Vivendi Management Discusses Q1 2011 Results - Earnings Call Transcript

May.16.11 | About: VIVENDI SA (VIVDY)

Vivendi SA (OTC:VIVDY) Q1 2011 Earnings Call May 12, 2011 12:00 PM ET

Executives

Jean-Michel Bonamy – EVP and Head, IR

Philippe Capron – Member, Management Board and CFO

Pierre Trotot – Senior EVP

Julien Verley – EVP, Finance

Sandrine Dufour – EVP, Innovation

Analysts

Conor O’Shea – Kepler

Julien Roch – Barclays Capital

Thomas Singlehurst – Citigroup

Filippo Lo Franco – JP Morgan

Richard Jones – Goldman Sachs

Ian Whittaker – Liberum Capital

Nicolas Cote-Colisson – HSBC

Matthew Walker – Nomura

Operator

Good day. And welcome to the Vivendi First Quarter 2011 Earnings Conference Call. For your information, today’s conference is being recorded.

At this time, I would like to turn the conference over to Jean-Michel Bonamy, Executive Vice President and Head of Investor Relations. Please go ahead, sir.

Jean-Michel Bonamy

Thank you. Hello, ladies and gentlemen. Welcome and thank you for joining us for Vivendi’s first quarter 2011 earnings. Your host for today’s call is Philippe Capron, Member of the Management Board and Chief Financial Officer.

As usual, this presentation will be in English with a simultaneous translation and will be followed by a Q&A session. This call is webcast on vivendi.com, where the presentation is available for download.

I would like as well to remind you to read the legal disclaimer at the end of the presentation on page 36.

The first quarter 2011 financial report will be available on our website after the end of this call and you will be able to access a replay of this call for 15 days also on our website as of tomorrow morning.

And now, I have the pleasure to introduce our CFO, Philippe Capron.

Philippe Capron

Thank you, Jean-Michel. Good evening, ladies and gentlemen. I’m here with Pierre Trotot; Julien Verley; and Sandrine Dufour and after a brief presentation they will help me in answering your questions.

So I’m happy to present you Vivendi’s Q1 earnings. They are basically in line with our expectations. That’s true in particular of the operating earnings – operating results. Revenue at close to €7.2 billion is up by 3.8% and EBITA at €1.7 billion is up by 7.2%. We’ll see the contribution of the various businesses to those performances in a minute.

Adjusted net income is up by 29% to €950 million that’s due, of course, to the good operational performance but that also includes two items, which are relatively exceptional nature. The first one is Q1 2011 impact of the full year SFR integration for BMC purposes.

As you know, we account for the BMC on a quarterly basis based upon our expectation of the reimbursement we’ll get from the state in the next year, in 2012 and that means that as early even though we have not yet closed the acquisition of SFR.

We already take advantage of its fiscal integration for the full year because we know that we’ll get a check by roughly four times €70 million more next year than we would have had enough done this acquisition. So, therefore, there is a €70 million positive impact.

And there is another, as it happen almost equal impact, which is due to the contractual dividends we received from GE at the time of the closing of the NBCU transaction. And those two elements and there is second element, of course, is not recurring but those two elements combined in explaining this very strong adjusted net income performance.

In terms of guidance, we therefore are in a position to confirm our 2011 guidance. That’s true for all of our businesses. That’s also true for Vivendi and therefore we continue to forecast a slight increase in Vivendi’s adjusted net income at constant parameter, so to speak we need excluding any impact from the NBCU transaction and excluding the impact of the SFR 44% stake acquisition.

We are further refining this guidance by adding a new outlook for the full year at Vivendi level and this is that the adjusted net income will be above €3 billion, which of course will lead to an increase in the dividend in cash, as we had forecast at the time of – as we had promised the market at the time of the SFR transaction.

If we go quickly through the various businesses just looking at the highlights, for SFR the environment in France of course has been deeply disrupted by the VAT situation both on mobile and perhaps a bit less expectedly on fixed.

I would say that the situation is now back to normal – has been back to normal since March, of note is also the success of the NeufBox Evolution, our new set top box with more than 250,000 and actually today more than 300,000, customers for this new box.

Maroc Telecom has seen an increase, further increase in its customer base by 17% year-on-year, which is a good performance especially since this is taking place in a tough competitive environment. Some of you probably have seen already the announcement of the earnings by Maroc Telecom you’ve seen that the EBITA margin though declining is maintained at a very high level.

GVT, as you see, the main news is GVT has a new logo that apart from this we’re glad also to report that it has expanded further in three new cities in Q1 2011. That means there are now more than 100 cities covered.

And we’re also improving our service by the minimum broadband speed we sell to our customers is now 5-mega and the basic offers, the central offer, let’s say, is now at 15-mega, which is of course out of reach by our competitors.

Activision Blizzard, most of you have probably seen the release already and therefore you’ve been able to see that they have exceeded their Q1 guidance both in non-GAAP and GAAP. Their contribution to our (inaudible) figures is up by 33% to €500 million on the back of strong carry-over sales of Call of Duty and a still strong performance of World of Warcraft.

Universal, as you know, this is not a very relevant quarter for music because they don’t produce a lot of their revenues or earnings in Q1. It had a soft quarter due to the lack of major releases and then – and some unfavorable calendar effects, affecting the basis of comparison. The main thing for us is that our organization is on track and we continue to guide on €100 million of run rate savings by year end.

Canal+ has had a strong commercial performance and continues to do well with more than 200,000 new subscriptions year-on-year and overall a good quarter.

This leads on page six to table showing the breakdown of our EBITA. As you can see, the EBITA increase of 7% has been mostly driven by the strong performance at Activision Blizzard but also at GVT where the EBITA doubled. Actually it’s up only by 75% on a comparable basis. You’ll remember there were some accounting changes that you want last year but still a very spectacular performance.

And also Canal+, which also did very well this quarter and overall, this offset the weakness we see in SFR, Maroc and UMG for a net positive of once again more than €100 million improvement in our EBITA 7%.

Looking on page seven at the adjusted net income, as you can see, I mentioned it already. There is a positive impact of the NBCU disposal this quarter because on one hand you have the dividend we got directly from GE at closing.

On the other hand of course we did not have income NBCU as an equity affiliate this year because we don’t or we had some but it declined because we had them only for a month instead of three months. But overall the impact on the impact on this quarter is positive.

Of course, the impact on the full year is not going to be positive because that’s the only dividend we’re going to get whereas income from equity affiliates, which we had in the next three quarters last year, we won’t have this year of course.

The decrease in the cost of our debt is only marginal at €17 million. This is due of course to the fact that cash we invest, yields extremely little in the present financial markets and therefore, it’s a reduction of our debt only has a marginal impact on our interest charge.

We provision for income tax is flat in spite of the pre-tax increase in our earnings and that is due to the BMC mechanism I described earlier.

In order to help analysts in their modeling, Jean-Michel suggested I tell you the following. We forecast interest, the interest charge in the region of €550 million for this year and we forecast an adjusted tax rate around 20%. Thank you, Jean-Michel.

We now move on to slide eight, which shows the net income Group share, which reaches very high level €1.7 billion, compared to €600 million for the same quarter last year. This is due, of course, to the impact of the settlement of the litigation regarding PTC shares. We’ll receive the money from VT in January, which is why we look at in Q1.

Conversely, the last tranche of the NBCU exit impacted negatively the net income Group share because we had a slight capital gain in dollars but a significant loss in euros over the duration of our long-time holding in NBCU, hence a €400 million charge, but overall, of course, a very significant quarter in terms of net income Group share.

Financial net debt evolution on slide nine, debt is down from €8 billion to €4.4 billion, which is actually more than the pro forma debt we indicated to the market was €3.9 billion. As a reason for this is of course that well, first, Q1 is typically not a very strong quarter in terms of earnings generation. As you can see the CFFO after CapEx was only €900 million.

But also more importantly we had some investments or some leakage in this quarter, the first being the €440 million dividend paid by SFR to Vodafone and the second being a very significant activity in terms of buyback, €250 million at the Activision Blizzard level. So that overall our net debt has increased somewhat compared to the pro forma figure we gave to the market following the PTC and NBCU transactions.

But that’s not – that was, of course, not unexpected and we continue to guide the market on a net debt around €13.5 billion at the end of 2011 following the acquisition of the 44% of SFR presently owned by Vodafone.

Moving on to the various businesses, starting with AB, we don’t need to spend a lot of time on this one, I mean we had a very strong quarter at Activision Blizzard. There were no major launches but very strong digital sales, very – still very good sell through of Call of Duty, Black Ops, strong success of the first content pack so everything is going very well there.

There was some weakness at World of Warcraft but that followed a very, very significant spike in the number of subscribers following the launch of Cataclysm, since have gone down a little bit and there are some competitors, which means some of our customers going to try out the competing games but we know from experience that typically they come back, so we are not overly worried and meanwhile some monetization of World of Warcraft continues to be improving.

So IFRS EBITA is up by €125 million, which is very spectacular for this quarter especially as we are not entering this time. Deferred EBITA has increased further by €150 million year-on-year, so as you can see the situation at Activision Blizzard remains very healthy.

On page 11 we move on to music. As I mentioned earlier, Q1 is traditionally a very weak quarter and on top of this 2010 after the very strong comparable, I mean, we – if there is one activity in Vivendi for which I think it’s not very relevant, spend a lot of time over analyzing the quarterly results, it is music. We have to take here a longer view on this of course.

But, these are as it may, we had no major launches for this quarter and in spite of this revenues are basically flat in euros and down only 5% at constant currency so that’s not a bad performance.

EBITA is down at €46 million but we still expect a double-digit margin this year as business restructuring is going full speed ahead and as we have more exciting launches ahead. I mean, I think we’re launching Lady Gaga’s new work of art this very week.

For SFR, as I said, we went through a very challenging quarter with the VAT episode but apart from this it’s fair to say that apart from the tax and regulatory pressures the fundamentals of this market remain very healthy.

We had significant net gain in postpaid customers, data revenues have increased further and on the fixed side the pickup for our box has been strong even though a relative performance has probably suffered from the VAT issue and from an unexpected increase in the growth of the market, which is probably due to the late arrival on the market of the new box by Iliad.

Mobile EBITDA at minus 8.6% reflects its tough trading environment of course but as fixed EBITDA continues to grow thanks to a commercial success of the past two years and we continue to guide the market, I mean we maintain the outlook we have for SFR for the whole year.

Maroc Telecom on page 13 also had a challenging quarter. We – there has been a slowdown in the market. There is no doubt about that as penetration has reached more than 100% of Moroccan citizens.

Competitive pressures and regulatory headwinds continue to contribute to reduce our margins, even though it’s fair to say that we anticipate a better performance for the balance of the year. This quarter we feel is not completely typical of the performance we expect from Maroc Telecom for the whole year.

GVT continues of course to do very well. We had another quarter of fast and profitable growth with 47% of revenue increase at constant currency and a further improvement of the EBITDA margin at 32%, so there is not much to say there. EBITDA doubles but that’s partly due to last year’s accounting change in equipment lifetime, without this change in accounting methods it would be growing by only so to speak 76%.

This being said, we don’t expect EBITA to grow as fast as EBITDA for the full year, given the fact that we are slowly but surely going to be caught up by the higher depreciation due to higher CapEx and of course, due to the fact that the accounting change, which we booked in Q4 for the whole year is going to be reversed when we go to year end.

Canal+ remains on a very favorable momentum with 200 – with more than 200,000 subscribers portfolio growth year-on-year and very significant ARPU increase as well due to more sales of options and better bundling rates.

EBITDA is up by 15%, but actually it benefits from the calendar impact for the calendar effect on football games. There are two games left this quarter and therefore this favorably impacts earnings but it would still be up by 6% meaning more than revenues if we take this out of the equation.

It’s interesting to note also on the IPO issue that Lagarde Group has notified us of their intention to exercise their 2011 liquidity rights, which terminates the process initiated in 2010.

So, overall, this is I would say a good start for 2011, which means that we are able to confirm the outlook for all Vivendi businesses. I won’t read them again. I’m sure you’ve read them already and we’re not changing them this quarter.

So let’s move on directly to the final page on page 17 where we reiterate our guidance, meaning a slight increase in our adjusted net income excluding NBCU and the impact of SFR. And also that’s an additional guidance we are providing you and adjusted net income everything included about €3 billion, of course leading to an increased cash dividend this year.

And now we are, I’m with my colleagues ready to take your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Conor O'Shea of Kepler.

Conor O’Shea – Kepler

Good evening. Just three questions please, first question on SFR, I wonder if you could give us some details of the level of churn in the first quarter on the mobile side, and also relative to the first quarter in 2010 as an explanation for the increase in the subscriber acquisition costs as a percentage of revenues?

Second question, if we could just have some details on the holding and corporate costs, which were 20 million in the first quarter sort of running half the level of the first quarter of 2010 were there some non-cash exceptional elements? And then the third question on Canal+, could we have an idea as to when the favorable calendar effect of the phasing of the football games will reverse? Which quarter is that expected to happen?

Philippe Capron

Okay. On the holding, it's just timing and calendar effect. So don't hold your breath for anything more. The thing we can say on the holding is that thanks to the relatively lesser amount of activity we have on the class action and of course, thanks to the termination of the Polish litigation we anticipate probably some reduction in the holding and corporate costs this year driven by those elements. On SFR, I am sure that Pierre has the answer.

Pierre Trotot

Yes churn has been, as you can imagine, has been impacted by generally Vat turmoil, specifically on this period the churn has soared to 17.5%. Last year, it was 14, now we came back to normal rates and we are around 13%.

As you mentioned, this over activity, both in the gross sales and in churn, has sharply increased our acquisition costs, acquisition and retention costs as you mentioned. And over this quarter, this first quarter, we spent €37 million more than the preceding – the same quarter last year, in acquisition cost.

Philippe Capron

Okay. Thank you.

Pierre Trotot

It takes place – this and the vat impact on margin explains most, if not totally, the variation of EBITDA for the quarter comparing with last year.

Philippe Capron

Okay.

Julien Verley

And on your questions on the Ligue 1, this effect will have disappeared by the end of June as season will be ended.

Conor O’Shea – Kepler

Okay. So will there be a correspondingly negative effect in the second quarter or is the second quarter more of a normal quarter. And in fact, there was a more unfavorable quarter toward the end of 2010?

Philippe Capron

Julien, do you have that?

Julien Verley

Cumulatively, at the end of June, end of June EBITA will be comparable to end of June previous year.

Conor O’Shea – Kepler

Okay. Thank you.

Julien Verley

Thank you.

Operator

Our next question comes from the line of Julien Roch with Barclays Capital.

Julien Roch – Barclays Capital

Yes. Good evening. My question is on the interview Jean-Bernard, in the Financial Times when you said that you wanted to invest to "fill the pipes of GVT with content and services" but also that you could buy companies outside of your current areas of expertise in Brazil. So I wanted to have some comments on that if you've already some companies in mind or exactly what you meant by that and what will be the strategy?

Philippe Capron

You have only one question, Julien?

Julien Roch – Barclays Capital

Yes.

Philippe Capron

Okay. We'll take it nonetheless. I think the…

Julien Roch – Barclays Capital

It's only because I am restricted.

Philippe Capron

I think the – I mean, of course, we are very excited by the Brazilian prospects but we are not getting carried away. Maybe the journalist of the FTs are getting carried away and I don't think that Jean-Bernard insisted on acquisitions that much.

What we said is that we are willing to explore any relevant development avenues in Brazil but mind it would mostly take the form of Greenfield developments. I mean as we are doing this year with pay TV. So don't expect major acquisitions.

We are mostly looking at Greenfield developments, organic developments, start ups, that kind of thing, especially because the field in those areas is of course less crowded in Brazil than it is in the U.S. or Western Europe.

Julien Roch – Barclays Capital

Thank you.

Philippe Capron

Thank you.

Operator

Our next question comes from Thomas Singlehurst, Citigroup. Please go ahead.

Thomas Singlehurst – Citigroup

Good evening. Thomas Singlehurst here from Citigroup. Two questions on SFR, if I may. The first was on the overall sort of outlook for subscribers within the mobile part of SFR (inaudible) net addition profile for post paid is quite encouraging. But, I guess the aggregate subscriber number for SFR down in the 1Q, I was wondering whether you feel bold enough to give an expectation for the full year, whether you'd expect that still to be down on a full-year basis i.e. whether there's any scope to the catch up across the balance of the year. That was the first question.

The second question was on mobile EBITDA because I think last time we had a call there were discussions about what a decrease in EBITDA meant in the sort of – and you helpfully, said somewhere between zero and minus 10. The 1Q is down whatever it was, 8.3 or 8.5. I was wondering whether that's going to be the low point in terms of year-on-year EBITDA decline in your expectation. Thank you.

Pierre Trotot

Maybe first to comment on the mobile customer base growth so (inaudible) has disclosed the figures for Q1 for the whole market. And it happens that SFR performed quite well on the post-paid segment with net additions of 94 new net postpaid customers.

Considering the whole customer base, the total customer base, as you may know at the end of February, we have contributed the Debitel customer base to La Poste Mobile, which is a new MVNO, which will be jointly developed with La Poste and this customer base, which amounts to 290,000 customers, was formerly owned by Debitel, which was a fully owned MVNO by SFR and therefore the (inaudible) was accounting them in the SFR customer base.

Now, it's out o f the SFR customer base and this accounts for the difference that you mentioned I guess. And, as far as the mobile EBITDA guidance is concerned, I told you between zero and minus 10 and hopefully, we are in the higher end of this bracket. We don't change our guidance for the year.

Thomas Singlehurst – Citigroup

Thank you.

Operator

Filippo Lo Franco of JP Morgan asks our next question. Please go ahead.

Filippo Lo Franco – JP Morgan

Yeah. Good afternoon, everybody. I have actually four questions so I make up for those where Julien didn't ask. So the first one is on Activision. You are keeping your guidance for EBITDA but I mean Activision has increased. I mean it's doing better than expected so don't you think that it's a bit too conservative there?

And then the second is if you can comment a little bit on the new numericable offer. It's true that they have a limited coverage of the French territory in terms of clients but it looks quite aggressive. The third is on the cost cutting on UMG €100 million. I am getting old and I don't – I think that this is a bit more than expected but if you can please remind us this. And then the final one is on interest, if you can remind us what are your guidance on interest and tax please. Thank you.

Philippe Capron

Okay. Thank you, Filippo. On Activision Blizzard, while you may be right, we hope we are being conservative but I mean we are not going to play the game of moving the guidances at this early stage in the year. As you know, the translation of non-GAAP results into IFRS results is a very tricky exercise and therefore we will hold our breath for a quarter more before we possibly move on the guidance. But I mean I hope we are being conservative.

On the cost cutting at UMG, there is no change in the target. But we are pleased to report there is excellent momentum. I mean, for instance, we don't have New York headquarters anymore. We still have some East Coast labels but all the corporate functions have been moved to Santa Monica. So and in many other countries or many functions, we see things happening so there is excellent momentum, a lot of energy and enthusiasm, a lot of good ideas as to how to do this without hurting the business, the search for talent and the monetization of our core competencies through new means of distributing the music digitally.

So good news there, hidden a little bit by the earnings for this quarter but, as you know, this is not a relevant quarter. And in terms of guidance, let me reiterate that we anticipate an interest, interest charges of €550 million for the whole year and then apparent tax rate of 20%. And now, I'm sorry, on Numericable I think it's best and…

Pierre Trotot

So the Numericable Mobile offer launched today. Filippo, I suggest you should read the comments released by Natixis Today and Odo [ph] which are quite interesting. And they point out that we should read the little lines behind the tag price, which say that this is worth for 24 months offer that there is only one offer per family that you should already be a customer of Numericable et cetera, that if you want 12 months you have to pay five years or more et cetera. And if you consider this, it's quite aggressive offer yes but not that distracting so far.

You don't have TV access to TV on your mobile and so forth. So we are cautious with this offer but there has been a lot of hype on it but we should wait to see effectively what happens. So a good announce, a striking announce but ultimately when you compare with our multipack offer, you know the offer, where you can bundle both ADSL and mobile, ADSL and ADSL, mobile and mobile, all the mobiles of the family with additional discounts. We also offer attractive tariffs and offers. That's my comment today after 10 hours of release of the Numericable offer.

Filippo Lo Franco – JP Morgan

Just one thing on the tax rate, Philippe, is 20% a bit below what you previously said or…? Hello.

Philippe Capron

Well, it's lower than what we anticipated before the SFR acquisition of course.

Filippo Lo Franco – JP Morgan

Okay.

Philippe Capron

Because we get basically four times €70 million, €280 million, of additional tax benefit and therefore that changes the math.

Filippo Lo Franco – JP Morgan

Okay. That's good. Thank you.

Philippe Capron

Jean-Michel and his team can lead you through this if you want.

Filippo Lo Franco – JP Morgan

Thank you very much. Bye-bye guys.

Operator

Our next question comes from Richard Jones of Goldman Sachs. Please go ahead.

Richard Jones – Goldman Sachs

Hi. Just a quick one, on the new guidance for net income of at least 3 billion, I just wanted to check does that include the 141 million of benefits that you've had in the first quarter related to NBC and SFR? And then secondly, that net interest guidance of 550, I think it was presumably that's post the closing of SFR or is that pre the closing of SFR?

Pierre Trotot

No the answer is yes on both counts.

Richard Jones – Goldman Sachs

That's post the closing of SFR?

Pierre Trotot

It's post the closing of SFR and also the favorable impacts of the full year BMC and the G dividend so to speak are also reflected in the 3 billion guidance for the whole year.

Richard Jones – Goldman Sachs

That's great. Thank you.

Pierre Trotot

Thank you.

Operator

Our next question comes from Ian Whittaker of Liberum. Please go ahead.

Ian Whittaker – Liberum Capital

Fine. Thanks. Three questions, just first of all in terms of music, I know you, Philippe, you said it's a bit of irrelevance now but just given that and given the fact that Warner actually managed to get a high multiple for itself, 10 times 2011 consensus EBITDA, would you not consider selling at least parts of the music business and maybe exiting that – exiting there because it would seem as though it's a bit of a drag on a sense but maybe you could use that cash either for high growth businesses or maybe even return some of the cash back to shareholders.

The second question just has to do with GVT. I just wondered if you could inform us of what the competition is doing in response to your moves because obviously you've got very good profitability growth there but presumably both in pay TV and in the broadband market, the competition is not just sitting there. But it's taking moves to actually counter what you're doing.

And then the third thing is more sort of high level question in terms of how you see the entry of Iliad into the mobile market next year. From your standpoint, do you think that Iliad is doing this more as an aggressive move because they think they can get a large share of the mobile market or do you think it's more of a defensive move to actually protect their broadband base?

Philippe Capron

Okay. Thank you, very interesting questions. I'll try to answer them briefly though. For music, I mean we're of course extremely pleased to see that the market is realizing that this business still has some value and that so baby should not be thrown with the bath water as indicated by the prices, the transaction price you've seen published in the press.

It doesn't mean to say that we feel that at those levels, it fully captures the potential profit we can derive through music once the business model is re-stabilized. So I mean nothing is excluded if somebody came with a price, which we feel is attractive. Of course, our duty would be to go to the Board with it but basically the choice we've made and that we've repeatedly affirmed those past years is to be there for the long haul and to wait until this business turns around and starts realizing its true potential. As you know, music may end up for a time being a smaller business but with better margins because of the digital models, which are going to fuel our revenues in the coming years.

So – so far we are happy to be where we are. We are happy also to see some recognition of the true value of these businesses but that doesn't mean that we want to put it on the block, even though the block has been partly cleared by the Warner transaction.

On GVT, of course we are not complacent. We are growing, not just because broadband is growing in brazil but mostly because we are taking share from our customers so from our competitors so what our competitors are doing is of course highly relevant to us and we are observing this closely. So far I would say that they reacting mostly by doing two things. One is dropping prices but that's less and less relevant as we move up on the broadband side we are now basically providing our customers a product which is not – which cannot be matched in terms of internet speed or in terms of quality by our competitors so that's less and less relevant.

And also they are reacting by talking of investments. And sooner or later they may well start actually doing those investments even though today we don't see them we don't seem them revamping their obsolete legacy networks but we're not – we know that sooner or later they will do it. They will have to do it probably. They'll get tired of losing share and therefore we are trying to more competition to new grounds.

One ground, as I mentioned is higher speeds, even higher than revamped networks could reach. Another new frontier for us is making sure that we further improve our quality level, which is already recognized by the regulator or the consumers as by far and away the best in the market, to a level where we are clearly out of reach by the traditional players just because they are that they are traditional players. They're organized in a different way so we're not resting on our laurels we know that the going will probably get tougher as time goes by but still we feel that we can stay one step ahead.

On Iliad, I don't know whether it's an offensive or a defensive move and I would love to hear Pierre on this, but basically it's a question you should ask them not us.

Pierre Trotot

Philippe is totally right. I guess that when Iliad initiated its desire to enter the mobile market years ago we must acknowledge that have been consistent over years with that. The initial purpose was not to protect the broadband base. Today with the development of full credit and play offers – excuse me – it's become clear that on top they want to protect their mobile, their broadband, fixed broadband customer base.

Ian Whittaker – Liberum Capital

Okay.

Philippe Capron

That seems absolutely right. I think that initially what they had in mind was an enlargement of their business by looking at the larger business which was not so far apart from theirs and having the ability to leverage their brand but now they themselves are still the market in such a way that it's absolutely vital to be on both sides of the equation, which validates what we did with Neuf Cegetel and which of course is the same move which we got done by going into fixed.

Pierre Trotot

And it becomes mandatory for them to be there.

Ian Whittaker – Liberum Capital

Okay. Just two quick follow-up questions, one just going back to music sort of, I am talking about the sort of long term. If we get back to a low top-line growth industry what sort of margins do you think you can do for EBITDA margins? And then I guess the second thing just on GVT, is you talk about the competition so there of as some point they will react. How much of a window, sort of, from where you stand at the moment, how much of a window do you think you have before they do start to react?

Philippe Capron

Okay so on music it's difficult to know because we are not exactly sure what revenue streams will develop and be successful and what will be less so but I mean the thing we have in mind is recording should be I'd say 12% to 15% and probably 15% margin business in terms of EBITDA margins, net margin. For GVT, I mean again, it's a question you should ask from (inaudible) but basically we feel we have a few more years ahead. We don't know how many, which is why we are pushing as hard as we can and trying to deploy our networks into new cities as fast as we can, just because we don't know when the window of opportunity will start closing. We suspect it takes quite a few years to – and significant investments to revamp the networks and to shorten the last mile, so to speak, which our competitors have inherited from the previous monopoly.

Ian Whittaker – Liberum Capital

Okay. That's very clear. Thanks so much.

Philippe Capron

Thank you.

Operator

Our next question comes from Nicolas Cote-Colisson of HSBC.

Nicolas Cote-Colisson – HSBC

Well, thank you, I've got two questions. First one is on SFR could you provide us with a bit more color on your FTTH rollout? When do you think you'll be in a position to push it more on the retail side? And also where do you stand with the agreement you have with Telecom regarding co-investment? And my second question is on music. You just said that music may become smaller in revenue but better in margin should we read from this that you are confident to see higher EBITDA in absolute number in the coming years?

Philippe Capron

It's I don't have the answer to that question. It really depends how fast these two phenomena unfold but what I feel is that starting from this lower size for the music industry as a whole, hopefully not for UMG if we continue to capture market share and thanks to the disruption occurring with some of our competitors it may well be the case.

We will start growing at that stage. I mean, obviously, when the facility has disappeared as a support for music distribution clearly we feel that we will start growing again from that stage with a lower cost base and with better margins because of the digital model. So that's the general idea we have in mind. It's extremely difficult to plan ahead with any degree of certainty, given all that's happening in the business right now.

Nicolas Cote-Colisson – HSBC

Sure.

Philippe Capron

On the fiber rollout, Pierre. At the end of March we have 530,000 old pass [ph] and we have a little bit more than 80,000 customers and the co-investment program with wages proceeding normally.

Nicolas Cote-Colisson – HSBC

Have you already invested with this week?

Pierre Trotot

Pardon me?

Nicolas Cote-Colisson – HSBC

Have you already started co-investing with Wig or are you still at the stage of looking how to do it?

Pierre Trotot

No, there were two stages in the agreement with Wig. First was Wig was acquiring the existing network that we had already deployed and this is why we are what we are doing now. We are connecting Wig to our network and as we are deploying new CapEx, we are laying out new networks we are doing it jointly with Wig.

Nicolas Cote-Colisson – HSBC

Okay. And if I can ask another question on the regulatory framework, are you more happy with what you have today or what would you need to be more aggressive on fiber from the regulator?

Pierre Trotot

I would say it's okay. We have technical problems with our friends when you know that we are buying the vertical part of the network to the other operator then we are selling them our vertical part of the network where we have issues but so far we are trying to solve them without the help of the regulator either on the technical standards getting information where the network is, where we have to connect et cetera. But so far it works not that badly.

Nicolas Cote-Colisson – HSBC

Thank you very much.

Pierre Trotot

Thank you.

Operator

Our next question comes from Matthew Walker of Nomura. Please go ahead.

Matthew Walker – Nomura

Thank you very much. Good afternoon. I've got three questions. The first is could you give us a few more details you mentioned World of Warcraft. Could you give us a few numbers on how World of Warcraft subscribers have moved? The second question is on Canal+. I know you give information on subscriptions. Could you give us – now that documentation is out, could you give us how subscribers have moved in Q1 versus the end of year 2010? I think overseas were at 1.278 and mainland was 6.154 for the end of 2010. That would be helpful. The other thing is maybe you could comment on the various interviews that have been given by the Vivendi management around Canal+. Is they are sounding like it's not a top priority for them to reengage with Lagardere.

Philippe Capron

Okay. I'd take the first and the last question. On World of Warcraft I think that Activision Blizzard and especially Mike Morhaime have given some figures but I mean basically thanks to Cataclysm we had gone significantly above the $12 million thresholds.

Now we are down below that threshold but I mean quarterly variations have to be expected it's fair to say that the customers probably have gone through the game a bit quicker than we had anticipated but I mean we are not overly worried. We have seen such variations before and we continue, as I said to monetize the game better and better and it remains a stable and very highly significant source of revenue and margins for Activision Blizzard.

On the Lagardere issue for the IPO, what we just mentioned is factual. I mean we are – as we had announced in 2010 that Lagardere had exercised their liquidity rights leading to a possible IPO, we have to mention once this year also that they have on April 15th notified us of their willingness to again exercise their IPO right or it is a liquidity right this year.

As you know, they had previously in the previous month suspended this process because of the events in Japan and the volatility on the market. We have not had any contact so far with them regarding a new calendar so I am not in a position and actually, as you know, they are driving this process to a large extent and therefore we are not in a position to provide you with any more color than this legal disclosure so to speak. Julien, you may want to comment on that?

Julien Verley

Yes. On your questions on first of all subscriber and subscriptions and since the beginning of the year, so whether you take it on subscriptions or subscribers you know we have this kind of J curve over the year so we tend to lose subscriptions or subscribers in the beginning of the year and then we get it back. That's why what makes sense is to look at the evolution of the portfolio on a rolling 12 months and when you look on the rolling 12 months subscriber it's more or less stable.

Matthew Walker – Nomura

Can you say anything about the free channel that they wanted to launch? There was a budget I think they wanted to use a free channel to use the budget of about I think it was in the price of $100 million but it might be slightly less. Could you maybe give us a few more details on that?

Julien Verley

Sure I can comment a little bit. I believe you know a little bit of background of this so called Canal bonus so as part of the huge investments that the analog cycle and the rough channels are or have been exposed to migrate to digital we had options by law to get a new license for channels on DTT, not the terrestrial channel and these options let us using it for free TV or pay TV and we've announced that our intention would be to use this Canal for free TV television.

And basically the idea would be effectively to have two targets, a general release positions on DTT and because we believe that, based on the know how that we have now developed within Canal+ that we have that's one of the particular ideas of our model and we have what we call press and play and which are part of Canal+ presenter a free tour dedicated schedules, which have allowed us over time to develop some quite significant advertising revenues.

And the idea is really to get capitalize on this CSP plus target which is very interesting for advertiser and that's why we change the idea that maybe we would capture on the market some value with the free TV channels, so by the way enlarging the overall market, which in France represents the advertising revenues of a presence overall market presence of $3.3 billion.

It's been stable over the last three or four years and when you compare these amounts to the other European countries it's rather low and therefore, we think that creating these channels and potentially other channels should dynamite the overall advertising market and should be beneficial to all the players.

Matthew Walker – Nomura

Okay. Thank you very much.

Jean-Michel Bonamy

This is Jean-Michel Bonamy. I would like to apologize for all those who haven't been able to ask a question yet. I think there is another company holding a conference call now so we are going to stop the conference call now and obviously Aurelia, France and myself will be waiting to take all your follow-up questions you may have later on. So we do apologize again but we'll have to terminate the call now. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!