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Executives

Richard Williams – Investor Relations

Neil A. Berkett - CEO, CEO of Virgin Media Investment Holdings Limited and Director

Eamonn O'Hare - CFO and Director

Andrew M. Barron - COO

Analysts

Bryan Kraft – Evercore Partners

Nick Lyall - UBS Investment Bank

Robert Grindle - Deutsche Bank AG

Simon Weeden – Citigroup, Inc

Paul Sidney - Crédit Suisse AG

Timothy Boddy - Goldman Sachs Group Inc.

Steve Markham – Selected Research

Carl Murdock-Smith - JP Morgan Chase & Co

Steve Martin – Areton Research

Stuart Gordon - Berenberg Bank

Adam Rumley – HSPC

Virgin Media (VMED) Q1 2012 Earnings Call April 25, 2012 8:00 AM ET

Operator

Good day, and welcome to the Virgin Media First Quarter 2012 Earnings Release conference call. For your information, today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. Richard Williams. Please go ahead.

Richard Williams

Thank you, Batina. Good morning, or afternoon to you all. Welcome to our Q1 call.

Please, can I draw your attention to the Safe Harbor statement on Slide 2 where we set our quarterly disclosure. We should be ready with any forward-looking statements we make today. I’ll also point out that we will be mentioning certain non-GAAP measures today to record disclosures with respect to these found in the appendences to the slides.

The presenters on today’s call will be Neil Berkett, our CEO, and Eamonn O’Hare, our CFO. Now I’ll turn you over to Neil.

Neil Berkett

Thank you, Richard, and thanks for joining the call, everybody. Our financial performance for this quarter reflects the guidance we provided at our full-year forecast, our full-year results.

I’ll quickly run through the financial and operational highlights. Firstly, we delivered modest revenue growth of 2.4% from multiple sources.

Operationally, we had 21,000 cable customers net adds, which was slightly better than a year ago and reflect this improved churn for the second quarter in a row.

ARPU growth improves sequentially from the fourth quarter and came in at 1.7%. We saw 1.2% revenue growth in our mobile business as contract growth outweighed pre-paid decline and the impact of MTR customers.

I was pleased to see the business division deliver another quarter of solid growth with revenues up 7%.

OCF was flat in line with the guidance we gave at our Q4 results, reflecting the phasing of marketing spend.

Free cash flow was down, again, in line with our guidance, reflecting the flat OCF and increased CapEx.

Eamonn will take you through the financial details in a little while.

So my next slide is a repeat of the slide I presented at our Strategy Uptake and Delivery, updated with some of the facts from Q1.

We continue to generate modest sustainable revenue growth through multiple leaders despite ongoing time-limited headwinds from phone usage and prepaid mobile.

In respect to customer growth, we had 21,000 net adds, reflecting reduced churn. We began the program to double broadband speeds and we’ve launched some new product collections that offer TiVo, HD and superfast broadband all as standard, unique to the UK marketplace.

Pricing, we put through a price increase in April and have also increased the TiVo fee, encouragingly and in line with our views of a [inaudible] investment and superfast broadband is driving more actual pricing. We’ve began seeing some of our competitors raise their prices.

In respect to tier mix, again, nearly half of our broadband gross adds took 30 meg or above. In fact, we added 147,000 superfast broadband starts. PayTV mix improved and we saw continued strong growth in Virgin Media TiVo.

In respect to product cross-sell, we’ve improved triple play to 64% and quad-play to 15%. We added 30,000 triple-play customers, which is our best quarterly performance for a year. The cross-sell of contract more evolves into our cable [inaudible] space, also helped deliver mobile revenue growth.

In respect to business data, retail data revenue grew 22% and we won several new contracts during the quarter.

I recognize that circa 2% revenue growth we’ve achieved in the last few quarters is not reflective of the true growth potential that this business can or should achieve. We continue to focus our efforts on the right leaders to drive stronger revenue growth in the future.

The fact that we have so many different revenue drivers gives us continued confidence that we can continue to drive sustainable revenue growth. With the operating leverage we have, that will therefore continue to drive strong free cash flow growth on a long-term basis.

So let’s get into a bit more of the operational detail. It’s worth remembering that this is a quarter where we began notifying our customers in early February of a significant price increase. To mitigate this, we focused our marketing on our existing customer base with a Dumping Speeds campaign featuring Usain Bolt and Richard Branson. I think this, along with good value for the money propositions helped us to control churn, and in fact, actually reduced churn, which together with solid growth adds led to our customer – best customer growth for some two years.

And I just mentioned, we saw our ARPU growth improve to 1.7% from 7% in the previous quarter as the one-off impacts that we had called out dissipated.

We continue to lead the market in superfast broadband with nearly half of growth adds choosing 30 meg or higher for a fourth consecutive quarter. Remember, this was at time when we were advertising that we were going to be doubling speed. So this is a very positive result that so many so choose to enter at 30 meg rather than enter at 10 and wait for a free upgrade. It’s further evidence of a strong demand to superfast. We now have 20% of our broadband base on superfast and, obviously, this will rise further as we double speeds and offer superfast [inaudible] it to end customers, further differentiating us from our ADSL competitors. We added 46,000 broadband subs in total and 147,000 superfast subs.

As you know from March, we began to double broadband speeds for over 4 million customers. And as of yesterday, we’d upgraded about 250,000 customers or about 6% of our base.

The advertising rules for broadband speeds changed on the first of April. Since then, we’ve seen our competitors forced to change the way they advertise broadband and be more honest about the delivered speeds. Hopefully, this should further promote our speed advances versus DSL.

Fiber investments are resulting in upward pressure on fixed-line access pricing. For example, we’ve recently seen the line rental increases of both BT and TalkTalk and Sky have announced fiber pricing that is higher than our 60 meg price. I think that is very encouraging for a more rational industry pricing in the new superfast broadband world that we’re all advancing readily towards.

This means that connectivity proper pull continues to grow and there’s plenty more growth to come.

So moving onto TV, and specifically Virgin Media TiVo. We have the first and the best mover in connected TV; just as we were in superfast broadband. Two years ago, nobody else was offering superfast, and today, nobody else is offering connected TV on any great scale. We offer both; superfast broadband and connected TV. We are seeking to do to TV what DOCSIS 3.0 allowed us to do to broadband.

We already have an established next-generation TV service in around 700,000 homes and penetration is growing fast. The Virgin Media TiVo box has a huge hard drive with three tuners, which can record hundreds of hours of programming. It really brings to life our [inaudible], unrivaled Video on Demand and Linear library with all it’s different search, browse, recommendation and discovery tools. The TiVo box will even record program suggestions based on viewing patterns. This all gives us, our customers, the ability to control and personalize their TV experience. 90% of customers are using these tools and we’re seeing 1.3 million searches a month.

Interestingly, Virgin Media TiVo is driving more consumption of PayTV programming. TiVo customers are 23% more likely to watch a PayTV suggestion than a free TV suggestion. Suggesting that TiVo is unlocking content discovery.

The other great thing about Virgin Media TiVo is it’s dedicated, over-the-top connection, allowing our customers access to content and applications outside of our TV world garden. Unlike in a DSL garden, the bandwidth this connection uses will not impede the bandwidth other devices are using at the same time.

Virgin Media TiVo is a superior differentiated product and our customers are loving the features. The key customer satisfaction ratings, which we measure through promoter score, or MPS, are 24% higher than the non-TiVo customers. That’s our critical mass. This is why we’re offering TiVo as standard in our new collections. It’s the future of TV being delivered now and we will continue to improve and enhance service.

So we can see, on the next slide, that TiVo continues to sell very strongly. We had 242,000 net adds in the quarter. This is despite a price increase from £3 to £5 at the end of February. Remember, we’ve only been advertising this service for three quarters now and we have already penetrated 18% of our entire TV base. Over 40% of TiVo gross adds in the quarter were new to Virgin Media TV.

The success of TiVo is helping drive strong TV performance generally. We added 51,000 paying TV subs, which more than offset the decline in our free TV base. In the last 12 months, we’ve added 140,000 paying TV customers and the free tier is now only 17% of the total, down from 21% a year ago and 27% two years ago. And we continue to see good growth in Sky premiums, up 5% year on year to over 800,000 subs. In addition, we sell the standard with no fee for basic HD content and you can see that nearly 2/3s of our base now has HD, putting us well head of Sky’s HD penetration.

In Mobile, we’ve seen continued improvement in contract mix, which has resulted in marvelous revenue growth this quarter. This is in the face of the headwinds of prepay and MTR declines.

Contract Service revenue was up 15% to 100 million, while prepay revenue declined by 24% to 35 million. So prepay revenue is now down to around 1/3 that of contract net.

Regulated MTR costs reduced our inbound mobile revenue by around 6 million in the quarter. Total mobile revenue would have grown by about 6% without this effect. We expect the total impact of the year to be around £26 million. This is an acceleration on the £21 million impacted last year due to the ongoing regulated reductions. However, as last year, we expect the impact on group OCF to be broadly neutral due to the offsetting savings we make in interconnect costs.

We expect the headwinds of prepay declines and accelerated MTR cuts to continue to affect mobile revenue this year. We continue to do a good job of cross-selling contracts into cable homes with well over 1 million contract handsets in cable homes now, which is up 38% year on year.

This is also helping to drive quad-play penetration with subscribers up 21% year on year and penetration now reaching 13%.

As expected, the business division’s really coming into its own and showing continued strong momentum. Revenue was up 7%, driven mainly by growth in data and represented 47% of total group revenue growth. This is very encouraging. Remember, we are a net worth business with a fixed costing structure. So it’s important for us to continually load that network up. That’s what our business division is all about. The consumer network is pretty empty during the day and so we can fill it up with business data traffic and leverage the existing net worth investment at strong margins. Business has effectively has assigned Economic Marvelous Consumer, an annuity business with similar margins.

We continue to execute on our strategy to drive growth through high margin data and recent key infrastructure wins such as MBNL and London Grid for Learning, which is starting to drive real sustainable revenue growth.

We have also been winning other business. In March, we won the contract to provide public access Wi-Fi at up to 120 London Underground tube stations. This deal leverages our existing fiber infrastructure in those locations and for the first time, we’re offering great fiber-based connectivity to our mobile and cable customers outside of the [inaudible]. And we’ve recently signed new contracts with Portsmouth City Council and Knight Frank. We’ve been awarded a place on the new public services network connectivity framework run by the Government Procurement Service, which should allow us to compete even more effectively with public sector business going forward.

So with that, I’ll hand you over to Eamonn to take you though the financials.

Eamonn O’Hare

Thanks, Neil. I’ll start with a summary of our financial performance for the quarter. As Neil said, we gave very specific financial guidance last quarter on a number of metrics and we have met or exceeded our guidance.

We had another quarter of modest revenue growth, which came in at 2.4%. Operating costs grew a little slower than that at 1.4%, so we saw an expansion of gross margin from 58.1% to 58.6%.

SG&A increased by just over 9% due to the 50% increase in marketing spend that we guided to. This contributed to improved churn, which has an ongoing economic benefit; more on that in a moment.

So I’ve got it; OCF was flat year-on-year, as the increased marketing offset the gross margin growth.

Our interest expense fell by almost 7%, reflecting the refinancing and repayments we have made over the last year to just our cost of debt. Our cash CapEx increased by 12.7% and I will give you a little bit more detail on that in a moment.

So the net result of all of this is that, as we guided, free cash flow fell. It was down 13% at £87 million.

I just remind you that although we are delivering on what we guided in Q4, the first quarter financial performance is not indicative of our full-year expectations.

The next slide shows more detail on the 2.4% revenue growth, which resulted from solid growth across cable, mobile and business. Cable revenue was up by 1.8%, driven mainly by the 1.7% increase in ARPU that Neil just mentioned.

We also heard that our Mobile business delivered slightly positive revenue growth of 1.2% as contract growth offset the impacted decline in prepay and MTRs this quarter.

Business grew by 7.1%, driven by growth in data, despite a strong comparative quarter.

Let’s have a look at the SG&A costs in a little bit more detail. Total SG&A increased by 9%; however, excluding marketing costs, SG&A was flat at £160 million as we continue to maintain our strong discipline on costs and driving operating leverage.

Marketing cost increased by 15%, in line with guidance. The main driver of this increase was the Doubling Broadband Speeds campaign featuring Usain Bolt and Richard Branson, which began in the first half of January. This campaigned was aimed at our existing customer base to inform and excite them about their broadband speeds being doubled ahead of the price-rise letters that began to land on customer’s doorsteps in February.

As you heard from Neil, we think this campaign landed well and along with good value for money propositions, actually helped us to slightly reduce churn in Q1.

Turning now to CapEx, on CapEx, let me start by repeating and reconfirming the guidance we gave in January, and again on our Q4 results in February.

Excluding the incremental, £110 million investment in 2012 for the broadband speed upgrade, Virgin Media’s cash capital expenditure will remain within current guides of 15 to 17% of revenue for 2012 and for further years.

In addition, it is expected that the cost of assets acquired under leases 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.

I’ve set out for you here on this slide a reconciliation of our accrued CapEx to our cash CapEx for Q1 2011 and Q1 2012. I’ve also split the Q1 12 CapEx into base CapEx and the CapEx we are spending on our broadband speed upgrade. This is something we plan to do in every quarter of 2012 so you can track the underlying trajectory of our base capital spending, which, as I mentioned, we are committing – we are committed to keeping within the range of 15 to 17% of revenue this year, in 2013 and for future years.

In the quarter, our accrued CapEx as £233 million, which is up £56 million on the same quarter last year. The three main drivers for the increase are firstly, that we spent £21 million on the Doubling Broadband Speeds upgrade program. Secondly, CPE spending increased by £28 million, mainly driven by TiVo boxes. Remember, we were not selling TiVo in any great quantity in Q1 last year.

And finally, business CapEx increased by £12 million mainly due to success-based installation CapEx relating to our MBNL Mobile Backlog deal and our London Grid for Learning Contract where we are connecting up over 2,000 [inaudible].

We added £24 million in capital leases during the quarter, which is roughly the same as in Q1 last year and represented 2.3% of revenue, in line with our 2 to 3% guidance. At the same time, we repaid £21 million of capital leases, leaving our total capital lease balance at £260 million.

CapEx creditors increased by £25 million during the quarter, compared to a 9 million reduction in Q1 last year. The main movement here was due to the broadband speed upgrade program where we incurred £21 million in accrued but only £3 million in cash CapEx. Naturally, as we only started this project during the quarter, the cash payments [inaudible] the accrued spend. This left us with cash CapEx of £184 million in the quarter.

Let me know update you on how we’re getting on with our capital return program.

Turning first to the further progress we made during the quarter on our share buybacks. As you were aware, since Mid-2010, we’ve announced £1.8 billion of total capital returns, including £1.25 billion of share buybacks.

Since Mid-2010, we’ve repurchased 63 million shares for £954 million. This includes 10 million shares that we repurchased under an ASR, accelerated share repurchase, of £157 million in Q1. So our share contents reduced from 332 million in Mid-2010 to 278 million at the end of Q1.

We have £296 million of share buyback authority remaining this year, which represents around 7% of our current market capitalization. We expect to complete this by the end of the year, probably through a combination of open-market repurchases and accelerated share repurchases.

Assuming that this remaining £296 million is completed this year at the current share price, this would mean that we would have repurchased around 25% of our share content Mid-2010 in just 2 ½ years.

And in the quarter, we also made significant progress in terms of improving our debt profile. During the quarter, we tendered for and counseled $500 million, or 37% of our 2016 dollar bonds with a high coupon of 9.5%. To replace these, we issued $500 million new bonds due in 2022 with a much lower coupon of 5.25%, reflecting improved credit ratings on the progress we have made since first issuing the 9.5% 2016s.

The tender, a new issue, [inaudible] £9 million in interest costs this year and by £12 million next year. In addition, it enhances our maturity profile.

On the same day that we announced these transactions, Standard and Poors improved our credit rating outlook [inaudible].

On the right hand side of the slide, you can see that we have additional opportunities to reduce our future interest costs. About half of our total debt, or around £2.9 billion is callable in the next 2 ½ years at modest premiums. This includes the balance of our unsecured 2016s at 9.5% coupon and our unsecured 2018s at coupon rates in excess of 8%.

When you consider that we just issued some new unsecured debt of 5.25%, you can see that the opportunity to reduce future interest costs is significant.

So with that, I’ll – I think we’re ready to take your questions and I’ll hand back to Richard and the Operator.

Richard Williams

Operator, could you pick that up, please?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Bryan Kraft of Evercore Partners. Please go ahead.

Bryan Kraft – Evercore Partners

Hi. Thank you. I just wanted to ask you about ARPU. I know that seasonally ARPU normally declines in the first quarter. You know, went down about 90 pence sequentially. I just wanted to ask for your thoughts. I mean, with the TiVo rollout generating incremental ARPU, and upsale trends remaining, sounds like, very positive, you know, why aren’t seeing more of that flowing that flowing through to ARPU? Are you having to discount more on the retention side, or you know, how should we think about that? Thank you.

Eamonn O’Hare

Hi Bryan, it’s Eamonn. Good question. Your right, you know, year-on-year we’re at 1.7%, but if you look at sequentially, we’re off about 1.9%, or as you say 90 pence. I mean Q1 is a seasonally low dip for us in ARPU. Last year we actually fell-off about a pound 35. You kind of adjust the pound 35 for weather conditions because we had a pretty snowy Christmas in 2010. That 135 fall-off last year was more like a pound. So it’s kind of inline year-on-year versus the falloff last year to the falloff this year.

I think the broad theme is, you know, fixed-line telephony declined. As we pointed out our strategy with you in February fixed-line telephony usage is actually coming off over 20% per annum. We highlighted that at the Strategy Review. If you think about that in annual terms, it’s still at the thick end of £100 million impact on our revenue. If you translate that into ARPU, it’s the thick end of 2 quid. So it kind of is a really big, big headwind for us. As we move from quarter-to-quarter, and in addition to the seasonality, that’s kind of the future.

I’d say that the mix is positive and it’s fair. And as we look forward to Q2, with the price rise that we’ve already announced to our customers, you know, we should see that tick up again in Q2.

Bryan Kraft – Evercore Partners

Okay, so going forward, probably less of a diluted impact in terms of seasonality and discounting and you think we’ll see more of the TiVo and upsale flowing through in addition to the rate increases. Granted, I know the voice declines are there, and we can do the math on that. But do you expect more flow through going forward?

Eamonn O’Hare

Yes, because you get – you’re absolutely right. We’re going to be - the headwind from fixed-line telephony plan is going to be with us for some time. As you move from Q1 the seasonal effect kind of moves away. As we get the price rise coming through in Q2, that will be there. And as we sell more TiVo’s until we get greater migration on the superfast broadband, that would probably come through in the mix.

Bryan Kraft – Evercore Partners

Okay, thank you.

Eamonn O’Hare

Thanks, Bryan

Operator

We will now take a question from Nick Lyall of UBS. Please go ahead.

Nick Lyall – UBS Investment Securities

Hi there, it’s Nick from UBS. There’s a couple questions please on churn Could you maybe give us an idea, I know it’s very, very early days post the price rise, if you’ve seen any evidence that you’ve maintained the improvements in churn?

Secondly on churn as well, should we view this note as a 50-million-plus marketing budget per quarter in order to keep churning improving please?

Neil Berkett

Hi, Nick, it’s Neil. The price rise letters that we put out this year came out slightly earlier than the price rise letters of 2011. They was also somewhat more obvious in terms of what we were doing. We were clearly transparent in terms of the price rise. Having said both of those things, the experience we’ve had in the quarter, you saw. i.e. churn was a strong or 3,000 stronger despite those two factors. So I think that’s an indication of the underlying strength of the customer base and I guess the relative net promoter score of the customer base now compared to what it was some 12 months ago.

I wouldn’t – in respect to the second part of your question, assume that the level of spend will continue in marketing. We quite specifically called out the 50% increase in Q1, making no such call for the second quarter by way example.

And nor would I expect to always see our marketing campaign address our customers. The inherent strengthening we’re seeing in Churn is a combination of factors. I have to say, if I was to look again at the decision that we made in respect to Usain Bolt, Richard Branson ad, and say was it worth it to predict a certified price increase, I’d say absolutely it was.

Nick Lyall – UBS Investment Securities

Thanks very much.

Operator

We will now take a question from Robert Grindle of Deutsche Bank. Please go ahead.

Robert Grindle – Duetsche Bank AG

Hi there. Gross margin at the business division was a bit weak this quarter. Please could you say what’s going on there and will it recover later in the year? And were all your bonds issuance and tender costs contained, or actually paid during the quarter that you just reported? Thanks.

Eamonn O’Hare

Hi, Rob, it’s Eamonn. Good question. The business margin, as you can see from the release, looked a little weak in the quarter. That was due to one specific contract which was our London Grid for Learning contract where we’re in the early stages of transitioning that off the old supplier onto our network. And through this quarter, we’re having to service the contract through an off-net mechanism.

So it’s an early-stage transition around one contract. It impacts circa 6 to £7 million of cost of sales in the quarter. If you count it back, you can see that the B2B gross margin is kind of, you know, would normalize. And yes, we would expect that to gradually unravel over the coming quarters as we no-bit migrate that contract onto our network.

Neil Berkett

Can you just repeat the question Rob, on the bond-to-bond deal, I missed that.

Robert Grindle – Duetsche Bank AG

Yes. Did all the money you had to pay for the tender and calling early, et cetera, did that all get paid out in terms of cash during the quarter, or is there still some payments that have to come through?

Neil Berkett

No, it all depends on cash. The premium was about £47 million, and we tagged these about 3 million to give a total of about £50 million paid in cash in the quarter.

Robert Grindle – Duetsche Bank AG

Okay, thanks very much.

Operator

We will now take a question from Simon Weeden of Citigroup.

Simon Weeden – Citigroup Inc.

Thank you very much. I’ve got two questions, The first is just relating to add some margins to – you’ve done the best adds you’ve done for two years, as you’ve pointed out, but you’ve also done the lowest margin for over two years. And it looks to me like if you needed to make the consensus [inaudible] in revenue for the year, you need to show year-over-year increase in margin in the remaining nine months as placed to one percent, whereas you showed a year-over-year decrease in margin of first 1% in the first quarter. So have you discuss whether the low margin and net adds are related to each other, and if so, whether should we expect you to see the net add momentum ease a bit later in the year partly as a function of – while connected with improving the margin?

That is the first question, second question is given when moving into an environment, the government is targeting superfast broadband nationwide, or near nationwide, in the next five years or so. There is going to be more and more customers who are outside the Virgin Media franchise area, so covered areas, who will have access to pretty high broadband speeds of a different platform. Is there an ambition anywhere, you know, maybe not now because you are tied up with other things, but in due course, to have a TiVo offering built on a superfast broadband service offer, DSL platform for outside of the region, outside of the franchise ? Is that something that could be a viable option for you later on to help you take to you a nationwide at some later stage? Thanks.

Neil Berkett

Thanks, thanks Simon. I think you’re sort of double reading into the quarter. So our apologies if that’s coming out. So, if – just let me try to come back over the KPI.

So, yes, net adds are up, gross is solid, churn is held; broadly in line with where we’ve felt we would get internally. But when you draw that to the margin position, it’s – in our view it’s not direct. So aiming is called out 6 or £7 million worth of margin deterioration which obviously sits within business. And then we’ve increased SG&A by some 9% as a result of the increase – the 50% increase in marketing.

The marketing spend for the balance of the year, we don’t see it as being significantly abnormal, and I am comfortable with the momentum the business is creating off the back of its product differentiation. I’ll draw to your attention the launch of collections where for the first time we’re offering superfast broadband, HD, and Virgin Media TiVo, all as standard. So uniquely in the market for £25, plus line rental, you will get 30 megs of broadband, and a true 30 megs of broadband, you will get TiVo and you will get HD. I think that’s fairly competitive, and I’m comfortable that our comparative competitive advantage will continue through the course of the year.

Second part of your question, in respect to the Virgin Media TiVo off net, we have a license in respect to exclusivity for Virgin Media off net. So it’s always an option for us, but it’s not something that we are planning in the short term, clearly, given that we have a license we have that level of optionality.

Simon Weeden – Citigroup Inc., Research Division

Thank you, thanks very much.

Neil Berkett

Thank you.

Operator

We will now take a question from Paul Sidney of Crédit Suisse. Please go ahead.

Paul Sidney - Crédit Suisse AG

Thank you very much, I also had two questions, please. Firstly, are you seeing any evidence of customers spinning downward in your base given that you’re doubling speeds? Are seeing any evidence of customers are sort of taking a low package maintaining their speeds, or is price the upgrade?

And second question, telephony wer surprisingly strong in the quarter. I was wondering, is that just the feature we are moving of a deeper into a triple-play world that some customers now tend to just take a telephonypackage if they take over their old TV package, or broadband package, or is there anything else going on here you thing? Thank you.

Neil Berkett

Surely the limit goes up. I think the best way to answer your question in respect to spinning down is to actually look at superfast broadband metrics for the quarter. So of the 147,000 superfast broadband adds we made – sorry, we did a 147,000 superfast broadband adds, and in fact, that represented some 45% of our mix.

When you think that’s broadly in line with what we’ve delivered in the last couple of quarters, they’re all in the high 40s, and in the face of probably one of the biggest campaigns we’ve run, telling the whole world we’re going to double your broadband speeds for free, I think putting those two things together would be, hopefully, some comfort for yourself in terms of evidence that we’re not seeing spin down.

We’ve also continually disclosed our portfolio mix, our portfolio mix is now up to 20%. So if you think about gross adds being at 45% of superfast broadband – superfast being 20% and above despite the fact that we’re telling the world that we’re going to double your broadband speeds, to date, we’ve seen no evidence of spin down.

In respect to telephony, look, six-line telephony is going to go up a bit and down a bit each quarter. I mean, you’re right, it was a particularly strong quarter, it was nothing really internally that we’ve been doing that would have provided that little of strengthening. It is part of a broader – this is a triple priced world, that’s what collections is all about, making it easy to see superfast as standard. TiVo is standard and obviously is coming with your telephone line, but I wouldn’t read any sort of great recovery and growth into the fixed line voice market unfortunately.

Paul Sidney - Crédit Suisse AG, Research Division

Great, thank you, it’s very helpful.

Operator

We will now take a question from Tim Boddy of Goldman Sachs, please go ahead.

Timothy Boddy - Goldman Sachs Group, Inc.

Yes, a couple of questions. You talked about growth accelerating and the fact that the growth in the quarter didn’t reflect what the business is capable of. I’d just being interested in what you think the business could do, and the key things it would change to get you there? Secondly, obviously, we’re not getting nearer and nearer to the much delayed launch of You View, how do you see that affecting your business in the third quarter and beyond with, I guess, probably a large initial marketing push by the back of the You View? Thank you.

Neil Berkett

Cheers, Tim. And I think we come back to our sort of, business model, which is moderate revenue growth will deliver superior free cash flow growth. I mean, my comments were reflecting that, you know, we recognize 2.4% hardly qualifies us as being moderate, aleit, we’re generating the superior free cash flow growth even at these levels.

You’re seeing the underlying strength of the business, we’re trying to give some granularity in respect to what’s happening with call off revenue – that their obviously easier in consumer than it is in business. And as you map through TiVo penetration at £5, as you map through superfast broadband penetration at a circa £6 per tier uplift, similarly in terms of overall TV mix, you can see the underlying strength of ARPU. We saw in the quarter net adds of 21,000, clearly volume is another lever which could represent for the growth. Price increase has already been put in place, it’s completely transparent. We’ve notified all of our customers, we’ve not seen early signs of churn, if anything slightly better than this time last year. So that price increase, we expect that to come through. Virgin Media Business growing at 7% in the year despite a fairly strong comp in Q1 of of 2011. We expect Virgin Media Business to continue to grow and to continue to grow at a significantly greater rate than that of consumer cable.

Mobile, we saw mobile grow at circa 1%; albeit, facing MTR and a prepay headwinds. Mobile, I wouldn't expect to be doing any great things in 2012. It's more of a 2013 play when we get the prepay and MTR headwinds behind us. But again, in the medium to long-term that represents another lever.

And I guess if I come back to Andrew Barron's, I can’t remember how many he had on it now, but his six-trick pony, but the last element of that was all around the brand and our service. And we're seeing better service levels than we have experienced ever as more and more customers become advocates and less become detractors.

I hope that that will continue. So despite the headwinds of fixed-line telephony, I think Eamonn's articulated that with some level of granularity. Prepay and we articulate that now on a quarterly basis and MTR and we articulate that on a quarterly basis.

I think you can see the underlying strengths of the business as we go into the next phase. So they, again my reference was, I think we're working on the right things that will contribute towards growth in the future.

Your second question, Tim, was in respect You View. We felt it was very important that we chose a connected TV platform that we could take to the market quickly and we chose what we thought would be best in class. My view is we have now obviously launched, we are first mover globally actually, but certainly in the UK in terms of connected TV circa 700,000 connected TVs today. And therefore, we've taken the first-mover position in connected TV in exactly the same way as we took the first mover position in respect to DOCSIS 3.0 with superfast broadband.

First mover is a critical positioning in any technology lead sector so we managed to tick that box to thanks to some very hard work from Virgin Media people. I also think we ticked the best mover box and it's up to us in conjunction with TiVo to ensure that it remains as best mover. And we thought long and hard about how we would take TiVo to market, so for 5 pounds a month you get TiVo. In fact, for 25 pounds a month you get Virgin Media TiVo, you get HD for free, you get some additional pay channels, and you get superfast broadband. I think that's a pretty compelling package, which is clearly designed fairly and squarely at the bottom end of the pay TV market. Albeit we're potentially the top end of [Inaudible]. We've been competing with Freeview many, many years, probably the most attractive and compelling free proposition in the world, and therefore we're learning how to deal with it. If I was to pick out a weakness, clearly we have 17% of our TV base that are currently free, that's declining at circa 1% a quarter. And we'll continue to focus on that base to ensure that we provide and attractive offering. And my final comment is YouView will work best on Virgin Media. So if we were to lose some of our free TV customers I think we have a strong chance of retaining them particularly giving our compelling broadband pricing. And I remind you that now for 14 pounds 50 you can have superfast broadband, i.e. top end ADSL pricing for superfast broadband.

Tim Boddy - Goldman Sachs Group Inc.

Thanks, that's very clear.

Operator

Our next question comes from Carl Murdock-Smith of JP Morgan. Please go ahead.

Carl Murdock-Smith - JP Morgan Chase & Co

Two questions please. Firstly, I was wondering if you could provide any color on the ARPU of churners you see in the quarter. And then secondly, just looking at the Sky premium the actual additions in the quarter there was only 1000 and it does seem to be an issue every Q1 there's a slow down there. I was wondering if you could touch on the seasonality of that. And then also around that if you've seen any impact against the launch of Netflix and LOVEFiLM pushing their streaming only service more. And with respect to that whether you're any closer to forming an agreement with [Inaudible] provider in terms of maybe a TiVo [Inaudible]. Thanks very much.

Neil Berkett

Sure Carl, I'm going to have to ask you, I missed a bit of the beginning of your second question, so I'll come back to that in a minute. In respect to ARPU of churners it was lower than base and clearly lower then of acquisition. We haven't given specific on that this quarter, but it's consistent with our broad portfolio movements over the last few quarters. I think we have in the past given detail in respect to that. Directionally that has materially changed, so we're not seeing any shift. I think ways and means that may help you get there is looking obviously at what's happening to the numbers coming off some 38,000 a quarter. Obviously, they're not all leaving Virgin Media, but over half of them are. And therefore, that would be one way of looking at it churning up. I'm sorry, I got the strategic part of your question in respect to TV, but I missed the specifics. Let me answer the backend of it and you can remind me of what the beginning was. You know, I'm very, very comfortable with our positioning in respect to Virgin Media TiVo. We think about it as a through the middle platform, i.e. it is a controlled open platform. It has a walled garden in terms of linear pay TV. It has a walled garden in terms of video on demand, but it is also increasingly bringing elements of over the top as it is referred to buy wire of application. And clearly the names that get lobbied around are a LOVEFiLM or a Netflix. I think potentially we will fit on our platform as we go forward. When we're in a position to talk about any movement there we obviously will. Your specific question at the beginning was just scribbled down for me, was in respect to Sky premium. Sky premium is on an annual basis, it's obviously out some 5% so we continue to see the growth of Sky premiums. We're under penetrated in respect to Sky premiums. If you look at Sky Premiums as a percentage of our TV customers versus Sky premium the percentage of Sky's customer base we are significantly less penetrated. That's really a function of historically we didn't market. There was a lot of activity at the backend of Q3 of 2010 where BT gained access to Sky Sports 1 and 2 and we leveraged off the back of that. So if you go back to our premium base in 2010 it was 150,000 less than it is today. But 5% growth is okay. I think it'll probably accelerate going forward. But seasonally the post-Christmas period is normally weak, if you look at in terms of what data you've got, you look at premium penetration straight off the back of Christmas it is traditionally weak. So I would see that as pure seasonality and not a function of what's happening to our overall base. I mean, our TiVo Sky premium attach rate, our TiVo premium collections attach rate our premiums in terms of superfast broadband and TiVo are all very strong. It's showing high degrees of advocacy, high degrees of attach rate for other ARPU enhancing products. I'm please with our progress and hope I can continue to report that.

Carl Murdock-Smith - JP Morgan Chase & Co

That's great, thank you.

Operator

We now come to a question from Steve Markham from Selected Research. Please go ahead.

Steve Markham – Selected Research

Yes, good afternoon, guys. I’ll follow a trend [inaudible] if that’s the case. Just coming back to the question on B2B margins, I understand the point you’re making on the London Grid impact, but I mean, looking at the overall mix of revenues that are improving quite nicely, the retail base in particular, is there any reason to think the margins weren’t recovered to at least and possibly beyond the level you’ve seen in the last year or two as that sort of winds down?

And then secondly, just in Q2, I don’t want to sort of get too wrapped up in quarterly trading, but obviously, [inaudible] had a particularly difficult Q2, they fell 10% year on year. This year you’re going in to the quarter with a much stronger looking proposition into TiVo, the collections, the overall broadband speeds you’re offering. I mean, should we expect a reasonable recovery? I know you often get a spike in churn because university disconnects, but you know, shouldn’t we expect a better growth performance this year? Thanks.

Neil Berkett

Let me run through them both and if I miss any of the granularity, I will pick up in respect to margins. But I mean, the short answer, Steve, is I believe that the margins will improve to historic levels, B2B, the whole Virgin Media business model is that it will have an identical economic model to that of the consumer; i.e. it is an annuity stream driven by long-term contracts and it delivers similar, if not identical potentially superior free cash flow to revenue, OCF to revenue. So I'm comfortable that the novation that occurred in Q1 of this year in respect to B2B circuits is just part of bring on board a large contract and that will dissipate towards the back end of this year.

Eamonn O’Hare

In respect to the second quarter, as you know, Steve, we do not give sort of intra-quarter guidance. A couple of thoughts, though; the second quarter of last year was not one that I’d like to repeat. Albeit, underneath, we [inaudible] from our customer lifetime value MPV, we did the right things that clearly losing some 38, 39,000 subscribers is not ideal. But if you go back over the last few years, you will see negative ads in the quarter; not to that level. Given the seasonality around the second quarter, you called out students, we’ve been quite specific on that in the past. I agree, we do have a stronger proposition, but we do normally see modest negative in the quarter.

Steve Markham – Selected Research

Okay, thank you. That’s great.

Operator

We will now take a question from Stuart Gordon of Berenberg. Please go ahead.

Stuart Gordon - Berenberg Bank

Yes, a couple of questions if I could. On the cost, Eamonn has often said that he can keep costs flat and invest the cost savings in the business. Is that something, obviously, within reasonable parameters that you expect to be able to do this year despite the high marketing spend in the first quarter? Do you think you’ll be able to manage cost to similar levels in the past couple of years?

And the second question, just perhaps trying to go about the last cost question a slightly different way. I remember on the call after the second quarter last year, you made the comment that it had been pretty clear from the incoming calls into your call center that it was going to be a difficult quarter last year. Given that you sent the letters on the pricing increases, what has been the call center experience since then in terms of driving a signal for the quarter? Thanks.

Eamonn O’Hare

Maybe I’ll take the first question and then I’ll pop it over to Neil for the second. I think, I mean, the discipline around costs has been a core part of the way we run the business. And you know, we’ve been very focused, as you know. We continue to be very focused by taking bad cost out of the business. And I’d like to hone in on the SG&A line as one element of that. You know, the non-marketing piece of our SG&A, we want to keep as low as possible. You know, we are working hard to do that. There are lots of other costs lines that are on the P&L and we actually think about even cost lines that consider the P&L, such as CapEx and interest build, et cetera. So I think our philosophy is working really hard and taking bad costs out of the business. Our cost actually doesn’t end up in our customer’s hands. That allows us to actually invest in good cost. And whether that’s success based CapEx or whether that’s incremental marketing. And you’re seeing a bit of that in this particular quarter.

I think that’s a core principle and something we’re going to continue. I think we’re very, very focused on making sure that we continue with operating leverage in our P&L, so you know, like [inaudible], we’re absolutely committed to making sure that our costs are not rising as fast as our sales.

Specifically, quarter to quarter, or through this year, giving me kind of the upwind in marketing, whether a particular line like SG&A comes in that flat as it did last year, I think is a little less important than whether there will be operating leverage in P&L and we’re pretty confident about that.

Neil Berkett

Let me pick up on the price increase and notifications to it. I’ll add a little bit to what I said earlier. We were early in the notification. We were more transparent in the notification, so the early; i.e. first four to six weeks, potential negative impact of that notification, you would have already seen. So churn of 1.7 is some 3,000 [inaudible] as it was this time last year. I think it’s indicative of the communications landing well in conjunction, obviously, with other things we’ve done in terms of enhancing value for money for our customers, increasing number of Video on Demand, in particular is a significant move that we made as well as doubling up broadband speeds.

So that volume of calls that was driven purely by the price increase, I think we have seen the first wave of that and that is, as I say, you’ve seen the results of that. The second wave occurs when the invoice strikes, which we’re in the middle of now. I, again, I wouldn’t want to comment in a micro sense numerically, but I’m comfortable that we’ve landed the price increases as well as we could and that it’s been well communicated to our customers and our customers are seeing that we provide good value for the money.

Stuart Gordon - Berenberg Bank

Thank you very much.

Operator

Our last question today comes from Adam Rumley of HSPC. Please go ahead.

Adam Rumley – HSPC

Thanks. Thanks very much. You’ve spoken about nearly half of the gross adds to broadband using 30 meg or above for the last four quarters. When I think about what was being sold in Q1, the introductory mix, the introductory tier was in the second tier, was 30 meg per second. Into Q2, that changes with 30 meg being the entry level, so I guess my question’s really whether or not to date you’ve seen any change in the mix of customers taking the second tier rather than the first tier of broadband products?

Neil Berkett

Adam, it’s just too soon to call, you know, we’re only a few weeks into the quarter. I would be surprised if in the first quarter or two post the upgrade that we achieved the same level of mix as we have done historically. That’s my view. You know, our view is that it is the right time to do the upgrade, to move from 10 to 30 and 30 to 60 and 50 to 120. You pick your timing for this in terms of ensuring that the demand is there for a new tier structure along with the economics that are associated with it. I think we’ve got the time spot on, quite frankly, of although we might see a modest degradation in tier mix on acquisition, I think it will be pretty short lived. But that’s a view, that’s actually not overly supported by the facts because it’s too soon.

Adam Rumley – HSPC

Okay, thanks very much.

Neil Berkett

Okay, with that, thanks very much, everybody for listening. Thanks very much to Virgin Media people who put their shoulder to the grindstone for another quarter and product a solid set of results. We’ll continue to work on those levers that we know will drive revenue growth going forward. Thank you very much, everybody.

Operator

That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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