Virgin Media's CEO Discusses Q3 2011 Results - Earnings Call Transcript

 |  About: Virgin Media Inc. (VMED)
by: SA Transcripts


Please go ahead, sir.

Richard Williams

Thank you, operator. Good morning or afternoon to you all. Welcome to Virgin Media's Q3 results call. Please can I draw your attention to the Safe Harbor statement on Slide 2, where we set out cautionary disclosure, 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 are found in the appendices to the slides. I'm Richard Williams, Director of Investor Relations. And the presenters on today's call will be Neil Berkett, our CEO; and Eamonn O'Hare, our CFO. And now I'll turn you over to Neil.

Neil A. Berkett

Thanks, Richard, and thanks for joining the call, everybody. We've delivered another solid quarter that demonstrates our investment thesis. Steady, sustainable revenue growth driven by multiple sources, including and improving customer mix, mobile cross-sell and business data. It's all leading to strong free cash flow growth. The power of our fiber optic network gives us long-term, sustainable network advantage, both in consumer and in business. It gives us a significant advantage in connectivity, where we're seeing very strong growth in superfast broadband, but this connectivity advantage works in business as well. We have a deep fiber access network that gives us a significant technical and economic advantage. This has allowed us to win our first large strategic mobile backhaul contract.

We are beginning to exploit advantage in application with TiVo, where again we're seeing very strong sales. In the Business division, we're also launching new applications like our first Cloud product. And we're increasingly taking a strong position with convergence, as we're successfully driving cross-sell of Mobile into our Cable homes. In the consumer business, we're also at a point in the industry life cycle, particularly in broadband and fixed lines, where the main operators are increasingly focused on upsell and margin expansion, rather than market share landgrabs.

For example, we've seen line rental increases announced by all the main players in the last few months. This is being driven by several factors that we think that the move to superfast broadband, whether it be through BT's playing video sell network or our own DOCSIS 3.0, is a real positive. This is all creating strong free cash flow, which allows us to continue to invest in growth. We see quite an opportunity to press our advantage in our 4 strategic areas: TiVo, superfast broadband, mobile cross-sell and business data. These are all areas where we have strong growth opportunities.

Our strong free cash flow generation allows us to delever and execute a large buyback program. In fact, following the sale of UKTV, we are today announcing an extra GBP 250 million of buybacks on top of the GBP 625 million we announced last quarter. This takes us to an expected total of GBP 1.25 billion from mid-2010 through to the end of 2012.

This performance has achieved amid a dynamic market landscape. The fragmentation of the marketplace that we have highlighted previously is gathering pace. A number of consumer statements with increasingly distinct behavior patterns, expectations and requirements are crystallizing. To many people, digital technology remains principally a function -- functional commodity, which, while important to their lives, they use in a fairly conventional way, staying in touch with friends and family, for browsing the worldwide Web and for watching traditional broadcast TV.

There's another population of households who are embracing digital technology with far greater zeal, and deliberately or otherwise, integrating it into the hearth and their lifestyles. These people are not simply using digital technology, but are allowing it to shape how they interact and how they entertain themselves. Both the size of this digitally savvy segment and its appetite for next-generation services is growing fast, faster, in fact, than we had anticipated and we're focusing our investment on a range of differentiated services that is tailored to their needs. For example, Ofcom's latest communications market report shows that 59% of mobile users have acquired their smartphones just in the last year.

So what do these digital savvy households look like? I do not associate being connected with a specific activity, such as watching a TV program or checking their e-mails, but expect to be in touch or entertained whenever they want at the touch of a button. They are, in other words, always on.

Ofcom's report showed that 37% of adults and 60% of teens admitted to being always on. Driven largely by the proliferation of exciting new services, they're accessing digital media over a wide range of increasingly interchangeable screen-based devices, often all at the same time. Ofcom again report that people are spending more and more time online.

Faced with the bewildering choice of different services, they recognize the importance of being able to search and access what they want quickly, to organize their content and to personalize their entertainment experience. They understand the importance of quality, be it high-definition programming, glitch-free streaming, superfast downloading or lightning-fast gaming. Now stereotyping these people isn't easy. They're not geeks. They're not the traditional TV addicts. It is actually tempting but entirely wrong to associate them with a particular sociodemographic profile. These are people from all walks of life who recognize that in all its forms, the best digital technology is a benefit worth paying more for. And as today's results show, in increasing numbers and despite the ongoing pressure on household incomes, they actually do.

This doesn't mean that they're not cost-conscious. Like all consumers, they look around for the best deal. But we make balanced quality with cost. They are increasingly concluding that it makes sense to get all their digital services from Virgin Media. What these customers do have in common is their demand for data, the vital lifeblood of a digital experience. That it is simultaneously unfettered and simple. As services migrate from the analog to the digital world, consumption of data is growing fast and, as it does so, access to spectrum is becoming an increasingly valuable resource. We can see this by looking at the average data usage of our own broadband customer, which is growing by over 40% per annum, and increases significantly as customers move to higher speeds. In fact, average usage of our fast-growing 30Mb base is over 40GB per month, which is about the usage caps of our main competitors, including BT Infinity's entry levels.

At the heart of our success and our future growth, the power and versatility of our fiber-rich access network and the superior connectivity it offers, by investing consistently in this infrastructure and the applications that bring it to life, we are creating a transformational and differentiated consumer proposition, which our competitors cannot easily replicate. This provides a sustainable platform for growth. To understand this trend in more detail and how we're exploiting it, we need to get benefit -- beneath the headline metrics and look for some other increasing significant data points.

So let's have a look at some of the KPIs for the quarter. As expected, we returned to modest customer growth in the quarter after the seasonal decline of last quarter. In fact, we have the best customer gross adds performance for 4 years. This was up 3% on a year ago compared to a 10% decline last quarter. This is being driven by increased marketing, particularly on the TiVo campaign and the demand for superfast broadband. With regard to churn, this was up slightly year-on-year as we've seen for the last 12 months. Part of this increase is due to higher non-pay churn and this may be due to a wider macroeconomic weakness. We've also seen movers increase. Voluntary churn has remained relatively stable.

Churn was seasonally up versus Q2, mainly due to high mover and student churn, which is traditional in Q3. What is important is that the quality and mix of our customer base is improving and this is helping to drive ARPU, and more importantly, customer lifetime value. The 2% growth in triples and quads is offsetting the 3% decline in singles and duals.

On the top half of this next slide, you can see the success we are having in improving the tier mix and further penetrating the growing digitally savvy segment. The mix is improving as we successfully upsell, as new customers are attracted to higher tiers and as lower tiers subs churn out. So percentage of broadband subs taking 20Mb or higher has grown from 18% a year ago to 26% today. The percentage of our TV subs on pay tiers above the premier tier has grown from 76% a year ago to 80% today. And the phone mix is improving too. So all of this along with some price increases we've been able to put through is leading to a 3.2% growth in ARPU, to a record GBP 47.86 per month. By contrast, the ARPU of our churners is around GBP 38, or 20% lower than that of the base.

The bottom right-hand graph demonstrates my point about the churn mix, which is weighted to fewer products than the base mix. For example, 29% of churners with single product customers compared to just 14% in the base. Only 5% of churners were quad play compared to 14% in the base. Of course, we prefer that no profitable customers to leave us, but it is encouraging for those that do leave that are weighted towards lower ARPU and mix.

By using sophisticated customer segmentation tools, we are looking to push down the value of these existing customers as well as strengthen exiting customers, should I say, as well as strengthen our position for our higher value subscribers. In a competitive market, we believe this will further improve our customer mix, and we'll look to talk more about this segmentation work next quarter.

Now moving to the next Slide. This is a chart we've not shown you before, and it tells a very positive story. It shows the number of customers being upsold, i.e. moving to higher tiers of service, such as faster broadband speeds, and the number of customers downspinning to lower tiers of service. What you can see is that the quarter in, quarter out, the upsell significantly exceeds the downspin. This is shown in the net figures, which are up from 118,000 a year ago to 143,000 in Q3. In fact, in Q3, we hit the highest net upsell since 2009. This is a classic example of how we're managing customer lifetime value in our organization.

What is also very interesting is that the total downspin is down year-on-year. So even in a weakened economy, we're doing a great job of upselling our customers to higher ARPU that are quality products, and less of them are downspinning. This suggests that once customers have higher broadband speeds or more TV content and applications, they are reluctant to spin down to an inferior service.

So let's look at how connectivity advantage is starting to play out. We added a net 24,000 cable broadband subscribers in the quarter in total. Remember, cable only covers half the country, so our competitors' broadband subscriber growth is weighted to off-net areas where clearly there is less competition because we are not there with our cable. You'll also find that their net adds are at a significantly lower ARPU.

Fiber investments are resulting in upward pressure on fixed line access pricing and reduced broadband price differentials. For example, we've recently seen line rental increases of both BT and TalkTalk. I think that it's very encouraging in the news that superfast broadband world that we're all advancing rapidly forward. This means that the connectivity profit pool is growing and there's plenty more growth to come. We can see within our rapidly improving broadband mix, in Q3 a record 54% of gross adds took 30Mb or higher. Now 26% of our base is on 20Mb or higher, and 14% is on 30Mb. And we have over 180,000 customers on 50Mb or higher. This is all happening very, very rapidly. Putting it in another way, we grew our superfast broadband base by 178,000 subscribers in the quarter. That growth was just 18,000 a year ago. We're able to price these upgrades. You can see that the GBP 5, GBP 650 and GBP 10 price uplifts through the tiers. The quality of our product means we can command higher prices. But we're not standing still. 100Mb is now available to over 8 million homes, and we see significant opportunities to push our speed advantages further.

Recent changes to the advertising rules will force our DSL competitors to be honest in advertising their broadband speeds, and it think we will make it easier for us to hammer home the significant quality advantage we have. We're just beginning to place a lot more emphasis on improving our TV services, and I think this alongside our superior broadband is helping us to successfully acquire more TV-hungry customers that we haven't appealed to in the past.

Our superior Video-on-Demand platform, which exploits our connectivity advantage, continues to strengthen with nearly 2/3 of customers using it regularly, and monthly views of 10% -- are up 10% I think from last year. Just in the last few weeks, we've added a significant amount of Sky VOD content, which will increase the total VOD content available by around the third. This includes up to 500 films from Sky movies, Sky Sports highlights and lots of other popular shows. We've also been strengthening our HD platform with extra content. We now have 36 HD channels. This is resulting in strong penetration growth. Nearly half of our TV customers now have HD-enabled boxes, which just puts us well ahead of Sky.

Subscribers to the Premium Sky Sports or movie channels have grown 7% over the last year, taking up to 21% now of penetration within our TV base. But, of course, the main news on TV is the strong uptake of TiVo. We have 128,000 net adds in the quarter, taking us up to 163,000 at quarter end. We've seen strong demand from both new and existing Virgin Media customers, with around 1/3 of TiVo subscribers to date being new to Virgin Media. In fact, in Q3, nearly 40% of TiVo net adds were new to Virgin Media.

Sales continued strongly since the quarter end, and as of yesterday, we have 222,000 Virgin Media TiVo customers. That is around 5% penetration of our total TV base after just one quarter of above-the-line marketing. I'm delighted in the success we've had this quarter and with the positive reaction from customers. TiVo will eventually be rolled out to our entire TV base. The only question is how quickly, so we're evaluating the opportunity to accelerate this.

So why is TiVo doing so well and how is it changing customer behavior? Well, firstly, it's a superior product and our customers are loving the features. It is either a 500GB or 1-terabyte hard drive, which can record hundreds of hours of programming. Unlike Sky Plus, it has 3 tuners so you can actually record 3 different programs at the same time as watching one you recorded earlier. TiVo really brings to life our massive, unrivaled Video-on-Demand library.

For example, our EPG allows customers to go backwards in time and catch up on shows they've missed. We have great search features that allow customers to discover content more easily. They can search by title, by actor, director or topic. TiVo gives intuitive programming recommendations based on a customers of viewing patterns, again, helping our customers to discover great programming on both linear and in VOD. Customers can give a thumbs up or thumbs down to individual programs to further enhance the recommendation effectiveness. In fact, the TiVo box will even record program suggestions based on viewing patterns. So even if like me, you're away and forgot to record the mighty New Zealand winning the World Cup, if you're a rugby fan, the box will probably record it for you anyway.

The other great thing about TiVo is it's dedicated Over-The-Top connection, allowing our customers to access the content and applications outside our TV while gone. Unlike in a DSL home, the bandwidth connection users will not impede the bandwidth other devices are using at the same time.

We have an open platform. We have no fear of adding to Over-The-Top provider as an application on TiVo because although TV is the key to the wallet for us, it is not the wallet. We make most of our margins in connectivity. We will continue to add innovative applications, like Spotify, where we're exclusively the only TV and broadband platform in the U.K. able to offer access to this music-streaming service in a bundled way. We will also soon be launching our companion iPad app. Through TiVo we're the first major operator to launch a TV service that will ultimately reside on everyone of our customer TVs, PCs, tablets and mobile devices. It will be the glue that brings together the TV, the PC and the mobile with a better tablet or a smartphone. It is a truly converged platform.

Others have talked about launching IPTV. We've done it. We've done it on time, on budget and it's actually the best product in the market by a long way. It's a superior service and should continue to see us acquire digitally savvy customers. Perhaps our competitors' subscribers who are attracted by the combination of the best broadband connectivity and the best TV application. It's an ARPU driver because we're charging for quality, with a GBP 3 premium per month. It should also drive improved loyalty, and therefore improve churn as we roll it out to the existing base, as it is a vastly superior service to our existing TV platform. We will also continue to add increased functionality as the year progresses. In fact, as flash-based software, it is the service that will continue to improve and evolve.

Our product today is just at the first rung of a very long ladder. So how are our customers finding it? Well, firstly, they love it. Our net promoter score or customer satisfaction is much higher for TiVo than our Legacy TV product. In fact, TiVo customers are twice as likely to recommend Virgin Media to their friends, by telling their friend and their family about the game-changing technology, about the content discovery and about their control. TiVo is facilitating the personalization that customers want. It's liberating them and putting them in control of their own viewing. 80% say that TiVo gives them more freedom to watch TV when they want it, 50% are watching more catch-up TV. Customers are finding the search and browse functions really, really valuable and engaging with their TV more. Half say they're watching more good quality TV, i.e. content that is more relevant to them. TiVo users love the Mb of hard drive; 3/4 of our customers say they no longer have to worry about disk space. In fact, the average customer, who's had the box for 3 months, still hasn't filled it up. I think consumers will continue to get more and more demanding over time. That's what we're witnessing in this segment that we're targeting. With TiVo, we have a platform that will be able to meet, and in fact, exceed those demands. The third element of our strategy is convergence. We're the only major triple play provider with a significant mobile capability, and that gives us a huge advantage over our fixed-line competitor. As you know, we're very focused on increasing penetration of mobiles into our cable base. 83% of our cable customers don't take mobile from us today. You can see in the top right-hand chart the contract growth has really accelerated in the last year, particularly contract penetration into the cable home. We did a record 70,000 contract net adds into cable homes in Q3. That is well over double what we were doing this time last year. We are converging our fixed in mobile services for several reasons. Firstly, it drives the churn improvements in our cable business. Secondly, it mitigates some of the voice usage decline that we suffer on our fixed line telephony business. And thirdly, our customers benefit from bundling and pricing benefits, such as free fixed-to-mobile calls. That makes it easier to acquire and hold them. As we move forward, content convergence will increasingly play a role as TiVo becomes the converged platform. Our customers will be able to use many different mobile and fixed devices to access their content. Finally, as I've mentioned before, we continue to explore the metro WiFi opportunity, which could give further advantages and benefits to Virgin Media customers out of the home.

So to sum up, our mobile capability gives us multiple strategic and economic advantages. You don't necessarily see it all in the mobile revenue line, but the benefits of the Virgin Media business as a whole. Only 14% of their customers take the full quad play, and so we think there is a significant growth opportunity here.

The business division is really coming into its own, and is a massive growth opportunity for us. We only have a 4% share of the GBP 12 billion retail market. This is despite us having access to around half of U.K. businesses. We are the second largest access network after BT. Our network has fiber closer to business customers and leverages off our consumer networks, so we have a lower cost base and make stronger margins. We have a completely different peak time profile to other business networks and network was built for consumers and so is largely empty during the day. So it is very capital efficient for the business division to use this free daytime capacity. Recent wins, such as MBNL and others, mean we're building more network capability, which will help us to compete for further business. The Virgin brand, which is less than 2 years old to business, is giving us improved credibility.

We also continue to strengthen our business management team, including a new COO, who started just last week. At the regionally based on-net business, we have strong local presence, which we think can give us advantage in sales and account management.

Moving to my next slide. I think a real proof point occurred this quarter. The mobile backhaul contract we signed with MBNL, with over GBP 100 million. The explosion of mobile data traffic through smartphones and similar devices is pushing the mobile-operators' networks to their limit. The solution for them is to transform their backhaul networks by deploying fiber-based ethernet services to cell sites. This represents a once-in-a generation opportunity for a network provider with the deep fiber access network, so really only us or BT. We're building highly scalable aggregation networks, which will give us some great cell site economics and position us very well for the future. The MBNL deal is for just 2,000 cell sites out of the 54,000 in the U.K., over half of those sites are on our network. Whilst we may not get a 50% share of on-net cell site, we think there's a significant opportunity for us here to win increased share in what is a GBP 650 million market. Our leadership within the public sector continues, as we were awarded public service network accreditation and can now sell PSN connectivity direct to the public sector market. So we should be able to build on recent large strategic steals such as London Grid for Learning, Hampshire, Westminster, Lambeth and Cambridgeshire Council. We just won a contract to provide our high-speed network to doctors in Lancashire and Cumbria, allowing them to use high-quality videoconferencing. We've also just won a new contract with the DVLA, which is our first significant central contract win -- central government win.

In the corporate space, we've launched our first cloud product, which will address -- which addresses some of the security and reliability barriers that can prevent the adoption of cloud services. We've also recently signed new deals with ITPS in Newcastle to provide superfast resilient access to its data center services.

Deals like MBNL and others are now starting to install and will drive better revenue growth in the fourth quarter.

Before I hand over to Eamonn, I think we're on the cusp of something quite exciting here. Our 4 strategic focus areas are all running on or ahead of plan. We see significant opportunities in both consumer and business despite the economic environment. So we're evaluating some different investment ideas, including whether we accelerate TiVo, further enhance our broadband differentiation, drive mobile cross-sell faster or drive faster business growth. With the strong free cash flow we generate, we have the ability to continue to invest in growth while still rewarding shareholders with significant buybacks. So with that, Eamonn, will you now take us through some of the financial and operational details?

Eamonn O'Hare

Thanks, Neil. Let me start with our revenue performance for the quarter and for the 9 months. As you can see from the chart, we've had solid year-on-year revenue growth for the ninth successive quarter. The total for Q3 came in at exactly GBP 1 billion, which is up 2.2%. This is exactly the same growth rate as in Q2. Overall performance in the quarter was underpinned by solid revenue growth in our Cable business of 3.4%. As you heard from Neil earlier, cable ARPU was the main driver, up 3.2% to a record GBP 47.86. ARPU is driven by price, mix and cross-sell and it shows a focus on the quality of our customer base is bearing fruit.

It's also important to note that we delivered this performance in the face of a continuing double-digit percentage decline in fixed-line telephony usage.

Our mobile revenue came in at GBP 141 million, a little stronger than in Q2, but down 1.6% versus Q3 last year. The decline was predominantly driven by mobile termination rates, which I'll talk about in a second.

Business revenue at GBP 154 million came in up 1.2%. This compared to a slight decline in the previous quarter and behind the 9-month growth rate of 4.4%. Again, I'll talk more about this in a moment.

For the 9 months, total revenue of nearly GBP 3 billion was up 3.3%. Now before I move on, let me just remind you that next quarter, the cable ARPU comparator is a bit tougher. Q4 ARPU last year benefited from unusually high snow-related telephony revenue and some strong boxing pay-per-view revenue. So it is likely that the Q4 '11 ARPU growth will be weaker than the Q3 growth rate.

Turning now to mobile, where headline revenue was down 1.6%. However, as for last quarter, the regulated production in mobile termination rates reduced revenues by around GBP 6 million. Backing that figure out, revenue would have actually grown by 2.6%. Although these regulated changes depressed our revenue, we make similar interconnect cost savings in our fixed to mobile businesses. So the impact on the group's total OCF is fairly neutral.

Now as Neil has explained, the main opportunity for us in mobile is really about driving contract mobiles into our cable biz. This means we have a very different mobile business to our U.K. competitors with very different dynamics.

Total contract subscribers are up 23% year-on-year to over 1.4 million customers. Even more impressively, the number of contract mobiles in our cable biz is now over 900,000, up by 24% since the start of the year. This means that about 2/3 of our contract mobiles are now in cable home.

It is also worth highlighting the prepaid dynamic in our mobile business. Pre-pay subscribers have fallen by 18% over the last year, and pre-pay subscribers are now less than 1.6 million. Of course, prepaid customers are less valuable than contract with less than half the ARPU and much higher churn dynamics. But nevertheless, this prepaid decline has created a significant revenue headwind. So, in summary, the strong progress in contract growth, particularly into cable homes, is masked by the MTR and pre-pay headwinds.

Turning now to business. Before I go into the detail, I want to put our business division into a little bit of context. As you can see from the top left chart, this was a business in decline just 2 years ago. It was not a strategic priority at the time, so we did not rebrand it to Virgin at the same time as our consumer business and we did not invest in them. Instead we focused on improving our consumer division and our balance sheet, whilst the business management team was told to tread water.

Fast forward to today and things have really changed. We have successfully refinanced our balance sheet, we have rebranded to Virgin Media business, we have changed and strengthened our business management team. With increased investment, we are winning some new large strategic contracts and we're starting to see some real growth.

With low market share providing superb growth opportunities, combined with our strategic advantage network and strong economics, we remain very positive about this division going forward. Revenue growth in the quarter was 1.2%, compared to 9-month growth of 4.4%. As we've said before, business revenue growth can have short-term volatility, particularly as some of these larger contracts start to drive some momentum.

Retail data growth remains very strong, up 14%, and we have a growing order book, up 16%. In addition, some of the larger deals we have recently signed, such as MBNL, are now starting to produce revenue. Collectively, this gives us greater confidence that we will see much better revenue growth in Q4. Therefore, I would encourage you to look at the year-to-date performance as more representative of the underlying growth of the business. So to summarize business, we remain very confident about this division producing strong revenue growth moving forward, and we continue to expect its revenue growth to outpace consumer.

Turning to the financial performance for the quarter. The headline is that our strong cash flow growth continues. This quarter, again, demonstrates our investment pieces. Modest revenue growth has, again, delivered significant free cash flow growth. I've already discussed the revenue growth of 2.2% for the quarter and 3.3% for the 9 months.

Operating costs are growing slower than revenue, and we therefore saw an expansion in gross margin in the quarter. We continue to focus on finding cost efficiencies to allow us to invest more and those are sure to drive growth.

SG&A is well under control and is absolutely flat for the year-to-date. In Q3 specifically, SG&A was up just over 2%, as we increased marketing spend behind our successful TiVo campaign. Marketing costs were up by GBP 10 million, or 26% in the quarter, and are up almost 8% year-to-date.

This results in 2.8% OCF growth for the quarter and 5.4% growth year-to-date. As you can see, our interest costs have fallen followed by almost 9% in the quarter and 7% year-to-date. This is due to the lower debt levels and refinancing at lower rates. We actually used cash in our balance sheet during the quarter to repay approximately GBP 290 million of high-yield bonds, which had a coupon of over 9%. Cash CapEx is up slightly for the year-to-date but remains well within our guidance of 15% to 17% of revenue. The result of this is free cash flow growth at 13% to the quarter and an impressive 31% for the year-to-date.

Finally, on the right-hand column of this slide, you can see the very strong cash conversion dynamics of the business. For every point of revenue growth, we've generated 62p of OCF growth and 87p of free cash flow growth.

Next, let me update you on the further progress we've made during the quarter on our capital structure. Starting from the left-hand side of the chart, I just want to remind you of a few things. In July this year, we completed our GBP 700 million Phase 1 capital return program. As you are aware, this included GBP 375 million per share buybacks. At the same time, we announced an GBP 850 million second phase, consisting of GBP 625 million of new stock buybacks and GBP 225 million of other transactions. Then this morning, Neil has already pointed out, we have announced that we are going to increase the buyback program by an additional GBP 250 million following the successful sale of UKTV.

This all adds up to a cumulative capital return from mid-2010 to the end of 2012 of GBP 1.8 billion, of which GBP 1.25 billion is share buybacks.

On the right-hand chart, I've set out our progress to date with regards to the buyback program. You can see that as of the end of Q3, we have bought back a total of 37.8 million shares, leaving us with 301 million shares outstanding today. We now have a remaining buyback authority of GBP 641 million, which represents 12% of our current market cap. Assuming we use all of this by the end of 2012 and assuming the share price remains constant, this means we would have bought back 22% of the total share count in mid-2010 in just 2.5 years.

So to wrap up, my final chart attempts to sum up the resilience and robustness of our investment proposition. We've got strong free cash flow, underpinned by revenue drivers from multiple sources of. Network advantage, digital-hungry customers, innovative products and our ability to monetize those are the fundamental underpinnings of our investment proposition. That, coupled with a network that's already built out, strong cost control, success-based CapEx and lower interest expense is driving strong cash conversion and free cash flow growth. Combined with our financial leverage, favorable tax position and buybacks, this is enabling us to deliver significant returns to shareholders.

So with that, I think we're ready to take your questions. Before we do, may I ask that you limit yourself to one question each. That will give more people the opportunity to ask a question. Operator, back to you.

Question-and-Answer Session


[Operator Instructions] And our first question today comes from Nick Lyall of UBS.

Nick Lyall - UBS Investment Bank, Research Division

Just a quick question on churn on gross disconnect. They were also high and you've mentioned the end-tier TV subs have left as well. But you're now bookings about 14% of cable homes on quad play plus TiVo. When do you expect the churn numbers to really start to come down? Are you seeing any significant data from either the mobile customers yet or the TV homes? I know it's early days.

Neil A. Berkett

Yes, Nick, it's Neil. I think what you're seeing is a shift in the base more than a structural increase in churn. As I was saying, we're really seeing the -- I mean, to just loosely describe them as digitally aware or data savvy. The segment that is wanting or happy to pay for quality that requires significant data consumption that is really excited about the application of TiVo is a significant segment that's worth going for in the mass. And you're seeing by the underlying metrics how we're being successful there. There is another segment. It is a segment that we played in quite significantly 3 or 4 years ago. It's why we launched MTV back in 2007, and that segment is moving away, because they don't value a greater application. They tend to be free TV. They're not using VOD services. They're lower ARPU, they're on 10Mb broadband and entry-level telephony. I never see it -- we don't want to see losing any customers. I think that shift in terms of lifetime value you're seeing warrants the strategy. And if you point specifically, you saw a quite a significant shift. We're down from some 24% of TV subscriber down to 20% of subscribers being free. I think you'll see that continue to decline, and I think you'll see that decline principally with those customers leaving the organization rather than migrating, albeit we've seen a 17% shift in terms of how we [indiscernible] product.

Nick Lyall - UBS Investment Bank, Research Division

Great. And is it possibly to get a rough idea of the NTL losses over the last couple of quarters or were they all bunched up in Q3, please?

Eamonn O'Hare

Nick, I'll come back to you with that data.


Our next question today comes from Robert Grindle of Deutsche Bank.

Robert Grindle - Deutsche Bank AG, Research Division

I'm finding the comments on the future investment options that you're alluding to a little bit vague. What are you actually signaling here? Is it that you think you could grow faster if you raise your CapEx and investment in TiVo boxes, et cetera? And is this the reason you've recently added another manufacturer to your TiVo box lineup recently?

Neil A. Berkett

Robert, in conversations we've had with all of our major investors, we constantly get asked can we grow faster. And I think we're seeing at a point in time where we do have opportunities to potentially shift our investment, and not necessarily increase, but shift our investment to be more strategically aligned with the 4 strategic priorities that we've identified. So we're going through that evaluation. So that's the point I was making. We will evaluate that if we do believe that by shifting our investment, or in fact, increasing our investment, we could provide greater returns then we would be completely transparent, and come back and talk to you about that.


We'll take our next question now from Paul Sidney of Credit Suisse.

Paul Sidney - Crédit Suisse AG, Research Division

We saw a press release from Netflix last week with their intention to enter the U.K. in 2012. I was just wondering how you think Netflix will impact the pay TV market in the U.K., if at all, and would you be willing to partner with more Over-The-Top content providers in order to protect your base and enhance your offering?

Neil A. Berkett

Yes, Paul. Good question. The world is moving to multiple suppliers over multiple devices. And the likes of a Netflix potentially can disrupt the traditional walled garden pay-TV operator. We're not a traditional walled garden pay-TV operator. You'll hear us talk about application more than you'll hear us talking about TV per se, and we see TiVo as an application that allows customers to discover entertainment, whether that be linear, our walled garden Video-On-Demand, or in fact, Over-the-top. So yes, you will see us partner with Over-The Top providers, such that we can provide them at either a straight application within TiVo, or in fact, using the metadata to access their assets via the search capability of TiVo. That would be the way in which we would go about partnering, and as such, we would enhance our application offering. We would provide a superior distribution channel for the supplier and our customers would benefit.


We'll take our next question now from Carl Murdock-Smith of JPMorgan.

Carl Murdock-Smith - JP Morgan Chase & Co, Research Division

I'll ask 1.5 questions, if I can. Firstly, just the data you've provided on Page 8 in terms of upsell/downspin, I'm trying to take that another way. Is it fair if I take the upsell after the downspin and then add the disconnections in terms of customers who've actually changed their packages over the quarter? And then if I look at that in terms of -- against the rest of the base, it effectively tells me that 85% of the base haven't touched their package over the quarter. I'm just trying to get some idea of the level of inertia within the base, I suppose. And then my half question is just following up on Robert's. In terms of the investments, should we be looking at this with the mindset that you may look to push the CapEx to sales envelope slightly above 17% going forward?

Neil A. Berkett

I'll pick up the first one, and I'll let Eamonn sort of articulate our position around CapEx. The graph represents upsell and downspin only. It doesn't represent cross-sell. So your calculation of 85%, and I'm sure your math is right, represents the movement in a quarter of customers moving up or moving down, but it doesn't represent those customers that have bought another product. For example, 70,000 customers bought a contract handset during the quarter that didn't have a contract handset with us before. So that's the position, and you can see the dynamics. What we're trying to do here is give you some insight into the way in which we manage, if you like, the NPV of the annuity stream, the customer lifetime value. It should give you some comfort in terms of what's happening to ARPU. Eamonn, do you want to pick up on the CapEx point, and particularly around our cash CapEx guidance?

Eamonn O'Hare

Yes, I mean, I think, we are very clearly staying within 15% to 17% cash CapEx guidance. We think we'll be kind of at the upper end of that. I think what we're signaling is we're seeing some really good successes and whether that's a fab quarter as we kick off in TiVo and see the adoption of superfast broadband. And so what we're signaling is kind of standing back and reviewing some of our options. Whatever we decide to do, it's not going to get in the way of the GBP 1.8 billion capital returns program, which is what it sums up to today given the extra GBP 250 million we announced this morning. And certainly, it doesn't get in the way of the constant journey towards 3x leverage. Those things are cast in stone for us. So picking up Neil's point, whether we decide to redirect capital resources, whether like we did in Q3, we're using our suppliers to help us drive investments, we've clearly signaled data, some of our TiVo boxes early on in operating leases, whether we use finance leases. So all of those options we're just really considering. But I think all of it goes towards success-based CapEx. It's all driving towards and against opportunity.

Neil A. Berkett

And I just want to repeat the last thing in terms of success base. For example, to try and give you some comfort, if we were to accelerate TiVo, we know we get GBP 3 per month for every additional TiVo subscriber. That's your classic -- well, if the market is there, why would we constrain ourselves rather than next year risking that less significant payback?


Our next question today is from Simon Weeden of Citi.

Simon Weeden - Citigroup Inc, Research Division

And to make up for calls earlier, 1.5, I think I've got 3/4 of a question. And that is regarding your comments, partly because it's partly been asked and that it relates again to CapEx, and you've made comments in the statement about the fact that you're taking the boxes currently on operating leases and you're looking at changing that. So I just wondered if you would want to elaborate and if you can give us a sense as well separately on finance leases and how much that's affecting the cash CapEx line and how much that might change over time? Might just give us some extra color.

Eamonn O'Hare

Well, in the quarter alone, you'll see the finance leases are minimal. Yes, we chose to, in Q3, as we kind of started to ramp up TiVo, we chose to leverage one of our big suppliers to help us roll that out. I'm not going to give a little more -- I'm not going to give anymore detail behind that because some of it's commercially sensitive, but I think this management team has over the last 2 or 3 years, and will continue to demonstrate that we're quite commercially savvy about how we execute some of our investments and whether that's how we tap into the debt capital markets for financing, whether we leverage our supply base for financing and whether we use that finance leases. And we're going to continue to do that. So really those are just wrappers around putting investment behind big growth ideas. And I think what we're signaling is we've got a whole plethora of growth opportunities ahead of us. And as we stand back and look at that, particularly with the big success in Q3 around TiVo, we'll do what's best for the shuttle. I mean, when you think about -- as we think about the buyback program, for example, that sits in the scale of do we retire debt, do we actually invest in incrementally in the core business. Buyback is one of the instruments. Investing in the core business is another mechanism for tying debts and other mechanisms. What you can be assured about though, Simon, is we aren't going to be losing our financial discipline. Neil and I are very, very focused on making sure that we're getting good returns for shareholders, however it manifests itself.


And our next question is from Adam Rumley of HSBC.

Adam M. Rumley - HSBC, Research Division

I have a question on the upsell prices, please. Could you talk just about the extent which your customers are coming to you to look to move up through the tiers or whether it's coming from you being more proactive? I mean, I guess, it's probably the easiest point to upsell at the initial point of sale, is that right?

Eamonn O'Hare

Yes. I think a really good example of that is broadband. So in the quarter, 54% of customers actually chose to take 30Mb or above. That -- those customers actually had the stock choice of do I take 10Mb and pay GBP 13.50 a month, or do I take 30Mb and pay an extra GBP 5 a month and pay GBP 18.50. 54% are choosing to actually pay the extra GBP 5 a month to get triple the speed. That's about forced dynamic. It's a very good value proposition, and that's what really driving it. So people are seeing real value for money, triple the speed, GBP 5 extra month and that's nudging more than half of our new broadband customers to be taking those higher tiers at higher prices.

Neil A. Berkett

The touch points are quite varied, Adam. It may be a customer calling in for a care issue, and the care agent being prompted by our CRM because of their segmentation to suggest that they upgrade, because of the data consumption. It might be some cross-sell marketing or it might be self-initiated by the customer who's seen -- TiVo, for example, being advertised externally or internally. So it's like any reasonably sophisticated retail operation. Their touch points are very, very...


And our next question today comes from Bryan Kraft of Evercore Partners.

Bryan Kraft - Evercore Partners Inc., Research Division

My question is on -- is also on the TiVo boxes and the operating leases. How do you feel -- assuming you continue to use operating leases for the TiVo boxes, how do you feel about your comparability to continue to increase margins going forward if you do that?

Eamonn O'Hare

Yes, I don't think it really impacts our margins. I mean, an operating lease wrapper versus a financial lease wrapper versus us losing money in the debt markets as a wrapper, that's something myself and our Treasurer Rick Martin obsess about daily. That doesn't impact what we ultimately charge our customer, which is an extra GBP 3 a month ARPU. And the fact is the customer don't really care how we're financing the boxes. What they see is that GBP 50 install and GBP 3 a month extra ARPU, which is basically that it's fabulous value and we get fabulous margins out of it. Really the operating lease piece just the most advantage and economically most sensible thing for the business to actually do to actually acquire the boxes.

Bryan Kraft - Evercore Partners Inc., Research Division

So the decision to do the operating lease was more about kind of that's the best NPV way to finance it? Is that...

Eamonn O'Hare



And our next question is from Andrew Hogley of Espirito Santo Investment.

Andrew Hogley - Lehman Brothers

I was hoping you could give some guidance on where you see the effective financing cost? Next is you spoke about the payback of the expense of debt. Where do you see the financing costs falling to over the next couple of years?

Eamonn O'Hare

Well, you see we made a lot of progress on that over the last year. In the quarter alone, we've retired nearly GBP 300 million worth of 9.25% coupon debt. That made a lot of sense for us. As we look out, we still have legacy debt that has a coupon of over 9%. Unfortunately, all of that is still sitting in no-call territory, which means you have to pay a premium for it to take it out of the marketplace. And so I sit here today with my Treasurer. We're constantly looking at what we can raise capital in the markets at in terms of coupon. The good news is we have a lot of opportunity there, a lot of flexibility because we can either raise money in the U.S. or the U.K. or Europe. We can raise money in the senior secured investment grade market or the unsecured sub-investment grade market. So lots of options, constantly monitoring and you can rest assure that we'll be commercially savvy about capital that we can raise or capital that we can retire, because getting that interest built on going forward is a very important part of our investment thesis.

Neil A. Berkett

Operator, do we have another question?


Yes, sir. Our next question today is from Nick Delfas of Morgan Stanley.

Nick Delfas - Morgan Stanley, Research Division

I just want to come back to the CapEx issue. Obviously the cash CapEx is a little bit variable, depending on how the financing of that CapEx is timed. If you look at the accrual CapEx and add in the TiVo boxes, I think that CapEx is running around 20% from an economic point of view. On the revenue side, are the connection fees taken up front as well or are they spread over the lifetime of the TiVo box, and how far do you think that CapEx to sale number of 20% could increase over the next couple of years?

Eamonn O'Hare

Well, I think, they -- well, I'm not sure where you're getting the 20% from, but I'm assuming you're taking the accrued CapEx and adding back an assumption for TiVo boxes, which...

Nick Delfas - Morgan Stanley, Research Division

That's right.

Eamonn O'Hare

And you're taking out, I'm assuming, the working capital benefits the way we manage our CapEx, right?

Nick Delfas - Morgan Stanley, Research Division

That's right.

Eamonn O'Hare

And I think, I mean, quarter by quarter, CapEx is very lumpy. You can see actually there are no real finance leases in Q3, whereas there were significant ones in Q1. I wouldn't get too focused on the quarter in, quarter out of what the CapEx number actually looks like. And I think actually, that's a very separate kind of conversation versus the commercial proposition. Every TiVo box we sell in the marketplace, we're getting GBP 50 up and we're getting 3 part of ARPU and it's a -- from an economic perspective, from a driving returns perspective, every box is a positive NPV and value creative. So I think that's the key thing to focus on. So the more customers that want TiVo boxes, the more we sell, the better it is for Virgin Media shareholders.

Neil A. Berkett

So let me just continue -- we're coming back on this issue. Let me just try and reassure everybody where we're coming from. So our investment thesis is tried and proven. We're generating moderate revenue increase circa 3%, 4% delivering superior free cash flow and to date, that's over 30% over the last couple of years. It's been in excess of 20% before you allow for share buyback. If we get opportunities like mobile backhaul, like increasing TiVo rollout and getting paid for it, that by definition will start to change the shape of that investment thesis, i.e. revenue would increase. And if to do so, we took an appropriate financially disciplined analysis that by investing a little bit more then we would be foolish not to do so. What we're not talking about is expanding our network or having risk capital investment. That's the only point we're signaling, and we're responding to quite an amount of pressure that we've had from our large shareholders in terms of things are going well, could we invest a little bit more. What we're saying to you is we're going to evaluate that, and we'll come back to you in due course and let you know what we think.

Okay, we got time for one last question, operator.


Okay. Our last question today is from Tim Boddy of Goldman Sachs.

Tim Boddy - Goldman Sachs Group Inc., Research Division

Just a question about customer growth. Can you just confirm you're still anticipating a stable or better customer base for the year, and that being the case, what are the levers that you're looking to pull to achieve that? So should we expect a sustained level of marketing intensity in the fourth quarter? And help us understand where your focus is at the present.

Neil A. Berkett

Yes. As we sit, Tim, at the half year, we did not expect to have negative adds for the full year. I confirmed that piece of guidance. We will continue with much what you have seen. We are specifically looking at programs or running programs as we speak in terms of both TiVo and fast broadband advertising, but all within broad direction of we're running with SG&A, nothing different there. And obviously, continuing to look at ways and means in which we can drive down churn and increase the longevity of the customers we've got. But from what we're seeing today, I would confirm that guidance.


That completes our question-and-answer session for today. I'd now like to turn the call back to Mr. Williams for any closing comments or statements.

Richard Williams

I would just like to say thank you all for joining and you know where to reach us if you need us. Thanks a lot.

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