, underpinned by a 7% cable revenue growth. ARPU grew 5.2%, customer growth was 9,000 and were supported by lower churn. Business revenue growth remains lumpy and was negative in the quarter, but we signed a number of large new backhaul deals, which gives us good confidence going forward, more on that in the moment.

OCF grew 5.8% to GBP 399 million, but this was affected by GBP 8 million of cost relating to the announced merger with Liberty Global. OCF for these merger-related costs was GBP 406 million, or up 8%. Free cash flow was up 54% to GBP 135 million. If you baked the $8 million merger cost, again, it would've been GBP 142 million, or up 63%.

So my next slide is a repeat of the slide we presented for the last few quarters, updated, obviously for Q1. We continue to generate sustainable modest revenue growth through multiple leaders. In respect to customer growth, our base has grown by 1.6% in the last 12 months, reduced churn remains the main driver. In fact, it was down year-on-year for the sixth quarter in a row to 1.1%.

From a pricing point of view, the most important activity in the quarter, was in fact the 5% price increase we put through in February. For the second year in a row, I was pleased it has landed very well and did not stimulate churn. This is because increased product differentiation is underpinning our ability to increase price. We've been doubling broadband speeds for over 4 million broadband customers. TiVo is transforming the digital entertainment experience and more cable customers are taking a great value mobile service from us.

Moving on to TMX. This continues to improve across the product set. Over 40% of broadband gross ads takes 60 meg or above, an incredible statistic. Our pay TV mix improved also driven by TiVo, which is now up to 40% penetration. In respect to product cross sell, we've improved triple play to 65% and quad-play to 16%, adding 37,000 triple play and 18,000 quad-play customers. Mobile cross-sell into the cable base continues to driver contract growth, with subscribers up 10% year-on-year. With respect to Business Data, we've signed 3 major backhaul deals, which will underpin revenue growth going forward.

Overall, our multiple revenue drivers give us continued confidence that we can continue to drive sustainable revenue growth.

We continue to lead the market in superfast broadband to attractively priced bundles. Our speed doubling program is driving this further, leveraging off the technical and economic supremacy of our network. Over 85% of the network has now been upgraded for doubled speeds with the remainder on track to complete by the middle of the year. We're driving a fundamental shift in mix. We're growing the superfast broadband base that is 30 meg and above, by 338,000 this quarter. This is underpinning growth in our total broadband base, which is up 37,000. Again, this really demonstrates strong demand for high speeds and the success of our collections. This is not a niche market, as I've said. It's a mass market.

We now have 58% on 30 meg or higher, but what really stands out and shows how differentiated our customer base is, is that 1 year ago, 69% of our base was on 10 meg or lower. In other words, that we're getting speeds similar to normal ADSL. Fast forward to today, and only 9% are on 10 meg or below. This is a key reason why our churn has been so strong. Superfast customers do not want to trade down to ADSL speeds with one of our competitors, particularly when our superfast pricing is so competitive. We offer a 30 meg product for just GBP 14.50.

Moving on to TV, where our differentiated TiVo service has mass market appeal, and is driving pay TV growth, customer satisfaction and improved mix. We now have 1.5 million TiVo subscribers and have penetrated 40% of our TV base in less than 2 years of above the line marketing. The success of Virgin Media TiVo is helping drive pay TV growth. We added a further 14,000 pay TV subscribers in Q1. In the last 12 months, we've added 165,000 pay TV subscribers and our three-tier is now quite deliberately down to 13% of our TV base.

In mobile, we've seen continued improvements in our contract mix, but regulated mobile termination rate cuts continue to distort the picture and it has resulted in flat overall revenue for the quarter, with contract service also flat at GBP 99 million.

Regulated MTR cuts reduced our inbound mobile revenue by about GBP 7 million in the quarter. Mobile revenue would have grown by 4.5% without this. But full year, we're expecting MTR impact to be less than last year at around GBP 18 million, and will largely disappear in 2014. We'll see this help growth in the second half of this year.

We continue to focus on cross-selling contracts into cable homes with 1.2 million contract handsets in cable homes now, up 12% year-on-year. This is also helping to drive quad-play penetration, with subscribers up 11% year-on-year and penetration now reaching 16%.

In business, as we've seen before, significant contracts can cause some unevenness or lumpiness in revenues from quarter-to-quarter, especially at this stage of our growth cycle. Revenue in this particular quarter was down 4%, reflecting lower voice and installed revenues. Since the start of the year, we are seeing improved sales momentum compared to the second half of last year, with the first quarter being the strongest in the last 6 quarters.

We've just signed a significant tenure deal for Telefonica U.K. for the provision of backhaul 1,500 sites. And we've secured significant orders under a framework agreement to support the creation of a U.K.-wide aggregation network for another large U.K. mobile operator. This means that we now have material backhaul contracts with all of the U.K. mobile operators.

We've also secured a significant 5-year deal backhaul contracts with Sky. We expect to see the revenues from these new contracts benefit the second half of this year and I remain confident that the underlying growth rate, the business revenue continues to remain strong.

I'll now very quickly run through the financial details, starting with the revenue breakdown. We had a very encouraging performance in cable with growth 7%, driven by both customer and ARPU growth.

Mobile was flat in the face of the GBP 7 million MTR headwind and as discussed, business revenues were down 4%. This all results in a 3.6% total revenue growth. As you can see from my final slide, accelerated revenue growth and strong operating leverage led to strong OCF and very strong free cash flow growth. Gross margin percentage expanded to 59%, SG&A was up 1.8%, driven mainly by the GBP 8 million of merger-related costs. Without these, SG&A would have fallen by 1.9%. This resulted in OCF up 6% and OCF before merger related costs up 8% to GBP 406 million. Net interest was down 15%, reflecting last year's refinancing. Cash CapEx was down 5% and was within our 15% to 17% stated guidance. This is despite us continuing to spend CapEx on broadband upgrades and our TiVo rollout. This resulted in free cash flow up 54% to GBP 135 million, ignoring the GBP 8 million merger related costs and would've been up 63% to GBP 142 million for the quarter.

And with that, we'd be happy to take your questions. [Operator Instructions] Back to you, operator. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Paul Sidney of Crédit Suisse.

Paul Sidney - Crédit Suisse AG, Research Division

I just have a question on the monthly data usage, please. And I'm just wondering if you could give us any stats on what the average date usage is for household currently, and how that's evolved over the past few quarters, just to give us a sense in what high-speed broadband or superfast broadband is doing to the levels of demand for the data usage.

Neil A. Berkett

Yes, Paul, it continues to grow. I don't have the exact metrics at hand, but we continue to grow daily consumption around 45% per annum. This quarter's been no different. We obviously carry data both in terms of across our DOCSIS network for broadband and from memory, that's just over 42 gig. And then on a monthly basis, and then on top of that, we carry about another 15 gig from memory in our closed DVB-C network, but we can give you the exact data. The key underlying trend is daily consumption remains at circa 15% growth per annum.

Operator

We will now take our next question from Tim Boddy of Goldman Sachs.

Timothy Boddy - Goldman Sachs Group Inc., Research Division

I just wanted to ask about the -- in terms of the merger announcements. Obviously, I'm sure your -- the work with Liberty Group has continued, just if you could talk a bit about any further opportunities for knowledge sharing or other synergy opportunities that you might have identified during that process?

Neil A. Berkett

Tim, I don't really have anything further to add than what Mike and I said obviously publicly. Obviously, we do continue to have conversations and I'm comfortable that we continue to understand each other more. And the rationale for why the transaction taking place is absolutely there. I'm sorry, I'm not in the position to be able to provide any more specifics than that.

Operator

We will now take our next question from Bryan Kraft of Evercore Partners.

Bryan D. Kraft - Evercore Partners Inc., Research Division

I just wanted to ask you, historically, why haven't you targeted the small business segment? And do you think that's a significant opportunity going forward? If I could just sneak in very small second one. How did your on-boarding ARPU for new customers today compare to that of 1 year ago?

Neil A. Berkett

Okay. So let me pick up both of those. Look, there is strong logic for us to enter the SME market front. It's a function of ensuring that your change pipeline doesn't give you indigestion, quite frankly. And with everything we've been doing over the last 2 or 3 years in terms of product development, both across enterprise and consumer, it hasn't reached the top of the list. We are in the process of running pilots. They are interesting and we are learning. It's a slightly different opportunity here in the U.K. than it is in the U.S., for example, principally, in terms of where we are. But I'm comfortable that as we do accelerate into the SME space, it could provide some additional opportunity to the B rate that you're seeing in B2B today. In respect to on boarding ARPU, on boarding ARPU is higher than it was this time 12 months ago. We continue to attract a high level of data steady customers. You can see that by the individual metrics that we give you, 60 meg and above being at 40% of growth is a pretty good indicator of a strong ARPU. So on boarding ARPU continues to be strong, which is reflected in a 5.2% increase in ARPU for the quarter.

Operator

We will now take our next question from Dan Wright of Deutsche Bank.

David-A Wright - Deutsche Bank AG, Research Division

David Wright of Deutsche Bank. So I just wanted to ask you guys about quad-play. You've clearly had very good traction this quarter with that and I think historically, you've shown a very low churn rate from quad-play. If you could give us an update on your thinking there. And I guess just on that same subject, so maybe not a second question. Just your view of the future, whether you will be using home spot technology, as in the Wi-Fi, to create the kind of the local Wi-Fi network as it were. Just your sort of vision maybe over the next couple of years for quad-play would be really interesting.

Neil A. Berkett

David, I think as we've spoken, this is, to me, fixed-to-mobile convergence, both in the consumer and enterprise space, is proven. I think we -- in owning one of those networks, and I think owning a fixed network is a much easier way to go. You can continue to prove out the theory. And 16% quad-play penetration is more than theory. I mean, we do use customer lifetime value methodology in VMED. You get a higher CLV for a customer that's got mobile over and above what you would get for the same lone CLV of the mobile product, and that's broadly driven by churn. And we're now at a point of critical mass where the sort of natural bias you get with early adopters has dissipated and that continues to provide a very, very solid economics. And it is driven by churn. It's been a while since we've disclosed that churn, but not materially different from our early days of disclosure. I mean, I think there is a very strong strategic and economic case for us starting to accelerate into the mobile space over the next couple of years as we build those platforms that start to leverage, part of your second question, which is how do we make our mobile even more relevant to our cable customers. Well, the way you do that is you've got a shared billing platform, shared capability to transfer product and in fact, you've got a shared network. So more and more, we would like to see our mobile customers using our network. In that respect, you're seeing us moving into Wi-Fi. And that is across a full array of what we do. I mean, clearly, we will think about splitting our modems in home, such that we can create more of a critical mass in Wi-Fi, as well as Wi-Fi dedicated in the home. We're exploring small cell technology in a whole range of different urban environments in conjunction with some of the MNOs. We're using our fiber access network. We can create small cell technology that will allow seamless transport of IP from cell towers, macro cells through the micro cells, through the Wi-Fi. And the art is each of the technology starts to evolve, it's going to be the organizations that are capable of safely carrying the consumer or the enterprise across each of those various piece of technologies, such that you get a seamless shift from, if you like, 4G into a semi-fixed world off the back of Wi-Fi. On about, [ph] I think the whole area of fixed to mobile convergence and the technologies that go with it will play further into the connectivity advantage that cable operators have. We've got this huge advantage in terms of an amazing fiber access network wherever cable operates and therefore, being able to leverage that into the broader FMC world. We'll continue to make a strategic advantage.

Operator

We will now take our next question from Nick Lyall of UBS.

Nick Lyall - UBS Investment Bank, Research Division

Just a quick one on the Sky's Sports price increase. Can you maybe just give us an update where you got to on the timing of any -- and any details you can give us too, on appeal on the CAT judgment? And if not, what's the plan B there? Is there any chance of seeing a reduction in pricing soon?

Neil A. Berkett

Well, we continue to have the conversations and in all likelihood, we're going to end in the wrong space, I suspect, in terms of the CAT review. But we are Sky's largest distributor of both premium and basic product. We have -- I use the word frenemy. We have a relationship, which I think is appropriate from a wholesale point of view. We've just announced today how that relationship is reciprocated by us and now starting to move towards taking their backhaul. And I think in that sort of arrangement, you should be able to work together in a wholesale sense and then that evening compete in a retail sense, and I think you'll see more of that. And we are in, as we are with all of our suppliers, continual debate and negotiation around commercial pricing. There's nothing new in that respect.

Operator

We will now take our next question from Adam Rumley of HSBC.

Adam M. Rumley - HSBC, Research Division

I just have a quick question on the backhaul deals you've announced today. If you look forward a year, say, can you give us any indication of what proportion of the total business revenue, those will represent? I just wanted to get an idea of the kind of scale of that business to you?

Neil A. Berkett

I think it has significant opportunity, Adam. I don't think it's appropriate for us to give guidance in terms of the scale of that. The fact that we have the everything everywhere cell sites, we've nominated how many there are, we've done the same thing with Telefonica. We're obviously in the process of doing backhaul for another operator. Similarly, we do backhaul for TalkTalk, we're now going to do it for Sky. So where we are advantaged, which is just over half of the country, in terms of our access network, I think we have a real alternative to data retailers for their backhaul. And you're seeing that success over the last, well it's only been 12 months. So do I think we're going to have a 50% share of that market on that? That's probably a bit aggressive. But certainly, we've now got a toehold in all of the mobile operators that will allow us to extend it, and more than a toehold, with the 2 resellers of BT product.

Adam M. Rumley - HSBC, Research Division

So it's right to think of these deals as first basis of a greater pipe to pursue?

Neil A. Berkett

I think, as bullish as I was with David over FMC, I am bullish in our capability to provide the alternative backhaul arrangements for all of the carriers here in the U.K.

Operator

We will now take our next question from Neila [indiscernible] from Deutsche Bank.

Unknown Analyst

I had a question on TiVo add. I just wanted to know the split between the old and the new subscribers to the platform.

Neil A. Berkett

We haven't given that, that level of detail, 172,000 for the quarter. It is predominantly new as it was in the previous quarter, but we haven't given the detailed split. We will [indiscernible] to move in terms of using this as an acquisition tool as well as a retention tool. So it'll actually move between the 2, depending on the circumstances. But at the moment, I think from your modeling point of view, you can assume that it's pretty even if slightly biased to new at the moment.

Operator

Our next question comes from Steve Malcolm of Arete Research.

Stephen Paul Malcolm - Arete Research Services LLP

I'll go for the sneaky two-part question, but both on television. I guess both, looking at both ends of the TV spectrum, first of all, in the quarter, do you see any kind of noticeable impact from you getting first of all more aggressive on the market? And secondly, with respect on your XL TV package, I mean, how comfortable are you? We haven't seen that wholesale deal with BT yet, but as ESPN effectively disappears in the next few months, that you've got the right tools to your disposal to protect what is still roughly 1/2 the TV base when the new football season starts in August.

Neil A. Berkett

Steve, I think if we had not preempted connected TV as we did a couple of years ago, the situation may well have been quite different with you. But the fact that we were first mover, and are still and I think we'll always be best mover, given the funding and economic situation for a connected TV for ourselves, means that we're not really seeing any sort of impact competitively. I remind you that we quite deliberately launched Classics, which is effectively the same product set that sits on YouView, but on a TiVo platform. So our customers can, for the same prices, fiber in YouView, get fiber in TiVo. So again, we positioned ourselves from the consumer's point of view to be able to cover the ground. And that product is not proving to be delusionary, it's proving to be, if anything, additive. So we're tapping into a market that perhaps we weren't there. I'm comfortable, in the second part of your television-related question, I'm comfortable that we have the tools to ensure that our XL customers will remain advocates. I'm hopeful that we will end up with the right solution in respect to BT sports and that may come in, in a flavor that is different from where we're looking at the moment, who knows? We're having appropriate commercial conversations as we do with all of our suppliers. I mean, clearly, sports is a little bit more emotive and it maybe hits the front page of the press all the time, but we don't really treat it any differently from any other piece of contenders. We evaluate what is worth to us and that's what we're prepared to pay and obviously at the triple point where you go above that, it's because you believe that economically, you're better without it. I'm not signaling anything from there, I'm just giving you our general philosophy as to how we approach content. I'm comfortable, to the core of your question, that we have the tools at our disposal to ensure that our XL customers remain happy.

Operator

[Operator Instructions] We will now take our next question from Laurie Davison of Deutsche Bank.

Laurie Davison - Deutsche Bank AG, Research Division

It's just a quick question about the escrow. Could you just confirm the amount that's held in escrow at the moment under the CAT ruling?

Neil A. Berkett

Laurie, we haven't actually disclosed it. So I think on that basis, I can't really answer your question, but it's still sitting there.

Operator

[Operator Instructions]

Neil A. Berkett

Operator, if there are no more questions, I suggest I'll just do a wrap up.

Operator

There is one further question, would you like to take it? It comes from Matthew Harrigan of Wunderlich Securities.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Could you update us on the Virgin TV, anywhere in getting the parity with the feature set with SkyGo and how you are seeing consumers react to that, thus far?

Neil A. Berkett

So we just launched another 21 channels, Matthew. So with the exception of premium, we've broadly got parity with Sky, in terms of channel. In terms of product feature, it's a superior product because it links back to the TiVo brain, so it includes the recommendation characteristics that sit on our TiVo platform. So it is -- our consumers will consume product and discover product wherever they are. It's a natural extension to our TiVo world. A lot of the consumption still is sitting on our own Wi-Fi, sitting in the home. So somebody watching catch-up. And as we progress in terms of our TiVo rollout, you'll see TV Anywhere accessing the hard drive of your TiVo box from, aside from wherever you happen to be. So it becomes very much an integrated part of our offering. And back to the question that David was asking earlier in respect to quad-play, it's one of those applications that will ensure that customers will demand seamless carriage across fixed and mobile and Wi-Fi, and whatever other mechanism. So I'm bullish in terms of its ability to be able to continue to drive advocacy within our customer base and therefore, our ability to, in some shape or form, monetize it.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

And you'll have an Android app on that very shortly, I assume?

Neil A. Berkett

We will. I can't remember the exact drop date, but it's within the next few months, yes. And look, with that, I'd just like to thank you, all, for the support you've given us during our period. In particular, my period as COO and then CEO over the last 7 or 8 years. I'm very, very proud of what the Virgin Media team have managed to do. I think it's a fantastic achievement and it's reflected, obviously, in the price and value that we've created for the Liberty Global shareholders going forward. So thank you very much for your support, and thank you to the Virgin Media people that made it happen. Thanks very much, indeed. Cheers.

Operator

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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