Virgin Media (NASDAQ:VMED)
Q4 2011 Earnings Call
February 08, 2012 8:00 am ET
Richard Williams -
Neil A. Berkett - Chief Executive Officer, Chief Executive Officer of Virgin Media Investment Holdings Limited and Director
Eamonn O'Hare - Chief Financial Officer and Director
Andrew M. Barron - Chief Operations Officer
Unknown Executive -
Timothy Boddy - Goldman Sachs Group Inc., Research Division
Nick Lyall - UBS Investment Bank, Research Division
Robert Grindle - Deutsche Bank AG, Research Division
Paul Sidney - Crédit Suisse AG, Research Division
Simon Weeden - Citigroup Inc, Research Division
Stuart Gordon - Berenberg Bank, Research Division
Carl Murdock-Smith - JP Morgan Chase & Co, Research Division
Henrik Nyblom - Nomura Securities Co. Ltd., Research Division
Wilton Fry - BofA Merrill Lynch, Research Division
Michael Bishop - Barclays Capital, Research Division
Frank Knowles - New Street Research LLP
James Ratzer - New Street Research LLP
Good afternoon, everybody. Good morning to those listening on the phones from the United States. Welcome to Virgin Media's Q4 Results and Strategy Update Presentation. I'm Richard Williams, IR Director. To my right, firstly, we've got Neil Berkett, our Chief Executive; and Andrew Barron, Chief Operating Officer; and Eamonn O'Hare, Chief Financial Officer.
We're going to have Neil and Eamonn review our Q4 results firstly. That will probably last for around half an hour, possibly a little less. Then, we're going to give you a bit more of a detailed strategy update. That will probably last [indiscernible], and then we will have a Q&A session.
I'll draw your attention to the Safe Harbor statement on Slide 2, where we set a cautionary disclosure, which [indiscernible]. I also point out we will be mentioning certain non-GAAP measures today. The required [indiscernible] with respect to these are found in the appendices to the slides.
And so with that, I'll hand you over to Neil.
Neil A. Berkett
Thank you very much, Richard. Today's session takes place at a time of significant change in our industry. Whether that be U.K. households, consumers or in fact, enterprise. And the market for more sophisticated mix [indiscernible] service is actually happening apace Q4 results. I offer some encouraging evidence that Virgin Media is successfully positioned and positioning itself to exploit this opportunity.
In our strategy session, I'll speak more about how we're going forward in this respect and how we continue to build on this momentum. And ultimately, monitor opportunities that a mass market of digitally enabled customers, business and consumers actually present.
Having said that, I fully acknowledge that strategic and operational progress will not always translate into linear, i.e immediate progression in terms of our overall quarter [ph], not for a minute suggesting that we won't stand up and be accounted [ph] every 90 days. What I'm saying is that at times, strategic progress will be lumpy and strength in some aspects of our operating metrics will sometimes be offset by a more muted performance in other areas. And I think Q4 is a case in point.
Because in this quarter, we did continue to make some strong progress in the face of some time-limited headwinds, but that our positions -- this positions us very well all for 2012 and beyond. It's really starting to come through in some better operational performance. As I say, it won't always come through perfectly in across all of the aspects, i.e, firing on all 8 cylinders of our operating performance. Because there were some very strong operating positives in the quarter. Churn improved. So for the first time in 6 quarters, churn's come back to the level it was for the same quarter in the previous year. Business finished very strongly with circa 7% revenue growth for the full year in line with our guidance that we gave at the half year. I'll try not to make the ride quite so lumpy in 2012.
We had a record quarter for contract net adds, 100,000 net adds. Gross adds, 85% of contract were sold into Virgin Media homes. And we finished the year with 5% OCF growth, 21% free cash flow growth, which I can now say is exactly what we expected at the beginning of the year when we set our budgets. And I have to say in 2011, for that to have been achieved, is a credit, I think, to the Virgin Media team and to our people, to achieve a budget in such a tough economic environment.
But yes, there were some mixed statistics, too, in the quarter. Another quarter of 2% revenue growth, principally driven by consumer ARPU. But as we've explained, and I will do further, that's in the face of a pretty tough comparator. And mobile revenues were also down, and that's in the face of prepay decline, which is a structural decline, and obviously, the MTR headwind.
Strategically, however, we continue to make very, very strong progress in rolling out our differentiated products. TiVo had a fantastic quarter. We've now reached a penetration of 12% of our base, and we've only been running at it for 6 months since we started our above-the-line advertising. I think it's fair to say, having read the reports this morning, that far exceeded everybody's expectations.
We're also having very strong demand for superfast broadband, 30 meg and above, 133,000 net adds for the quarter. The combination of TiVo and superfast broadband is providing very strong differentiation, and it gives us confidence that we can execute the price [ph] rise that we had already announced [indiscernible] that we put in place for April.
So strong data growth results also in business revenue being up 7%. So I'll talk about how data growing in double-digit figures and revenue in turn [ph] and for that to continue.
So overall, I think we produced a strong performance for the quarter, and one that continues to prove that our business model of producing modest revenue growth, and superior free cash flow is intact.
So turning now to the revenue growth. Another year, sustained modest revenue growth. We delivered 2% growth in the quarter and 3% for the full year with a solid full year results, both across cable and Business.
And as we guided at the beginning of the year, Business revenue was roughly double that of Consumer, and we expect Business revenue to continue to outpace Consumer over the next planning cycle.
Cable revenue grew at some 3% for the year, weaker in Q4 because of the lower ARPU growth that I've explained. Mobile, clearly mildly at a negative for the year, and again, dragged back by the prepay decline and the overall MTR cuts. Pleasing to see, however, that contract mobile now outpaces prepay decline. Business, as I say, finished very strongly with 7% growth in the year. So with that, let's go into more detail.
So cable revenue clearly has 2 pillars, customer growth and ARPU. So let me start with the first pillar, growing customers. We have delivered positive customer growth for the full year per our guidance at the half year, which was encouraging considering the poor net adds performance in the second quarter. So we ended the year relatively strongly with some 15,000 net adds in the fourth quarter, similar to that, that was achieved in the fourth quarter of last year. So we've seen gross adds that were relatively solid for both the year and for the quarter, but disconnects had been up for the first 3 quarters. And we've seen that improvement in terms of churn for the fourth quarter. So clearly, it's early days to call this a trend, but it's very encouraging. And I think it's no coincidence that it coincides with our strong differentiation in terms of superfast broadband and TiVo coming together.
Finally, we can see that we've been improving the customer mix with a shift in mix towards Triple's and Quad's. We also feel that we're starting to move in terms of customer loyalty and look to continue the churn going forward.
Second pillar of cable revenue growth is obviously ARPU. ARPU was the key driver in the full year for cable revenue performance in 2011. Cable revenue, up 3%, driven by 2.3% growth in ARPU. However, the fourth quarter ARPU growth was clearly weakened at 0.7%, reflecting, as we've said, a tough comparator quarter. And we've pointed that out in our Q3 results. It's actually important though to notice that the gross margin level [indiscernible] actually grew by 1.2%, so the average marginal average contribution per unit grew at 1.2% whilst ARPU only grew at 0.6%. And let me just explain why that was the case.
Certainly, in terms of overall ARPU, 35p of snow-related activity. Sometimes snow is a wonderful thing when you're a fixed line telephony operator. But it occurred a bit late for Q4, and actually isn't heavy enough so far for Q1. But we did all benefit from it in the fourth quarter of 2010, and we pointed that out obviously at the conclusion of that quarter. But also, there was a couple of events that occurred. If you'll recall in Q3 of 2010, there was very intense activity between Sky and BT over the launch of [indiscernible]. We benefited from that with some quite subdued advertising. We had a big uptick of Sky Premium customers from Q3 to Q4 in 2010. Revenue fine, ACPU very, very small subject to regulatory reform.
So that's the principal reason that we see the delta between the ARPU and the ACPU. I think there was a pay TV or a pay -- a fight movie that occurred in the same quarter. But obviously, a significant contributor in the quarter is the continual headwind that we face in terms of declining telephony usage, which I'll talk about a little bit later in the strategy session and the mitigants that we have been having in place for quite some time.
So onto broadband. And here, we see our tier mix continues to improve, and it continues to improve and demonstrate to us the elasticity that exists in the market in respect to the various tiers. And we now run with circa GBP 5 per tier differential, and we can see that starting to flow through in terms of our underlying subscription revenue streams. So in the fourth quarter, we had another quarter, the third quarter, I think, around half of which broadband gross adds took 30 meg or above. This compares to only 32%, taking as it was 20 meg and above this time last year. So we added 133,000 superfast customers in the fourth quarter with an associated ARPU. 17% of our base is now 30 meg and above, 28% of our base is 20 meg and above, with the price differential being very small. This combined usage and preparedness to pay has given us the confidence to double our customers' broadband speeds, which we announced a few weeks ago.
Onto TV as a product. Here, the strength of TiVo is contributing to the quality of our subscription revenues, alongside continual progress in growing the pay TV base. And I'll remind everybody that it was only 2 or 3 years ago that we had 28% of our TV customers that were free, M, and that is now 18%. We don't sell the product anymore, and you will see that continue to drop.
So that whilst TV subs for the quarter were only 1,000, 56,000 pay TV customers either joined us or upgraded from M, and 55,000 M customers either left us or upgraded. That's quite an important shift in understanding what's happening to the [indiscernible] of our customer base. We added 273,000 TiVo subscribers in the fourth quarter.
12% penetration of our Pay TV base in 6 months. It really shows that customers love TiVo. And a third about 273,000 were new to the TV base [ph]. So they either upgraded from a Dual to TiVo or they joined us from a competitor.
We also are continuing to see strong HD growth with the subscribers up 51% in the year to reach a penetration of 59%. [indiscernible] due to the set top box that is not HD compatible. So as we roll through and replace the balance of our set top boxes, they will all be HD enabled. Growing Sky premiums continue to grow on a [indiscernible] basis, backing them up, up year-on-year [indiscernible] penetration. Again, [indiscernible] of the Virgin Media customer base.
And finally, broad usage continued and continued to grow, such that around 2/3 of our customers now directly use Video on Demand. And there's a direct relationship between the pay TV [indiscernible], the 18% of [indiscernible] pay and VOD usage versus the 18% of them and non-VOD usage. So the core TV customer wants TiVo and uses Video on Demand. That's the principal differentiation of our TV offering.
Mobile contracts continues to grow forward. So first time ever, we now have more contract subscribers than prepaid. Following a quarter of record cross [indiscernible], we'll give some more granularity, which we haven't done before. So for the first time, we're actually disclosing the contract revenue and the prepay revenue. So you can see the improvement in growth that we're getting in contract revenue and again into the Virgin Media and the decline of the principally stand-alone prepaid customer as they fall away. And we added 103,000 contract customers in the fourth quarter, which was up 84% versus the fourth quarter of last year.
As I say, virtually all of these are into the cable base. We now have over 1 million contract handsets in cable homes, which is up 37% over last year. As I was chatting to a couple of you earlier, it's important to continue to look at the contract mobile business not just as a stand-alone business, but as an adjunct to Quad Play penetration, which has now reached 15% within the mobile -- within the Virgin Media base.
And turning to Business, we obviously had a very strong quarter with 14% revenue growth as revenues from some of our recent contract wins started to come through, resulting in 7% growth for the whole year. We continue to see the improvement in the terms of retail data, and it's resulted in the second half -- successive year of revenue growth within the Virgin Media business. I'll remind everybody that this business was x growth only 2 years ago.
Retail data has been the main driver, up 15% this year. So the large contract wins that we've seen such as MBNL, the joint venture between Everything Everywhere and 3 London Grid for Learning Hampshire County Council, et cetera, is starting to provide us with good momentum going forward. And what this all means is the lumpiness that we've seen in 2011, the roller coaster of double digit, 1, 0, double digit, we will not see going forward. You'll still see lumpiness, you won't get a complete even beat each quarter, but we'll try and give you the transparency. And the underlying growth that we've seen, we believe, is sustainable.
Before I hand over to Eamonn, I'd just like to give you some short-term guidance. First off, the consumer environment, it continues to be challenging. And it continues to provide a difficult macroeconomic climate for us to operate in. However, we do not see any different signs in terms of our metrics, in terms of our understanding of our consumers or business customers than we've seen through the course of 2011. So we are not seeing a deterioration in trading performance brought about as a result of the economic climate. We're getting used to operating in this climate.
Our Q1 2012 financial performance, however, will be affected by some front-loaded investment and some seasonal phasing, and is therefore likely to be flattish. But with the price increase that we've already announced that will flow through in April, this will be temporary and does not reflect our expectations of full year performance. We expect the first quarter revenue growth to be no greater than the revenue growth that you saw coming from Q4.
Apart from business, which was particularly strong in Q4, we do expect similar trends in the other areas for the fourth -- for the first quarter. In addition to this, our marketing spend will be front loaded, and particularly in the first half and therefore the first quarter, as we invest behind those differentiated products that we're seeing the success of in terms of superfast broadband and TiVo as you saw in the last quarter.
In fact, we expect our Q1 marketing expense to be around 50% higher in the first quarter than it was this time last year. We've begun our customer-facing TV ads for the first time, both in terms of using Usain Bolt and Branson, Richard Branson in our advertising, but also in terms of talking principally to our customers. And you've seen that hopefully during the course of the last few weeks. So therefore, we expect OCF to be relatively flat versus Q1 last year when it was GBP 376 million. The flat OCF combined with the front-loaded CapEx will mean that free cash flow will be down Q1 over Q1.
CapEx is obviously front loaded as we spend more heavily on the double your broadband speeds, the tier upgrade; on Business, which is obviously success-based; on TiVo, which is obviously success-based. And we'll talk a bit more about that in our strategy session. But as Eamonn will make very clear in a moment, our full year CapEx remains in place. We're just talking about phasing.
You'll have seen that we've increased prices to existing customers by 5% in April. We've also made the move to increase the price of TiVo for all new TiVo subscribers from GBP 3 to GBP 5, which takes place immediately. And in 12 months time, as current TiVo customers roll off their first 12-month contract, they will migrate from GBP 3 to GBP 5. These price increases are underpinned by our growing product differentiation. And obviously, an example of that is doubling our broadband speeds and aggressively rolling out TiVo. So although Q1 2012 financial performance is likely to be flat, it is absolutely not reflective of our full year expectations. When you take the -- when we take you through the strategy update presentation in a few minutes, we'll be explaining why modest revenue growth is sustainable going forward.
But before we do that, let me hand over to Eamonn.
Thanks, Neil. And good afternoon, everyone. Turning first to the financial performance of the quarter. You can see on the chart on the left-hand side that our revenue came in at just over GBP 1 billion and grew at 2% as Neil has mentioned.
Our OCF for the quarter came in at GBP 424 million, up 5% year-on-year. And our free cash flow came in at GBP 140 million, up just over 1%. Full year performance was once again -- once again demonstrated our ability to convert modest revenue growth to superior free cash flow growth. You can see in the middle of the chart that revenue at just shy of GBP 4 billion, came in at growth of 3% for the year. OCF at GBP 1.590 million, grew at just over 5%. And free cash flow, just shy of GBP 500 million, GBP 498 million to be exact, grew at almost 21%.
It was particularly pleasing to see the gross margin expand in the year. Gross margin grew by 3.7% year-on-year and was up to 4.3% [ph] . The year also exhibited once again strong cost control measures. You can see that the SG&A grew by just 0.7%, and that's despite us increasing our marketing spend year-on-year by 7%.
You can see in the interest line that our interest expense was down 7%, and that's almost GBP 34 million year-on-year. And that reflects our enhanced credit status and the various refinancings that we undertook through 2011. And CapEx, CapEx was held at 16.5% of revenue, and I'll talk a little bit more about CapEx in a couple of minutes.
And in the far right-hand side of the chart, with the little red disks, you can see the cash conversion remained strong through the year with GBP 1 of revenue, translating into 69 pence of OCF growth and 74 pence of free cash flow growth.
With this next slide, I want to take the opportunity to remind everybody about the explicit CapEx guidance we gave you on January 11. We announced our broadband speed upgrade. But for clarity, I'm going to read verbatim exactly what we put in that guidance, which is the top 4 or 5 lines in the slide that you're looking at.
"Excluding the incremental GBP 110 million investment in 2012 for the broadband speed upgrade, Virgin Media's cash capital expenditure will remain within current guidance of 15% to 17% of revenue for 2012 and for future years. In addition, it is expected that the cost of assets acquired under releases will continue to be no greater than 2% to 3% of revenue per annum, in line with recent years. All other strategic growth opportunities will be met within this guidance."
The table on the chart on the left-hand side makes this clear. You can see the cash CapEx to revenue was 16.2% and 16.5% in 2010 and 2011, and capital leases were 2.5% and 2.3%, respectively. Then, in the red box in the middle of the chart, including the GBP 110 million incremental investment in 2012, cash CapEx will remain within 15% to 17%, and capital leases will be no greater than 2% to 3% of revenue.
Also, you may have noticed that we enhanced the transparency of our [indiscernible] in today's earnings release. We've given greater clarity around 3 key figures: lease balances, lease repayments and the interest expense on those leases. Now it goes without saying, but I just want to emphasize or make quite clear our commitment as a business to providing clear, transparent and consistent disclosure, so investors have all the necessary information to benchmark our performance and make formal investment decisions.
And now I want to give you a little bit more detail on another topic, TiVo operating leases. At the Q3 results, we confirmed that the initial phase of TiVo set top boxes was financed using operating leases. And we were evaluating the opportunity to accelerate the TiVo rollout with different financing options.
We concluded this review and have taken the decision to convert all TiVo boxes already acquired under operating leases in 2011 and finance them with capital leases. We have also decided not to use operating leases for customer premise equipment in 2012 and for the foreseeable future.
So why have we done this? Well, a couple of reasons. Firstly, we have moved to dual supply for TiVo boxes. And this has created the opportunity to renegotiate supply terms within our buying structure. And secondly, this has enabled the delivery of better finance [indiscernible]. Finance cost for the new capital leases going forward are significantly superior to the previous lease structures. In fact, the cost of new capital leases in 2012 are expected to be less than 5%.
On the right-hand side of the chart, you can see the impact of the conversion on 2011 CapEx. Accrued CapEx increased by GBP 56 million from GBP 708 million to GBP 763 million or 17.8% to 19.2% of revenue. Capital leases were increased by exactly the same amount, rising from GBP 36 million to GBP 91 million or from 0.9% of revenue to 2.3% of revenue. And because of the equal and opposite effect of the above, there is no impact on cash CapEx, which remains at GBP 657 million or 16.5% of revenue.
Finally, I'd like to update you on our capital return program. As you are aware, since mid-2010, we announced GBP 1.8 billion of capital returns, including GBP 1.25 billion of share buybacks. Since mid-2010, we've repurchased 52 million shares for GBP 797 million. This included 41 million shares we purchased in 2011 alone for GBP 635 million.
Our share count has now reduced from 332 million in mid 2010 to 287 million at the end of 2011. And today, we've announced an additional accelerated share repurchase for the sum of $250 million. This is a further tranche of our existing board authority. $250 million represents about 4% of our current market cap, and at current prices would mean the repurchase of an additional 10 million shares.
And post this latest transaction, we will have GBP 295 million remaining buyback authority to the end of 2012. This represents circa 7% of current market capitalization. It's worth highlighting, assuming a constant share price, of course, 25% of our share count in mid-2010 is expected to be repurchased in just 2.5 years.
So with that, that concludes our Q4 and full year 2011 results presentation. And I'd like to hand back to Neil, and we'll crack on with the strategy update.
Actually, sorry, we're having apparent [indiscernible] audio issues, so we just need to run it for just 2 or 3 minutes. [indiscernible], so apologies.
Neil A. Berkett
Can I suggest logistically, we were considering having a small wee break between Eamonn and I and the strategy session. We're going to plow straight through. So for those that feel so inclined, you might just want to take a comfort stop now. Cheers.
Neil A. Berkett
Okay. Thank you very much. [indiscernible] I think you would notice from the sound quality, so hopefully, we've managed to reboot the kit, and we're all set to go again.
So following on from that interim [ph], for our fourth quarter and full year results. We really can see key elements of our strategic progress. And that, I believe, continued to underpin our ability to continue to deliver sustainable modest revenue growth.
So what are our strategic drivers? Clearly, in the consumer space, we're seeing a continued unprecedented demand for data rich content and applications. This [indiscernible] in terms of overall [indiscernible], but the demand of consumers for streaming for new movie x for other applications and data rich content continues.
We're also seeing that as we invest in differentiation, particularly when you invest in superfast broadband, individual function [ph] increases. So demand from greater content, supply sees demand through greater supply [ph]. We continue to leverage our superior network and our superior products, and it's a combination for fast broadband and TiVo that is really driving this forward.
We have forever gone on about connectivity followed by application, followed by convergence. And you are seeing that in the fourth quarter: 273,000 TiVo application, 133,000 superfast broadband connectivity. We talk about best [ph] alone, better together.
But we've also got a continued great opportunity to cross-sell mobile. And this will continue to be cross-sold into our customer [ph] base. And now, Business division gives us significant growth opportunity from a low market share, but a strategically and net advantage in enterprise telco.
As I made clear a few minutes ago, we'll work against some headwinds, like declining telephony usage, all the telco incumbents and prepay revenue. However, these are time-limited, and we manage everything for a long time, fixed lines, in particular. They will become a smaller and [Audio Gap] part of our overall revenue, and therefore, will not go on forever.
Finally, we've got a well balanced and disciplined capital allocation and reinvest for growth as well as an ongoing commitment to significantly provide shareholders with returns.
Our business model is working. It is working now, and we believe it will continue to work well and consistently. Modest revenue growth, strong operating leverage delivers superior free cash flow growth, which we are returning to shareholders.
We delivered a 3% revenue growth in 2011, following a 6% growth 2010, which meant that we grew free cash flow 20%, in both 2010 and 2011. That is operating leverage. And we returned a lot of that cash to shareholders with over GBP 800 million in share buybacks and dividends between 2010 and 2011 with a further GBP 453 million of buybacks authorized to the end of 2012.
Demand by consumers for data is exploding, and customer demand for bandwidth-hungry content and applications is generating rapid and accelerating traffic volumes. Consumers are increasingly more digitally enabled with more devices in their home accessing content in the cable [indiscernible] individually or by different family members. And clearly, there's 3 drivers for this: supply, as I said earlier, increasing [indiscernible] through headline broadband with [indiscernible] exclusive Video on Demand [Audio Gap] a dedicated top broadband connection. We deliver [Audio Gap] take it. [Audio Gap]
The price, the tablets, [indiscernible] phones, laptops, television screens continues to come down, and therefore, the mobile access concurrently continues to go up. [indiscernible] driving it through with more fragmented [ph] data, heavy content [Audio Gap] with different applications and therefore different devices.
You can all see this reflected in terms of data traffic, in terms of gigabyte consumption. And this is the [indiscernible] 40% per annum, and we expect it to continue at that rate. We may not be as bullish as the Cisco's of the world, but they've got a reason to be bullish.
Our customers download 49 gigabits of data per month on average. So that is across the full spectrum of 10, 20, 30, 50 and 100 megabit customers and obviously the far minority are on Virgin Media 10 megabit. But obviously, the majority of those [indiscernible] Video on Demand, which is on a separate piece of that [ph]. 49 gigabits, so what does that mean? It means they are consuming nearly 3x more data than DSL. 2.8, why? Because they can, and because they are used to being able to instantaneously get content entertainment when they click the button, very low latency, small latency. Whether that comes from our OnDemand library, dedicated BBC, whether it comes from Over-The-Top DOCSIS 3.0 or whether it comes from broadband.
The chart on this slide also demonstrates the large and increasing proportion of bandwidths, as I said, which is being used as the big driver now. And as more and more Video on Demand goes to HD, the more stress and pressure is going to be put on DSL [indiscernible] that is also the case of DSL. And again, I'll talk about the different technology in the allocation spectrum shortly.
[indiscernible] our data traffic, and we think by 2013, it's expected to be the entire data traffic was in 2010. And data traffic [indiscernible] again in the next 2 years. Our network is perfectly positioned to deal with this ever-increasing demand and are prepared to pay for it, as we've seen in terms of our -- I guess the best way to look at it is actually with our broadband tiers, but its wide Video on Demand takeup is also very important. We can see that affected in that strong demand. That experience in increasing our speeds, [indiscernible] as a result of that, either directly or indirectly, without triggering churn, we're confident we can do it again.
We spoke about this a little bit at the end of the last quarter. The market is segmenting. It's segmenting at a rate that is faster than I would have predicted even in 12 or 18 months ago. Fortunately, we predicted it would segment. And fortunately, it's moved faster than we thought it would, but it's why the combination of TiVo and superfast broadband will provide us with significant strength. We serve a fast-growing, increasingly discerning, data-hungry, digitally savvy mass market who will pay for what we offer.
This slide, obviously, try to make somewhat anonymous for obvious market reasons, attempts to summarize a lot of the detailed segmentation we've done around the 13 million homes that we pass. We think about the market in 10 key segments, which are based on if you like speed of digital adoption combined with the intensity of use of digital life, if you like. Consumers at the top of the spectrum are most digitally aware and tend to quickly embrace the full advantage of the digital world. It enables their busy lifestyles, driven by a desire to make their lives easier. They tend to be younger, they've got very, very high download volumes and spend a lot of time online. Consumers at the bottom are slower to embrace advances of digital. It is less important to them. They tend to be older and at the moment, this described them as being digitally cautious. The use of digital is combined principally to socializing with the family and it's a cheaper form of entertainment. The middle segments are digitally-aware, multiuser households using digital to enrich their family lives. They are huge users of VOD and are a key target segment for us.
Now on the left-hand side of the diagram, you can see how we penetrate into the households by segment across these differing characteristics. You can also see there is plenty of opportunity for growth. This is not a sociodemographic skew. This is not a niche. This is where the majority of customers are now becoming digitally savvy. More customers are becoming digitally savvy, and digitally savvy customers are consuming more bandwidth. This is a gigabyte explosion. And having the network capability to be able to keep pace, in fact, keep ahead, as we've demonstrated over the last 3 years, having the capability to keep pace and keep ahead of this gigabyte explosion is absolutely critical. We've got a 40% share of the digitally enabled segments and a 44% share of the multiuser households. And we're talking of the 13 million homes that we address. Our propositions play into the sweet spot of the digitally hungry segments that we target, particularly, at the moment, superfast broadbands. But you can see on the right-hand side of the diagram, where we're showing the penetration of Broadband and TiVo into the customer base, it's also encouraging, albeit nascent, to see good TiVo take-up across all segments, highlighting TiVo's, again, mass appeal. A mass product, not a niche product, a mass product being taken by all sociodemographic segments.
And as the arrows show, or arrows too show, is actually over time, as customers mature, they shift to the right-handed segments. And so we'll see digital demand grow, as I said earlier, both in terms of the size of the market growing, as well as the data that they consume. So we've got an ongoing opportunity for customer growth without network expansion as the demand for digitally superior services grows across all the segments.
And we have clearly differentiated mass market products. We find that both existing and prospective customers really value the combination of broadband and TiVo. So that's connectivity and application. And we've got a real differentiation and real competitive advantage. So in the same way as 2 years ago, nobody else had superfast broadband. Today, nobody else has connected TV, and nobody has got superfast broadband and connected TV. So over the last few years, we've been building, I think, best-in-class products to service this market. So for broadband, this is evidenced by the fact that for the last 3 quarters, around half of our gross adds have taken 30 meg or more. And the customer satisfaction increases as, in fact, customers migrate up higher speeds. And obviously, in terms of quality, our common data shows that we provide the highest broadband speeds across the board that more importantly, this is not a speed race. This is about the data consumption that you're capable of taking and the quality of service that you provide. For our 30 meg customers, we provide 30 meg, I think it's 31. For our 50 meg customers, we provide 50. On 100 meg customers, I get 98 and no, it's not a special service. Although I do suspect if I ever was to lose connection, it would be categorized as a P1.
So we have now some 10 million homes that can get 100 meg, and we'll complete the rollout of our 100 meg over the next 2 to 3 months. So that all 5 million homes, potentially all 13 million homes across our network within the next 2 to 3 months will be capable of getting 100 meg and then migrating onto 120 meg. And of course, we're not standing still. We're doubling our speeds for all of our customers.
So again, this is not a speed race. This is not who's got the fastest for 2 or 3 customers. It's what you can do for all of your customers. So what we will do for our 10 meg customers is clearly upgrade them to 20 through 30, and continue to do so. These are significant changes in a mass market. We think TiVo, concurrently with superfast broadband, is the best way to watch TV ever, and it seems that new and existing customers agree. So we've seen a 19% increase in ex-Sky customers taking our TV. Now, this is not an eat Sky conversation. This is just saying for the first time ever, we are really appealing to customers who were diehard Sky customers. And I think just in terms of the quality of the product, it's an important nuance in terms of our ongoing growth, both in terms of customer and product. 40% of those customers said they joined us because of TiVo. Because if you're a TiVo customer, you're an advocate. TiVo customers have a higher net promoter score than non-TiVo customers, are 20% more likely to be advocates than not. Advocates recommend. And you can see some of the verbatims that we've got on the slide. So with all of the enhanced search, recommendation, discovery and all the features of Over-The-Top applications, et cetera, TiVo offers a deep and compelling way in which to watch television. In fact, we're finding that once a customer has TiVo at around the 3-month level, half of their viewing is done through My Shows. My Shows is the area you go to if you want to search, if you want to browse, if you want to be recommended. Half of their viewing is outside your traditional I'm going to channel 101. That's where they go to search, whether it be broadcast, whether it be Video On Demand given to you by Virgin Media, or whether it will be the increasing number of applications we have in terms of Over-The-Top.
So we rolled out 273,000 TiVos in the fourth quarter alone. As I've said, it improves NPS, it's attracted Sky switches, it's generating value and it establishes a sustainable lead for us in the connected TV space. We've got circa 0.5 million TiVos connected today, and we will have substantially more before the next mass market connected television is launched. So we're seeking to use TiVo in the connected TV space to do what DOCSIS 3.0 did for us in allowing the super -- the broadband space, i.e. first mover, and we believe, best mover. We've had a strong take-up of TiVo, 12%, as I said, of our TV base now have it and just 2 quarters, in just 2 quarters of above-the-line marketing. It's attracting better quality, more satisfied customers. TiVo customers have a much higher ARPU than non-TiVo customers, about GBP 60 versus GBP 45. And again, so in the same way as when we're looking at Quad Play and we look at perhaps churn characteristics of Quad Play, clearly, first adopters will like you more and probably spend more with you. But it's encouraging to see that TiVo is across the board in terms of mass market, and where it's taken up at the moment, customers love us more and spend more money with us. And we've got a much higher penetration of -- in our top tier of TiVo and of Premium and of Triple Play and of Video On Demand users. So as you see that M tier continue to decline, we don't sell it anymore, 18% of our TV customers, more and more of our customers will be VOD users, will be TiVo users and will be heavy bandwidth-hungry users. And the why in which they do this is, as I said, is through access and discover.
So it's unlocking and enabling a strong desire to personalize the TV experience in the same way for the last 5 years, we've been seeing an evolution of personalization on the Internet. We saw, for example, 8 million thumb clicks, I like it, I don't like it, in November. And its financial returns are compelling. Now, it's a fundamentally different proposition for us. The majority of set top box rollouts, whether you're a satellite operator or whether you are a cable operator, the argument quite appropriately so is the benefits will come in churn or come in advocacy or come in cross-sell. I think we'll do all of those things.
In addition to that, in the majority, but not all cases, we charge for the installation for the TiVo box. You can see the maths. So if on 60% or greater of the occasions customers pay, you've immediately mitigated for the price of a box. Then in addition, every single month, customers will now pay us GBP 5, and we're paying out GBP 3 a month for that TiVo service, over and above what they would pay for the package if they just had a standard DVR. And if we look at the last quarter, over 3 quarters of TV subscribers new to us elected to take TiVo. And of course, beyond the straight economic benefit that is overt, so if we spend GBP 10 million last quarter more than anybody expected us to because we put more TiVo in, that's a good thing. It's a very good thing. Because it immediately, transparently provides an economic return.
So let's turn now to the doubling of our broadband speeds and why we did what we did and the sort of returns that we think are significantly greater. And obviously, I remind you all that we announced an incremental GBP 110 million investment in 2012, and that'll double, as we've said, all 4 million of our broadband customer speeds. It's largely funded by the disposal of our stake in UKTV, about a third of the UKTV proceeds were put into this, the other 2/3 returned to shareholders. And we'll spend another GBP 40 million in 2013, but I rush to finish the rollout, but I rush to say that, that will be completed within our CapEx guidance. We're taking our 10 meg customers to 20. And if they want to go to 30, they can buy a modem. We're taking our 20 and our 30 to 60. We're taking our 50s to 120 via 100. So we will have a clean suite, minimum of 20 megabits per second as a broadband speed. So our entry-level broadband will be superfast. It'll be superfast broadband at DSL prices. That is the power of our network, both technically and economically coming to bear.
And I'd like to reemphasize our network advantage. She is, as we refer to her within Virgin Media, a beautiful thing. A mass rollout of deep fiber across 13 million homes, accessing 50% of consumer premises and just over 50% of enterprise. It provides us with differentiated products because we have a superior network. It gives us technical -- technological and economic advantages, and it's unmatched network advantage. And it comes down to spectrum, 750 megahertz of spectrum. And as technology evolves, more and more of that spectrum will become available for us to apply to return path. We obviously use roughly half of it today for broadcasting and roughly half of it for return path, split across Video On Demand, broadband and then a dedicated pipe in terms of Over-The-Top to the broadband. This is not delivering single-shot superfast, it's delivering the capability for those data-hungry, growing customer base, data-savvy growing data customers to be able to feed from. And as time goes on, we can allocate different amounts of that spectrum to different services. We believe it gives us a sustainable consumption, if I could call it that, advantage over ADSL and also fiber-to-the-cabinet. And as important of this is the quality of service, and I quoted some of our comp statistics earlier.
And to -- just our network is future-proofed. We've got a deep fiber network already in place and the modems that we're rolling out are capable of doing, I think, it's 375 megahertz, might have quoted 400, but it's of that order. It all keeps us well ahead of the competition, who are seeing increasing costs, particularly the resellers, as they switch to fiber. Our customer base will be on at least 20 megs as a result of our doubling broadband speeds investment. Yes, our competitors will begin to move customers onto fiber, but the vast majority of their subscribers will remain on ADSL for the immediate future and sub-10 meg speeds for quite some time. We're able to move to superfast as standard. And again, we're doing this the modest incremental investment compared to the billions required to roll out VDSL. It's a unique piece of timing with a unique asset. Remember, we're only going outside capital guidance this year because we have such an advantage in a moment in time in terms of accelerating both TiVo and doubling our broadband speeds, whilst ramping up our Business division.
So we've got differentiated products, both superfast broadband and TiVo. We'll see, and I'll talk about it soon, but mobile will become increasingly relevant to the home. And we're putting in place a price increase of 5% in April. We can justify this by way of an example of how we think about price because we're enhancing value across the bundle. You can see this if you actually just look at the example I have here, which is your standard entry-level bundle. Now last year this consisted of an entry-level M+, so weren't selling -- wasn't selling M, so small number of pay TV channels, 10 megabits of broadband and obviously, capable of funding. In 2012, the same tier has got more channels, has got 4x more Video On Demand than it had this time last year. It's got free HD activation and it has all of the benefits of TiVo that we've been talking about. And the broadband speed has increased from 10 meg to 20meg. That is the way we believe we need to manage our infrastructure and our investment such that ultimately, customers will buy from us, will stay with us and will take, from time to time, a price increase. So also, if we compare this to similar competitor bundles, you can see our broadband is much faster. So our linear TV is more extensive than BT, our Video On Demand is more extensive than both BT and Sky, our HD is standard and we have TiVo. And by the way, we've got 3 tuners versus 2. We think about our bundles and we think that our bundles are going to be very, very compelling. And the enhanced value that these bundles bring to bear means that we can part command price. So superfast broadband and TiVo will become standard after we've completed this upgrade and as we have continued to accelerate TiVo. We've researched it, we've looked at our experience of previous price increases when increasing these, and we think that, that will end well without triggering churn.
And we continue to attract quality customers from that segment that I described 30-odd minutes ago. And therefore, the differentiation that we've got appears to be working, and it appears to be driving quality growth. So today's Q4 results showed, albeit modest, evidence of this when we added 15,000 customers, but saw quality additions in our main product area. So in TV, 77% of our gross adds took TiVo. Our paying TV base increased by 56,000. Our free base, it declined by 55,000. So yes, we only grew TV subs by 1,000. I acknowledge that. But the quality within that has improved and the ARPU of those customers have improved. Our HD base increased from -- about 395,000 when we added 42,000 Sky Premium customers. So again, representing quality. In the broadband, around half of our gross adds took 30 meg and above with 133,000 increase in the superfast base. 17% of our base now have 30 meg and 28% have 20 meg or above. And clearly, all of those customers in the next 12 to 18 months will be upgraded to 60 meg. In contract mobile, 82% of our gross adds were sold into the cable homes. We added 39,000 Quad Play customers, reaching 15% Quad Play penetration. We now have over 1 million contract handsets in our cable homes. We're not selling cheap and cheerful products, we're selling really high-quality, value for money, mass-market services. And we concentrate on developing customer lifetime value, not RGU metrics. And I think, thinking about our TV base with that is worth looking at. Again, 56,000 pay TV subscribers in the last quarter, losing 55,000 non-pay TV subscribers. We'll continue to show you the metrics of that as we go forward.
And we've continued to have strong progress in mobile cross-sell. We're building our contract mobile cells into our cable homes, and this has got significant benefits, still a meaningful opportunity for us to continue to exploit. As you've seen from our fourth quarter results, that year-on-year growth in contract had been very strong, with total subs up 26% and contract in home up 30%, and it's now just over 1 million. 99% of our contract net adds, just over 80% of gross adds, were into the home. So again, that is reflecting what's happening to churn for mobile, as well as churn for the home within that segment. Because obviously, adding mobiles into the home lowers cable churn as we've explained. And I again, I acknowledge, first adopters will be higher advocates. Their churn will already be lower. So we're not for a minute suggesting that the delta between a Quad and a Triple is going to be 500 basis points. Of course, it's not.
But goodness me, if it was only 10% or 20% of that delta attributable to the mobile phone going into the home, that is a lot of value that is being created from moving from a Triple Play to a Quad Play. And as we move forward, there'll be more and more convergence opportunities, as I say, as we start to make the mobile more relevant, whether it be the way that, that mobile connects to our data network, whether it be the way -- in the home, or whether it be the way that our mobile customers access TiVo, by way of example. A Virgin mobile will become increasingly more relevant to a Virgin Media customer. But I wish it was, but we obviously do not just have tailwinds. And we need to balance our view of how we make strategic progress by accepting and giving you some transparency around the headwinds we face. And I think there's 2 specific, reasonably material headwinds that we face, both of which we have experience of, and both of which are time-limited. I'm talking, of course, in respect to fixed line telephony usage, which has seen a 22% decline in 2011 in chargeable minutes, unlike -- sorry, just like the rest of the industry in the U.K. But we don't just stand there and see that this year, 2011, should I say, that decline amounted to the best part of GBP 100 million, GBP 96 million. But clearly, there are mitigants that we put in place. So if you take our mobile credit program. We approach customers with high amount of usage, we try and convince them to move from usage to fixed, first mitigant, and then we ask them to take a mobile phone, second mitigant. And as you've seen through the course of 2011, the third mitigant is there have been line rental increases through the course of the year. So of that, circa GBP 100 million, GBP 96 million, nearly 2/3 of that has been mitigated by those actions, excluding mobile, that I've just spoken about. But this structural decline will continue. But as we've highlighted in this chart, there is a point in time when usage, particularly domestic usage in the U.K., will be on a fixed bundle. And the whole sector is moving to that. And we'll all try and predict exactly when that will happen, but certainly, we'll see it continue at the sort of pace that we've seen.
We've also been facing headwinds in respect to prepay. And there's 2 things happening in prepay. The sector prepay is declining because the sector has introduced low-end contract that is basically taking the top end of prepay. So there's a lot of substitution that's going on. The second thing that's happening is the overlap between contract, now 15% Quad Play, now 1 million homes have Virgin Media telephones. The overlap in contract is much, much greater than the overlap in prepay. Clearly, hypothesis there is prepay customers are principally independent of the brand, and therefore, are not as aligned. So there's a couple of issues that face prepay. But again, we're seeing significant improvement in overall contract mobile penetration, and for the first time, contract growth has outpaced prepay decline. So just to repeat, these headwinds are there, we need to acknowledge that they are there, that they are time-limited in their nature and they underpin our confidence that with the things that we've just been through in terms of consumer, that our modest revenue growth is sustainable for many years to come.
Let me now turn to Business. Two years ago, Business division was x growth and had been for the previous 5 years. This year, it grew a tad under 7%, 6.8% from memory. And what we're doing with Virgin Media Business, which is now one of the faster-growing European enterprise telcos, is we're targeting our segments and our market to those geographies and those product sets that suit the investment we've already made in our fiber optic access network. So it's marginal, it's all marginal. It's all about ensuring that we maintain our focus on the segments, we use our superior connectivity in terms of access network, there are only 2 access networks in this country, and we target that area. So we're exploiting our structural advantages. And those -- a lot of these industry segments are far less competitive than the consumer world. The fact that we have our fiber close to 52% of enterprise, the fact that we are regional in terms of our sales structure, and therefore, closer to regional customers, the mobile backhaul opportunity we've spoken about, it's a GBP 650 million market that we're only just starting to exploit, and half of the U.K.'s 54,000, 55,000 cell sites are passed by our network. As part of the recent MBNL deal, we're building highly scalable aggregation networks that we can leverage to win other business opportunities down the track. And we have a strong public sector focus and a strong position in respect to local market because of our network's geography, because of our sales force's geography. And here, we can leverage the existing local network infrastructure to provide high-quality, efficient connectivity. But it's important to understand that our Business division has strong standalone economics because of its structural advantages. Its economics are virtually identical to the Consumer Cable business, virtually identical, whether that be revenue to gross margin, gross margin to OCF or OCF to free cash flow. It is an identical business that is growing faster than our Consumer business. It's capital-efficient as it's using effectively freer, there is no such thing as free, daytime capacity. And businesses tend to use the network, obviously, during the day, whilst consumers use it in the evening. We're leveraging both the access network as an asset and the existing core network. We don't need to make significant investments here. As I said, the CapEx required to connect customers are all success-based and provide an equivalent ROI to other investments we make in the business.
Now the scale of the business and the nature of the contract wins means that progress is likely to be strong over the year, but variable still between quarters, I repeat, not to the extent that it was in 2011. Because of the nature of the business, there was a longer lag between contract win, and therefore, incremental revenue. And we're working hard about getting some of our internal metrics around lifetime value the we're starting to use in the Consumer business to a state that we can talk to you about it. So you can have the same lead characteristics of what's happening in Virgin Media Business, as you do within the proxies for CLV that you get today for the Consumer business.
This is becoming a core competency of ours. And I think you'll hear more and more about Virgin Media Business going forward. So I'll sum up before I then pass on to Eamonn who'll talk about some of the financial characteristics that we're talking about today. So I'll try to set out for you the main drivers is growth as we see them. We'll continue to generate modest sustainable revenue growth through the 5 drivers that we've spoken about. This is absolutely consistent with what we said a year ago when we talked about being a 5-trick pony, when Andrew came up on the stage and did his juggling. We've got the best TV now, we've launched it through TiVo. We've got the best connectivity through broadband and Video On Demand. We're advantaged in mobile, we're advantaged in Business and it all sits behind a fantastic brand, being Virgin. These drivers feed into multiple growth levers, which spread the burden of growth, and therefore, the burden of risk across a profile. I'm really, really proud of our leadership team, but unfortunately, we're not capable of pulling all 5 levers simultaneously all of the time. And there will be times when revenue growth will be stronger than others, but I believe because of the multiple levers that we can pull, that modest, which is all we require, revenue growth will be sustainable, and therefore, our operating leverage will take that through to free cash flow. We believe we can grow the customer base through offering differentiated products, which we think will principally address churn. We've shown you that the digitally savvy market, we're seeing data usage grow in that digitally savvy market of over 40%, and we're seeing our improved market effectiveness in respect to that. We've talked about pricing and how it's underpinned product and value differentiation. We're increasing our overall prices by 5%, and TiVo Premium is moving to GBP 5 immediately. We're driving improved tier mix. You can see this in the broadband mix, where half of our gross adds to taking 30meg or above, and we've defined upsell paths right through our bundles and continuing to enrich our higher tiers. We've successfully cross-sold our products. For example, we now have over 1 million contracts, mobiles in our cable homes. But still, we have a significant opportunity. We've talked about Virgin Media Business. We've got a low market share and a significant mobile backhaul opportunity, but an overall retail growth of 15%. But of course, we face headwinds. No business doesn't. And principally, voice usage and prepay mobile are those headwinds. But these are known headwinds with a predictable rate, predictable life cycle, and we're used to facing them, they're time-limited. You don't have to believe in all of our growth drivers and they may not all grow, as I said, at the same rate at the same time. But with so many different drivers, we remain confident in our ability to drive sustainable modest revenue growth. With that, I'll hand it over to Eamonn to talk about how we convert that modest revenue growth into strong free cash flow and how we can allocate that superior cash flow back to our shareholders.
Thanks, Neil. So Neil's been talking about why we believe we can continue to generate modest revenue growth. My challenge over the next few slides is to give you a little bit of insight into why we think we can continue to turn that into superior free cash flow growth. And as you can see from the chart, over the last 3 years, we have demonstrated that we can convert modest revenue growth into superior free cash flow growth. Since 2009, revenue growth has grown at a 4% CAGR, OCF has grown at 9% and free cash flow has grown at 22%, all of which resulting in the expansion of both the OCF margin and the free cash flow margin. We've also seen strong cash conversions over the 3 years. One point of revenue growth has translated into 74p of OCF growth and 51p of free cash flow growth. And what's been particularly pleasing is the fact that at the FCF level, the free cash flow level, this translation has improved progressively over time, growing from 38p in 2010 to 74p in 2011.
Now let me go into a little bit more detail on why our free cash flow has been underpinned by strong and sustainable operating leverage. Neil has talked about the various revenue drivers, which you see along the top of the chart. And as I've just mentioned in my previous chart, revenue has grown an average rate of 4% since 2009. In the middle of the P&L, we have strong operating leverage. Firstly, we take advantage of our built-out network, that is largely at some cost, a very important piece of our operating leverage. Secondly, we are very focused on strong cost control. Good examples of this over the last couple of years include property rationalization, sourcing efficiencies, call reduction initiatives and back-office rationalization. The combination of all of these initiatives taken together has taken millions and millions of pounds of cost out of the business. And we're confident that there's further scope to do more.
This has allowed us to invest in success-based costs like marketing, which has increased 12% on a CAGR basis from GBP 125 million in 2009 to almost GBP 160 million in 2011. So bad cost out, to create the capacity to drive good cost.
Now below the OCF, our interest bill has been falling and we have refinanced many of our debts to reflect our improved credit rating. Cost of debt has been reduced from over 8% in 2007 to only 6.6% today. This has delivered almost GBP 16 million per annum improvement in interest costs since 2007. And again, we think there is scope to improve this further. Additionally, our CapEx, with the exception of the UKTV-funded GBP 110 million broadband speed upgrade, has and continues to remain within 15% to 17% of revenue and is increasingly success-based. And finally, as all of you know, we do not pay any tax. This is due to our significant tax assets. This feature is a very important point, a very important feature in our cash conversion capability. So these are the key reasons that has enabled us to convert 4% revenue growth into 22% free cash flow growth over the last few years.
So what do we do with all this cash that we generate? Well, we take a rigorous and financially disciplined approach to how we invest this cash. We only invest where risk-adjusted returns are attractive and create the most value. Now what you can see on the left-hand side of this chart is a risk return curve, return on the y-axis, risk on the x-axis. And if you look down on the bottom left-hand corner, you can see the lowest risk, lowest return, which is cash in the bank. And at the end of 2011, we had GBP 300 million credit back [ph]. As you move along the scale of risk, we can put a little bit more of that capital to work in retiring our debt. And in fact, since the middle of 2010, we've announced GBP 550 million actually allocated towards our debt. This is still low risk but gives us a slightly better return than having the money in the bank.
Moving further along the curve, the axis, we could put a little bit more of our capital to retire equity. And again, since mid-2010, we've announced GBP 1.25 billion of buybacks. Again, this is a slightly high-risk profile, but it's got a significantly higher return profile as well.
And then finally, in the fourth bucket on the right-hand side of the axis is cash to invest strategically in the business over and above our BAU CapEx: high risk, competitive risk, execution risk, competitive risk, operational risk, but also high return, and examples of that are superfast broadband and TiVo. This rigorous and disciplined approach ensures that our investments in the business are increasingly success-based. And on the right-hand side of the chart is 2 good examples. Firstly, marketing, which has increased by 12% on a CAGR basis over the last 2 years, whilst SG&A has remained fairly flat. And secondly, at the bottom of the right-hand side of the chart, you can see the CapEx investment has been and will continue to be increasingly focused on strategic investments like TiVo, broadband and mobile backhaul in our B2B space. These areas collectively have grown by almost 30% on a CAGR basis over the last 2 years, whilst total CapEx has only grown by 7%. So our investments in the business, increasingly success-based through the rigorous and financially disciplined approach we take.
This next chart highlights the fact that we have progressively greater distribution flexibility to shareholders. On the left-hand side of the chart, our leverage, as you can see, has been coming down and we have increased -- as we have increased OCF and reduced our debts over time. At the end of 2011, we are on 3.3x on a quarterly annualized basis and we're on track to hit our 3x leverage by the middle of 2013. On the right-hand side of the chart, you can see that over the last 3 years, the business has generated cumulative cash of circa GBP 5 billion. This is cumulative OCF and disposal proceeds from VMtv and UKTV. You can see in the first column of this right-hand side box that 35% of that GBP 5 billion went back into the business through CapEx, 41% of it went to debtholders, largely principal repayments and interest, and 18% of that GBP 5 billion was or is planned to be returned to shareholders through buybacks and dividends. But focusing on the cone at the bottom of the chart, what you can see is that over time, as we've moved from a 3-year timeframe to a 2-year timeframe to a 1-year timeframe, the proportion of cash going to shareholders has increased from 18% to 24% to 34%. And once we hit our 3x leverage, outlined in the chart on the left, we will have even greater flexibility to return cash to shareholders.
And now to my final chart on capital returns, this shows that we have substantial incremental capital return capacity. The free cash flow that we have the ability to generate over the coming years will be the equivalent of our market capitalization in a meaningful timeframe. On the left-hand side, you can see the GBP 1.25 billion of announced share buybacks. Phase 1, Phase 2 and the incremental proceeds from the UKTV disposal.
[indiscernible] million in mid 2010, with GBP 258 million by the end of 2012. That means 25% of our share count in mid 2010 is expected to be repurchased in just 2.5 years, when they're most efficient [ph]. Now much of the presentation today has been focused on how we think we can sustainably produce modest revenue growth, which leads into superior free cash flow growth. And as you can see on the right-hand side of this chart, even on a conservative free cash flow growth assumption basis, we can buy back a lot of stock. In fact, as you can see from the balloon on the left-hand side, if free cash flow doesn't grow at all, if it stays at the GBP 498 million generated in 2011 and assuming a constant share price, we could buy back 100% of our stock within 9 years. If however, free cash flow grows at a rate similar to the last 2 or 3 years, i.e. circa 20% plus, we could buy back 100% of our stock in under 5 years. And the final point I wanted to make before wrapping up is just to highlight the potent combination of a falling share count and a rising cash flow. And the potency of that combination to deliver superior free cash flow per share growth.
So to wrap up, our Q4 and full year results show some key elements of our strategic progress that underpin 2012 and our ability to deliver sustainable modest revenue growth and superior free cash flow growth.
We see a growing demand for data rich content and applications. We are investing in continued differentiation growth. We are leveraging our superior network with superior products. We have a great opportunity to continue to cross-sell mobile into our cable base, and our Business division gives us significant growth opportunity from a very low base.
But as Neil has mentioned, we do need to recognize that we have some headwinds, but we've been dealing with those. We are going to continue to deal with those, and the good news is they are time-limited. So finally, we have a balanced and disciplined capital allocation including reinvestment for growth and an ongoing commitment to shareholder returns.
With that, I think we're ready to take your questions.
Can I ask that you wait for the the microphone and say your name and institution, please.
Timothy Boddy - Goldman Sachs Group Inc., Research Division
It's Tim Boddy from Goldman Sachs. Just starting on the big picture, I wanted to just ask you about customer growth and when you expect to see customer growth return. If I've understood what you're saying, you're saying that you're over-indexed in the digitally enabled and multiuser segments, which are growing as consumer behavior changes. So that being the case, also, how come you haven't been growing this year? And then, just a more detailed point just around pricing. Do you have a sense there's more discounting now in the market because obviously ARPU is lagging quite far below the headline price tag?
Neil A. Berkett
Let me pick that up. If you look at 2011 from a net customer adds point of view, it was a game of 2 halves. And the game of 2 halves happened to coincide crudely with us launching TiVo and starting to move more aggressively in terms of our tier mix. The 2 are connected. It's not as acute a direction as that but I think you've seen net customer growth over the second half of the year, which I think is sustainable. Q2, in particular, was a phenomenon I'd prefer not to go through again. And it was disappointing for us all, that I repeat when you look at the lifetime value actions that we took in Q2, we probably still did the right thing. And it's always a judgment, isn't it, between price and volume. And when we think the opportunity is easier, in ARPU, we will go ARPU. If we think it's easier in volume, we will go volume, and obviously, ideally, we'll do both. Andrew, you might just want to pick up in terms of the marketplace and the level of discount that's working. But overall, we're not seeing a material shift in the level of discounting in our customer base although, clearly, the market is becoming more competitive.
Andrew M. Barron
I think that's right. I think what we're seeing, particularly in broadband, is a split in the market before -- between cheap and cheerful at the low-end and what I would call proper broadband, superfast at the higher end. And what you're seeing is people trying to decide which side of that line they want to go. So you're seeing it a bit in our TV segment as well. You're seeing people staying with us and building up and trading up with us, if you like, in the profit TV and the pay TV in the higher segments. And the discount algorithm isn't changing, but it's, if you will, by helping people through that transition. So there's people saying, "Look, you're putting more and more value into these bundles. I respect that, you're nudging the price, take me with you." So again, it's a process of moving the quality in the base consistently up, not just in our acquisition base, but also, in our existing customer base. So you'll see right now the Usain campaign talks to our existing customers and says, "We're looking after you. We're doubling your speeds." Clearly, there's also the annual price rise coming up at the moment and discounts can be used to help people through that transition and frankly, protect the volumes, at the same time as we migrate consciously and deliberately up the quality curve. But as Neil said, there's no structural change, we don't see in discounts. There's no direct correlation between that and the state of the economy. What you're seeing is us raising our aspirations and the value we're putting into those bundles, again, mitigated and softened, if you like, by some discounts.
Can I ask you, all, to keep to one question please, and we'll get around more then. Nick?
Nick Lyall - UBS Investment Bank, Research Division
This is Nick Lyall at UBS. Can I ask on the price rise itself that you mentioned, do you think the churn can continue to improve post the price rise? And also, do you anticipate BT raising its own prices, it used to? BT make for indiscernible] competitive?
Andrew M. Barron
Okay. So first of all, the pricing for fiber through Infinity is only now becoming clear. So 40 versus 80. So we don't have a 80. So what I think we'll see in our price rise is a recognition -- what I hope we'll see is a recognition that the significant amounts of value that we put into every tier of our offer are more than compensated for in the price rise. So I think what you'll see is people recognizing the strength of the offer against the competition. I don't know what BT will do in January, theoretically, of '13 when their current price rise, coincidentally exactly 12 months after their last annual price rise, when that comes in, I don't know what Sky will do, in this autumn, when their current price rise, again, comes to a theoretical end. I do know that the value in our bundles at every tier, after our price rise, stack up extremely well in the marketplace against the competition. And that's the value judgment that our customers and our prospects will make. So I feel personally justified in the level of price rise that we put in. You'll notice we didn't touch line rental. We put a subscription price rise in, and again, when you really go through it as our customers do, very systematically and look at whether it's the additional channels, whether it's the doubling of broadband speed, whether it's all the other stuff we've thrown in during the year, I think it stacks up quite strongly.
It's Ian Whitaker [ph] from Lipper [ph] . Just one question, just on your overall strategy. I mean, it's been a lot obviously on TiVo and superfast broadband and targeting the customers there. But if you go back to Slide 23, where you mentioned where potentially the biggest growth opportunity was, it tends to be more a traditionally cautious end of the spectrum, amongst the older customers and so on who perhaps would be less quick to take up these products. Do you think there's perhaps a slight disconnect there between sort of what your strategy is and the potential sort of high-end growth in the marketplace?
Neil A. Berkett
I think it's important to understand that it's come back to selling [indiscernible] bring it back to context that 65%, 70% of the market now is increasing its consumptions of gigabytes, at a much greater pace, it's accelerating. That is clearly, therefore, our core market. Over time, and it's not an aging process, it is an evolutionary process as content and applications come into the market. The bottom end, and I think it was at the chart, which shows the greatest opportunity, will actually migrate up. My 87-year-old mother has -- now has an iPad. She e-mails me. We send her photographs of what's happening in the U.K. She lives in New Zealand. She takes photographs and e-mails them back. I never would have thought in 100 years that my wonderful mother, for as much as I love her, would ever be capable of doing that. And she's not a market of one. And that's an extreme example of the bottom of that segment, and not every 87-year-old mother or grandmother will be there. And she's not there because of what I do. That is going to happen more and more because applications, in mom's case, the iPad, become so much more simple to use that the latent adopters will pick them up. There's no way she could have ever used a PC. So she went straight from pen and paper to texting, God bless her, to an iPad. And so I'm very comfortable that the huge amount of work and the knowledge that Andrew and the team have created under Nigel Gilbert, our CMO, that we understand the market. We've got the product and service set aimed at the right market segments, and the evolution that we've seen, without overdramatizing it, is becoming a revolution. This is a moment in time. And if you look at organizations globally -- I was reading something recently that Mike Fries sent, from Liberty Global, this is a 2- to 3-year opportunity for cable that cable must exploit and take advantage of their technical and economic advantage and exploit it. And that's what we're doing.
Andrew M. Barron
If I may, perhaps a critical point. We consciously, deliberately and religiously serve a mass market. So if you look at the way we're rolling out TiVo, it's not, in the jargon, an uber tier at the top, it's a mass market rollout. It's all of our various segments. And by the way, those segments are behavioral, as opposed to being demographic or socioeconomic. They are about digital behavior, and that's why you see the breadth and the speed of growth in some of those segments. When you look at our superfast as standard, as Neil referred to it, we're trying to put out really high delivered speeds, as opposed to headline speeds, to everybody at prices they can afford. It's a mass market strategy. Look at our mobile. Again, this is about all of our customers, 4-plus million, not a little sliver that we're putting more and more high-end stuff into. It's a fundamental premise of what we're trying to do.
Robert, in the back there.
Robert Grindle - Deutsche Bank AG, Research Division
Robert from Deutsche Bank. May I ask about mini Wi-Fi or should I say, mini 4G, according to some of the press. If you do get involved in any of the spectrum auctions coming up, would you consider that fitting in with the CapEx envelope or would that be something new?
Neil A. Berkett
Any involvement that we can see in the next planning cycle, 3, 4, 5 years, we can't see at this stage an opportunity that would run concurrent with other opportunities such that we couldn't live with in our own blood. You will not see us bidding for full-blooded 4G spectrum. If we think there's an opportunity in low-powered spectrum, i.e. reasonably inexpensive, we may well explore that with a partner. But time will tell, that would depend on price. So our principal Wi-Fi lens is aimed at Wi-Fi in the home and getting devices that we control in the home sitting there. And then, as we're aware, we're exploring a couple of other trials in terms of what else we might be able to do.
Paul Sidney - Crédit Suisse AG, Research Division
Paul Sidney, Credit Suisse. There's a growing debate surrounding Over-The-Top content and the threats from that content, especially the Sky's offer announced a couple of weeks ago. And how do you view that threat? And do you think there's an opportunity that you can increasingly partner these Over-The-Top guys to increase the content proposition of TiVo?
Andrew M. Barron
So there is a fundamental difference between our mentality and philosophy and what we're trying to do with TiVo and what a lot of other platforms, not just in the U.K. but around the industry, are doing. We are an open platform. I can't say that clearly enough. We carry Spotify. We were iPlayer's founder and largest distributor. We're Sky's largest distributor for premium content. We embrace some of those "Over-The-Top" applications, many of which run in Flash on TiVo. And then, we offer consumers the choice of how to access an ever-increasing and fragmenting range of entertainment, indeed coms. We run things like eBay and Twitter and stuff as well on TiVo platform and Facebook. And we give them the choice of how they want to engage with a plethora of supplies. If you go back 10 years, you had a choice of channels from lots of different suppliers. These days, you have a choice of services from lots of different suppliers, and the list is growing longer. So TiVo is designed to be their window on a rapidly growing and fragmenting choices of things they can do. So we embrace some of the Over-The-Top stuff. The challenge for us is, obviously, to balance the economics and take the sliver economics and the share out of all the stuff that runs through our platform, which, again, our experience today is just we can do. But we're not trying to move or try to hold on to or cling on to a "buy everything wholesale and sell it exclusively repackaged" retail, no. Our platform is open.
Neil A. Berkett
TiVo is, in marketing jargon, we talk about it as the best way to watch telly. That's not just about the application itself. It has to have a broader array of content, which means that we can be open. I think just following on from Andrew's point, it's important to understand our economics. We're not a classic pay TV provider. In fact, I'd almost suggest through not our [indiscernible] the fact that we were not overly successful early on in pay TV when -- 5, 10 years ago. Such that the way it's turned out, our pay TV business is our smallest business, not in revenue but in contribution. It's a critical business for us because it is the key to the wallet. It is what people want to use. They want the platform. They want TiVo. But actually, they pay for the TiVo application. They pay for the connectivity, and that's where we make our money. That's why we can afford to be as aggressively open as we are.
Simon, here in the front.
Simon Weeden - Citigroup Inc, Research Division
It's Simon Weeden from Citigroup. I have a question on CapEx mix, I guess, is the best way to put it. You're spending GBP 110 million more and directing that to broadband on top of the base budget, the base budget itself rising roughly in line with sales year-over-year, judging by the guidance. Was there not a significant chunk of the base budget that also went on broadband last year? And if there was, is that money also being used for broadband this year out of the budget? Or has there been another category which has seen a significant increase in spend on CapEx? Can you discuss the mix?
I think Neil alluded to it earlier. The reason GBP 110 million has kind of ended up popping out of our guidance is because we're trying to do a lot of stuff at the same time. We are trying to move all of our customers to double the speed, so that isn't just about nodes spinning in the network, but it's also about a big CPE challenge because as you get them above 20 meg, you need Super Hubs. And we are also trying to aggressively roll out TiVo. So again, that, as you saw from the numbers, is year-over-year quite significant. And then thirdly, in B2B, and we already flagged this, towards the back end of the year and going forward into 2012, we are seeing increased progress in landing big contracts for the success-based CapEx. So it's an array of opportunities, which we kind of flagged back in Q3, albeit in a rather clumsy way, that we're trying to get into a box. And the way that box is kind of manifests itself is, it's underlying 15% to 17% with GBP 110 million onetime on top of it for 2012. That's kind of the best way I could probably describe it for people.
Andrew M. Barron
Cable, if I may add, to build on that. Cable is streaming with things you could do. And one of the things that Eamonn and I enjoy vigorously every year is we lead a process of absolutely scrubbing to death the CapEx envelope we have available and turfing out lots of really worthy attractive opportunities that we should not pursue at this time. Neil calls it choosing right from right, and we have been really aggressive at making sure that the available CapEx is focused on the things that will really, really move the consumer dial or deliver near-term cost benefit. And we've been much more aggressive, I would argue, in the last few years compared to the history of U.K. cable about really putting those -- that money where it matters. And that's how you can squeeze a TiVo and a business and mobile broadband into the existing CapEx envelope and only if you have the GBP 110 million for doubling everybody's speed on top. It's a real tight, tight envelope.
Stuart Gordon - Berenberg Bank, Research Division
Stuart Gordon from Berenberg. I'm just trying to better understand the ARPU dynamics, particularly sequentially. I mean, I can't remember a fourth quarter ARPU being lower in U.K. cable than the third quarter. And if we run through it, I mean, line rental full quarter benefit, traditionally you get a boost in the fourth quarter and we up-sell a broadband, higher pay TV adds, TiVo, Skype, PMM and HD adds, no change to discounting, and the only headwind that you give is telephony usage. Can I just better understand what else is going on in that ARPU that caused the very modest decline in the fourth quarter, and how confident you are that when we sit here next year, ARPU will in fact be higher year-on-year '12 to '11? And just as -- I'm afraid, Neil, you reminded me in this, as a loyal customer, when are we getting the iPad app?
Andrew M. Barron
The last one is easy.
Neil A. Berkett
[indiscernible] as much granularity as we can because I think Simon may have missed a big chunk of the variances that we've already given. Do you want to walk through?
Yes. you kind of said it Simon. I mean, it was flat Q3 to Q4. We've talked about the Q4 on Q4, only going up 0.7, and we talked about why it's below the Q4 of last year. I think we are getting good benefits from mix, but the fixed line telephony decline every quarter is actually a big headwind for us, and nothing really has changed Q3 to Q4 other than the things you mentioned being positive for us. And the fixed line telephony decline, which is quite a substantial amount that Neil has alluded to, and if you kind of work that back into an ARPU, it's pretty significant.
Neil A. Berkett
It's important that you -- as we've try to identify here, you look at Q3 2010 to Q2 2011 to start with, increased 35 p, unusual, onetime based on usage and snow, 35 p. You then look at uptake of premium sports between Q3 -- sports and movies between Q3 and Q4 2010, unprecedented as a result of the Q3 activity and Sky providing sports and movies to BT. I got the data with me now, 20-something p. Again, you don't get that point of gain, the fight -- the big boxing fight that was in the quarter wasn't in Q3 of 2010, wasn't in Q4 of 2011. So when you look at the Q3 to Q4, you get a better understanding in '10 of the Q3 to Q4 in 2011 and the Q4 of '10 to the Q4 in 2011. And that is a fairly unusual events snow, uptake of premium, ARPU not ACPU, [indiscernible] continual decline in line telephony, and we've outlined the annual reduction in fixed line telephony was GBP 96 million.
Andrew M. Barron
And importantly, the iPad app, we've got it. It works. I've got it, you're going to love it. It illustrates a very important point though, which comes back to the mass market and how we've done the whole of the TiVo rollout. 99% of the companies would've rolled it by now. It's good. It's stable. It's good enough. It's quite impressive. We haven't. The reason we haven't is because we want to make certain that not only the early adopter enthusiasts will love it, we want to make sure that when it hits, and when it hits it will go mass quite quickly, that we support it thoroughly, that it doesn't generate huge number of calls into the call center, that it's self-explanatory, that it's polished and it's not viewed as some flaky application for enthusiasts. It's actually part of the integral TiVo experience. And it's as polished and thorough and robust as that already is. That's why we rolled out TiVo so slowly. That's why we went 6 months at getting it right right, right, right. And the then we pushed the button on it in the last 6 months, indeed the last 3 months of last year, doing the same with the app. So I can give you the beta. You'll say: "Why haven't you rolled this already?" And we'll say, "Because there are a few wrinkles in there that we want to get really, really right." And it shows you our philosophy. We're a mass-market company, when we roll these things, they have to be good enough for prime time. But again, if you want a trial version and you can give us some feedback and stuff, I'm very happy to give it to you tomorrow.
Carl Murdock-Smith - JP Morgan Chase & Co, Research Division
Carl Murdock-Smith from JPMorgan Cazenove. Almost following on from that, I had a quick check last night and counted 15 apps on the TiVo box. It was 12 in August. So the progression of apps has been fairly slow. I suppose, can you add any more color on how many other apps there are coming? Certainly the commentary previously, there's always been this whole wealth and very much stressing your open platform status. So is there any idea kind of in 6 months time, 12 months time, how many apps would you expect? And any more flavor of the other apps coming?
Andrew M. Barron
So we've never shared the roadmap publicly, quite deliberately because we think it's commercially sensitive. What you will see is you will see a few apps every month, and they will be heavyweight apps by and large, not just fodder. So it's the easiest thing in the world because it runs in Flash and pretty standard versions of Flash to publish all sorts of stuff to it. And that's not consistent with the TiVo environment. We want the Facebooks, the Twitters, the Spotifys, the iPlayer's, the real heavyweights out there. Yes, there's some weather apps, yes there's some promotional stuff that studios do for individual Harry Potter titles and the like. That comes and goes. Twilight has been on there recently. But again, we want few, polished, good. So the ones that -- I'm not going to say them out loud, but the ones that I want you notice is not "Oh my God, you've got another 16 subcategories." I want you to say, "Oh, fantastic. That's going to improve my experience." So we'll put a few on every month, and again, we'll resist the temptation just to put out endless fodder. Again, the platform can take it, there's no issue about that, but I don't think you'd thank us for doing it.
Henrik, in the front here , please.
Henrik Nyblom - Nomura Securities Co. Ltd., Research Division
Henrik Nyblom from Nomura. Just to come back to Nick's questions earlier, which I don't think you answered, on churn. It seems that a lot of things you do is clearly going to be churn-enhancing. But at the same time, I can't help feeling that you're thinking maybe that churn should be stable and it's just a matter of how much of these improvements I can then start charging my customers more for and then hope that not as many leave. So are you managing it based on trying to get churn down as low as possible? Or are you sort of happy with churn and instead pushing prices up in order to improve the ARPU?
Neil A. Berkett
It's not binary. We manage the business on lifetime value and lifetime value is a combination of the price per month that a customer is prepared to pay. The number of customers you acquire, the length of time they stay with you, the number of products they buy from you and ultimately, when they churn. So we don't look at churn in isolation and just say it's binary between price and churn. As you've seen in the last quarter, 133,000 superfast broadband adds; 273,000 TiVo adds; 56,000 pay TV adds. They're are all lifetime value enhancing. And they're all RGUs. Churn in the fourth quarter came back to the same level as Q4 in 2010, I've commented. I'd prefer it stayed there or even improved. Of course, I would. But in making the judgment, when we go to market, we make the judgment on a lifetime value. I think it was too high in the first 3 quarters of the year. We're doing things about bringing it back into play, but it was -- we managed to take more price loss. It was higher, which is why we've delivered the lifetime value and therefore, the cash that we've done. I repeat, it's not binary, and the team is actually pretty well practiced, and I think, up there, in terms of, let me use an analogy, yield management, which is in the same space in terms of being able to try and predict your capability to cross-sell, to up-sell, the propensity to churn, put in a price increase and take volume. So I'm sorry, I can't answer your question directly because it's not -- there isn't a direct answer.
Wilton Fry - BofA Merrill Lynch, Research Division
It's Wilton Fry from Merrill Lynch. I just want to get my head around this. I wondered if you could help me. How do you intend to repatriate cash from the U.K. OpCo to the U.S. holding company? You can obviously, with buybacks, bond pay downs and corporate requirements at the U.S. level given your IRS Subpart F essential problems. We obviously haven't seen the 10-K yet, but on my reading, it looks like you've got about $300 million of tax capacity in the U.S. Can you give us an update on what it is? Or basically what I'm missing?
I think it's a nonissue, Wilton. When you see the 10-K, you will see that. So rolling -- tying everybody up and lots of complexities of Subpart F and getting capital out of one legal entity into another. I think the short answer and the direct is it's a nonissue for us at this point in time.
Steve Malcolm [ph] From RSE [ph] Just building on the sort of churn and the value questions. I get the bit about putting the price up as you give customers more value. But on broadband pricing, by and large, you're putting the price up before you give them the value. The rollout starts in February. Most of the lower-tier customer is going to see a pound increase in April. The mid-tier will see 50 p before they get the speed upgrade. Can you just -- should we think of this as the first stage in the pricing correction for the extra value? Can you just sort of give us an idea of your thinking behind putting the price increase early rather than letting the customers see the improved experience? And then jumping the price a little bit.
Andrew M. Barron
Right. I think that you're trying too tight a correlation between the doubling of broadband speeds and the price increase. So every year, by and large, we and others tend to raise the price. If you're BT, you announce an annual price freeze in between those 2 dates. But the bottom line is, we will nudge the price not just because of doubling broadband speeds but because we've put in more channels, we've put in more Video on Demand, we've put in service improvements across the board, and that's what drives the cadence of nudging prices, you put more in the value. One of the largest, we call them, tickles, which is good things we do for customers, those of you that are customers have probably had a tickle of some kind. But the largest tickle that we've done is doubling everybody's broadband speeds. And we've had over 1 million customers go to, what we call, the Boltometer, which is the website where you check and see when you're going to be upgraded. And the feedback we get from those people is obviously skewed slightly towards if you're near a term and some of them are now, March, and some of them are into next year. It varies a bit. But it's always universally positive because, again, customers aren't directly equating the annual price rise now with that rather large tickle to the exclusion of everything else we're doing. So I don't see those 2 as hardwired perhaps as you're implying.
Neil A. Berkett
And plus, customers are getting 3x more VOD than they had this time last year.
Andrew M. Barron
We put Sky Anytime. We put all the Sky stuff on the VOD service, which people love, and we get tons of feedback about that. It's not just about broadband, although that is clearly important.
Should we just say, that in this sense [indiscernible]
Andrew M. Barron
We considered a whole bunch of different options. I mean, the bottom line is we felt that we had improved and continue to invest in improving the product and the service to the point where we could justify, hand on heart, a price rise and when you look at the scale of the price rise and you look at inflation and you look very specifically at the comparison of the bundles against the competition given what we've done to them, post price increase, I think you'd -- I hope that you'd come to the same conclusion that millions of customers will come to the same conclusion. Nobody but nobody likes a price increase outside of this room. But I think most of them will look at that their bill and say "Do you know what, as I go through it, it's a good deal, and I've got something for it."
Toby Sifel [ph] from Endess Analysis [ph] . One of the things that interests me, of course, is seeing you're getting a very good HD penetration. It's growing up faster, obviously, something like Sky that charges for it just lower. You said, in the long run, maybe HD should become a default medium, therefore, everyone should have it, so you really want 100% of your base, whoever you are, to be having it. What then is your thinking about TiVo, which is now 12%? Though it's a very important development, it's got a long way to go. Do you have a sense? Is it something that in time has to be 100% of the base, or a majority or what? What is your sort of strategic thinking about where you want that to be in 5, 10 years time?.
Neil A. Berkett
In 5 years time, we will retire Liberate. In 5 years time, our customers will be exclusively on TiVo, and I'm sure we will be considering the son of TiVo.
Michael Bishop - Barclays Capital, Research Division
It's Michael Bishop from Barclays. Just a quick question on usage and broadband pricing. If you look and your customers download 49 gigabits of data per month, that's actually above a number of the usage caps on viable products, even some of the higher-priced BT retail products. So how do you think about broadband pricing going forward? Clearly, you're sticking with the lump sum increases on the headline pricing rather than any more usage base or trying to drive the medium tier up through usage comps. Is there any potential going forward to move away from headline price increases? Or do you think the churn benefits, et cetera, outweigh the potential for, I guess, more of a price increase?
Andrew M. Barron
So what an excellent question. Because there are 3 different metrics, all of which plays a different constituencies on how you measure broadband, right? One of them is headline speed, which is what the advertising and us included, everybody's running at and shouting about. And it's a proxy for quality or usage or whatever, but it's perhaps not the best. You've then got the actual amount that people use specifically at peak time, which is what drives the cost base behind larger broadband. Okay? And operators all over the world would rather like to charge on a volume basis. No one has really cracked how you migrate globally from a headline speed-ish market, they're all a bit different, to what the cost base reflects, which is peak simultaneous data throughput volume usage. The customer has a different criteria. So what the customer cares about is average speed when they use it. So what they actually get -- forget the headline speed for a second. What they actually get when they try to load some video content or whatever is their experience at that moment of do they get it unbuffered, instantly, no latency, do they get what they want now. And that's a different metric, which is all about the quality of service, the relationship between what you actually deliver in peak and what you claim you deliver. That's the one we've been going for. That's the one where we excel. Ofcom last week said that our 30 meg service, on average, randomly tested, delivered 31. The equivalent, and I'm not going to go through the competitors' numbers, but have a look at the competitors' numbers of headline to delivered average real speed, that's the metric consumers care about. And as long as we continue to blow the doors off, bluntly, on that metric for 4 million customers, we have pricing strength because we're delivering real value. But the market, I completely agree with you is opaque. It's not priced according to cost, and it's the headline speed as a proxy for the customer experience is deeply flawed.
Neil A. Berkett
I can't resist the opportunity to answer the question that you didn't ask. The differential between ourselves and every other operator in the U.K. is that we have multiple allocation of spectrum. So that the data consumption that we're talking about, the quality of speed that we're talking about is purely on the 72 megahertz of spectrum that we happen, at the moment, to allocate to DOCSIS 3.0. We have a 110, I think it is, megahertz of spectrum that we allocate to Video on Demand. You saw on the graph earlier, VOD traffic is going to quadruple in the next couple of years. We are protected in that space because it all runs over, sorry to bore you, DVB-C. So it's the power of the pipe that gives us the long-term strategic advantage, and it gives us the economic capability to run this game much harder than anybody else because we're not going to be congested and relying on always increasing the bandwidth, which is called broadband.
Frank, I think.
Frank Knowles - New Street Research LLP
This is Frank Knowles, New Street Research. I had a question on the Business division, actually. The, obviously, good growth on the revenue side both this year and especially in the fourth quarter, I'm wondering if you could talk about whether -- how much of that might have been sort of one-off in-store revenues from some of the new contracts you've got. And then looking forward, in terms of growth, of the contracts you signed a few years ago, as they come up for renewal, what are you seeing in terms of price erosion in those existing businesses?
Maybe I can take the first part of the question and perhaps Andrew can take the second part. I mean, 2011 was very lumpy. We had a big Q1, a really low Q2, a low Q3 and a big Q4. And as Neil showed, B2B has progressively gone from negative growth back in 2009 to 3% in '10 to 7% in '11. And rather than getting into specifics that by the end of fourth quarter was there x million quid of installation revenue, which is interesting but not necessarily very insightful. I would encourage you to think about that, the B2B business, the momentum is there. And just like in Q3, I talked about at the Q3 stage, the underlying year-to-date performance of circa 4%, 5% was more representative of what the business is doing rather than the circa of 0 that the quarter itself suggested in Q4. I'd encourage you to think about the underlying momentum of B2B being circa more like the year-to-date 2011, i.e., 7% than what the Q4 suggests, i.e., 14%.
Andrew M. Barron
Sorry, just to take your second one. So the price per circuit per amount of data is going down in the market, the volume conversely is going up, the numbers of circuits and data throughput and the rest of it. What you see is we have certain inherited advantages, and that's where we seek to win and retain business. So mobile backhaul is predicated on our superior axis network and our ability to connect to sites as an alternative to BT. Our wins in Q4 are things like the DVLA or the national Volkswagen network, that we won for 400 dealerships. Again, that's predicated on our -- on the on-net portion of that which is covered, things like Big Red Internet that we launched into last year is predicated on the fact that our core network, from a business point of view, is largely empty during the day, and it clogs up when it is defined -- its capacity is defined by evening usage from consumers so we can afford to do it. We have superior economics for retailing access to that network at what would be considered business peak times of day. So there's a whole bunch of areas where we're not part of the crowd, and that's the secret to what business you try to win and what business you try to retain. Because if you go and compare our business division economics, and we gave you some clues in there, against the rest of the sector, you'll find evidence of that structural advantage because it's sharing a massive consumer network with distributed access unlike anybody else.
Neil A. Berkett
I think it's really important that we position Virgin Media Business economically, as an akin business unit. If you think about churn is the mechanism within Consumer that dictates the tenure of your customer and therefore, your effective contract value. A contract is the thing that dictates that even more strongly within Virgin Media Business because you run a 12-month contract and then about 1/3 of our customers are on a 12-month contract at any point in time, 2/3 are not. Within Virgin Media Business, our average contract length is greater than 4 years. So you've got an annuity strength, identical in Consumer and in Business. You've got revenue to gross margin that is identical. You've got gross margin to OCF that is identical, and you've got OCF to free cash flow that's identical. It is a business of equivalent value. Actually, are you -- is that you Mark? Yes. Mark, can you stand up a sec.
Sorry, I should have put an ID.
Neil A. Berkett
Mark Heraghty. I'll just introduce. Mark is the guy over the last couple years who's led the recovery of Virgin Media Business under Andrew's leadership. So after this, if you'd like any more detail, on the VMB, Mark will be here to take the question.
James Ratzer - New Street Research LLP
It's James Ratzer from New Street Research. You've clearly got network excellence at the moment in the U.K. but your utilization is measured by kind of home take-up, it's just under 40%. I was wondering, would you be interested at all in increasing your network utilization by opening it up to the other on bundlers like Sky and TalkTalk.
Neil A. Berkett
It's a $64 question, and with it comes all of the complexities. Obviously, if we had decided that we were going to do it, we probably would've told you. I think in the medium term, our view is that the best utilization is our -- of our asset is us using it. If at a point in time, we believe that we could explore wholesaling, in a way that was appropriate for us in the market, then we would consider it. But right now, I think we serve as an infrastructure competitor for UK PLC as acknowledged by Jeremy Hunt. It may seem [ph] at all that we provided infrastructure competition for BT and therefore, do not see any need to open us up from a regulatory point of view. And you can see the low-risk business model that we run with. Our low risk business model is moderate revenue generates superior free cash flow. We will not be doing anything that would upset that business model without very deep understanding of the implications of it.
Okay. Is there any more questions? No. Okay. Well, thank you very much everybody.
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