Virgin Media, Inc. Q4 2007 Earnings Call Transcript

| About: Virgin Media (VMED)

Virgin Media Inc. (NASDAQ:VMED)

Q4 FY07 Earnings Call

February 28, 2008, 9:00 AM ET


Richard Williams - Director of IR

James F. Mooney - Chairman

Neil Berkett - Acting CEO

Jacques Kerrest - CFO


Steve Malcolm - Arete Research

Wilton Fry - Merrill Lynch

David Kestenbaum - Morgan Joseph

David Gober - Morgan Stanley

Joe Boorman - New Street Research

Jerry Dellis - JP Morgan


Good afternoon, ladies and gentlemen, and welcome to the Q4 2007 Virgin Media, Inc. Earnings Conference Call. My name is John and I'm your conference coordinator. For the duration of the call, you will be on listen-only. However, at the end of the call, you will have the opportunity to ask questions. [Operator Instructions].

I will now hand you over to Mr. Richard Williams to introduce today's call.

Richard Williams - Director of Investor Relations

Thanks, John. Good morning or afternoon to you all and welcome to our Q4 results call. On today's call, we have Jim Mooney, Neil Berkett, and Jacques Kerrest. Please can I draw your attention to the Safe Harbor statement on slide 2 and remind you that some of the statements made today may be forward-looking in nature and that actual results may vary significantly from these statements. I would also ask you to refer to our latest filings with the SEC for applicable risk factors.

Now I'll turn over to Jim Mooney.

James F. Mooney - Chairman

Thanks, Richard, and good afternoon, good morning everyone. I just want to be very brief and just say first all congratulations to the whole Virgin Media team out there who have turned in a great performance in the fourth quarter. We are really leveraging our products, our brand and the people in the company, and I'm very pleased with the results. You'll hear a lot today very quickly here about our VOD platform, up to 33 million views a month now, our superior broadband product, and whole strategy of harnessing that in the triple-play, the quad-play via our mobile products, which is doing very well.

I think the effort that Neil and his team are leading on segmentation driving those offers to the marketplace are unmatched competitively and that is really what is driving the performance. So very, very encouraging results as we ended the third quarter, even more encouraging in the fourth. So from my perspective, continuing that momentum as we head into 2008 is our goal. We were very encouraged by our opportunity to do that and I'm real excited about where we are now as the new Virgin Media company.

So without further ado, let me turn it over to the guy leading the team and really harnessing all these strengths and driving very good results, our CEO, Neil Berkett. Neil?

Neil Berkett - Acting Chief Executive Officer

Thanks, Jim, and thanks for joining the call everybody. Our fourth quarter results represent the best operational performance since the merger of NTL and Telewest. There are clear signs of the Virgin Media brand combined with a compelling and competitively priced portfolio products is gaining real traction amongst our customers.

Let me give you a quick overview and then we can go through the detail. Our strategy is to maximize opportunities in the fast growing broadband market where we have a uniquely powerful delivery platform that enables us to exploit the increasing demand for bandwidths. And secondly, to realize the full benefits of being able to deliver an unrivaled platform for driving a next-generation or personalized on-demand TV services.

Alongside this, we have made reducing churn one of our top priorities. It appears that this strategy is working, as we've seen both customer and RGU growth continue to improve. This has not been achieved at the expense of financial discipline, as we've grown ARPU at the same time. Operational improvements and greater management focus on fixing the fundamentals, as we frame it, have resulted in sharply reduced churn, and this is particularly pleasing to me.

As I've said before, our network advantage allows us to differentiate our broadband service from our DSL competitors, and we plan to increase our broadband speed even further this year. As I explained on the third quarter call, my focus in 2008 is to grow the net present value of the annuity stream that is our customer base, both in consumer and in business. It will expand I will expand I a moment on the leavers that allow us to do that.

Driving operating efficiency is also important to us. And I'll give some examples of where we've been doing this. By growing the annuity stream and driving efficiencies, we will be creating value and building a solid foundation for improved revenue and cash flow growth in 2009.

So let me start by quickly reminding you of what I said last quarter and then how we've progressed against that so far. Firstly, I said reducing churn was my number one priority, and you can see it, it's now at 1.4%, the lowest point since the merger. We talked about how we were planning to effectively manage the backbook through cross-sell and upsell. This has helped to increase ARPU this quarter.

We talked about differentiating our products, and we've since announced that we will be launching 50 megabits per second this year. We're also upgrading our mid-tier from four megabits per second to 10 megabits. And we continue to see growing usage of our leading video-on-demand platform.

Broadband is our hero product, and we've had another strong quarter with net adds 16% up year-on-year in a slowing market. I have already mentioned cross-sell and upsell. We've seen continued strong growth in triple-play to a record 49.5, call it 50%, and we've seen the extra large or top-tier mix improve for all of our products. Within mobile, I explained how we were focusing on contract cross-sell into that cable base. We saw strong net adds this quarter, up 60% on Q3.

We've also previously talked about the changes we were making in telephony through smart pricing and bundling to stem the losses. Well, I'm pleased to say we added 39,000 on-net phone subs in Q4.

And finally, we continue to focus on right-sizing our business to get the right costs and organizational structure to position us for long term cash flow growth. For example, in the fourth quarter, we closed our venue sales channel, as it was not meeting our valuation criteria. The acquisition costs were just too high to justify the value of sales we were making.

In another area of the business, we outsourced the management of our telephony switches to BT Wholesale. We gained no competitive edge from managing those switches, and allowing them to sunset. By outsourcing, we can take advantage of some of BT's economies of scale, simplify our own business, and reduce our annual costs. So let's get into the detail.

First, let's look at the success we've had at adding RGUs and customers in the quarter. RGU growth was a record 272,000, driven by strong performance in all products headed by broadband. Customer net additions of 24,000 represents the best quarterly growth since the merger. This was largely as a result of reduced churn, which is at the lowest level for nearly two years. Gross adds also remained strong, and were up 5% on the same quarter last year. This was achieved alongside the continued success of increasing triple-play penetration, which has now increased to a record of just under the 50% mark. In fact, net growth in triple-play subscribers was the highest since the merger.

It is testimony to the enduring appeal of the Virgin brand that we were able to achieve all of this, with half of the satellite operators reported annual advertising spend. By the end of the year, prompted awareness of the Virgin Media brand among consumers had reached 90%, and by way of context, that's twice the level that O2 achieved in its first year.

So let's move on to churn. Reducing churn has been our number one priority. As you can see from the chart, we've had a great quarter. Churn is 30 basis points lower than the same quarter last year, which, I think, is a great achievement. It's also lower than Q3, which is reflective of operational improvements, but also includes some seasonal benefits.

So, how have we done this? Well, as I said last quarter, the overriding driver for churn historically has been the lack of a single prepared billing [ph] system, covering all of our customers. The migration of our on-net consumer billing system to a single icons platform is now largely complete, with just a small area of broadband provisioning of some of our ex-NTL customers still outstanding.

Consolidating our billing system was our number one priority last year. Now that it is largely done, it means we are able to devote more resources towards the next most significant causes for churn, product reliability and first time resolution. We've structured the organization to reinforce the importance and priority of this. This area did not get enough focus in the first half of 2007.

I've already touched on the third reason for churn, which is the value for money issue around existing customers. We are successfully addressing this issue through careful management of the backbook by our upsell and cross-sell. Targeting of churn is my number one operational objective, and is the biggest driver for value in this business. Churn reductions improve margin and value. So we can see that by reducing churn in 2008 compared to 2007, it will give us a greater growth emphasis going into 2009.

So turning to ARPU, I'm very pleased that we've achieved strong customer and RGU growth alongside increased ARPU. From the comments I've had in investor meetings, I know that this was an area that was of some concern to investors after the ARPU declines earlier in the year. I think today's results give some encouraging signs about our improving ability to manage ARPU going forward.

There have been a few items affecting ARPU this quarter. Firstly, we increased some usage-based telephony pricing in November, which was partially offset by some reductions in our flat rate packages. Secondly, we have continued to cross-sell and upsell to improve RGU per customer.

As I explained last quarter, we have really improved the way we manage our backbook. As a reminder, our backbook is our base of customers who are on a historic price plan. Our frontbook customers are those who have been acquired more recently on keener pacing. We have protected ARPU whilst ensuring value for money by continuing to encourage customers to take more products from us, i.e. cross-sell, and to upgrade or upsell. As a result, the level of price discounting has fallen; you can see this is reflecting in our growing RGU per customer. We really built up the skills and the tools to better manage our customer portfolio, and I'm delighted. This has been demonstrated by an improved ARPU performance in the quarter.

Finally, about [ph] 23 of the Q4 uplift is due to some benefits including high telephony usage and pay-per-view events that we do not expect to recur in Q1. We will continue to manage the backbook and ARPU carefully. As I'll expand on in a minute, we're managing for MPV, not just ARPU. This means that ARPU will not necessarily increase every quarter. It will go up and it will go down some quarters as we manage the backbook and other impacts. But what is important is that we're being more effective in managing the underlying value of our customer base and creating value.

Let me touch now on how we are running our consumer business in order to grow and create real shareholder value, and apologies to those who've seen this slide before, but I think it's an important point for me to make.

Our 4.8 million consumer customers represent a valuable annuity stream. We are focusing on maximizing the present value of this annuity stream. The net present value is determined by the three factors: volume; ARPU, or more accurately ACPU, average contribution per unit; and churn. We'll use ARPU as a close proxy for ACPU. We track this annuity value and we regularly look at the net present value of the customers we've acquired. This is based on their ARPU and volume from our knowledge and their likely churn impact based on the sales channel, product and tiering profile that our customer segmentation work tells us.

We also look at the MPV of customers who have left us and the MPV of any cross-sell, upsell or re-pricing of our backbook as we start to build this capability. That way, I know whether we have created or destroyed value. And we can tell you today and you can see from the Q4 numbers that we are creating value. In Q4 volume, ARPU and churn all went in the right direction. Even in quarters where ARPU doesn't go in the right direction, we can create value by getting the other two right, i.e. churn in particular is the biggest creator of value.

So, let's go through the three buckets. Firstly volume. Volume will continue to be driven by the UK broadband penetration growth, digital switchover, our product differentiation with high broadband speeds, video-on-demand, improved sales efficiencies, and growing warmth and acceptance of the Virgin Media brand. Secondly, ARPU. I've already explained how we are improving our management of the backbook whilst protecting ARPU and margin, primarily through less reliance on pricing discounts and more reliance on cross-sell and upsell.

By improving the depth and range of our product, we will also be creating stronger upsell propositions. For example, the Setanta deal we did to add their sports channels to our top-tier top basic tier, creates a stronger upsell incentive. Upgrading our 4-meg broadband tier to 10-meg has a similar effect. We're doing a better job with proactive migration of higher value, higher risk customers, again through cross-sell and upsell. And DVRs have helped in this area too.

And finally on ARPU, the change in dual and triple-play pricing from the resellers that hit the market first in April 06 and then again around the start of 07 has now been around for several quarters. So the re-pricing pressure from our backbook is dissipating, and it is difficult to see further step changes in the market pricing given this current state of LLU pricing. In fact, I hear that BT are petitioning the regulator to allow them to increase the local loop unbundling charges that the resellers have to pay.

So moving on to customer tenure or churn. I've already touched on what we are going to do here, and have already done to address the main causes of churn, being the billing system; product reliability, first-time resolution, and value for money. As you've already seen, we've had great success in this area in the fourth quarter.

The other big part of creating value, of course, is through driving operating efficiency to grow cash flow. I spoke last quarter about the OpEx re-engineering and restructuring that we would be targeting in 2008 and beyond. We are continuing to pursue our plan of reducing overall SG&A, although there will continue to be cost increases going the other way, such as the content initiatives we've undertaken, like Setanta, as well as inflation and other investments.

We are focusing on reducing overall underlying SG&A. In fact, as an incumbent with a short-term gross margin challenge to the existing pricing only on [ph] store base, we absolutely need to continue to reduce costs further to grow our cash flows in the medium and long-term.

In a fiercely competitive market where others are taking hits to profits to continue to grow, our unique cost structure and economics allow us to manage the RGU growth, ARPU equation, make selective investments where required, and be disciplined on OpEx, and efficiently efficiency to grow this business in the medium to long-term.

Let me now quickly recap on another slide that we showed last quarter. At the risk of being repetitive, I want to show that our strategy is consistent and ongoing. If we get this right, you'll see the evidence when we report each quarter. You can see here what we believe are the market growth characteristics in our positioning for our three main growth areas, TV, broadband and mobile, split where relevant between tiers.

Starting with premium TV, this market is not growing, and requires heavy investment in content, primarily movies and sports, to compete. Due to content locked up by the satellite operator, this makes the economics here difficult for us to compete effectively. So the opportunity for us here today is relatively limited compared with other opportunities.

Of course, as you know, we are addressing some of our concerns about market behavior to the regulators, and will continue to pursue all avenues to ensure a level playing field going forward.

In basic pay-TV, the market is growing nicely and is driven by choice and price. We offer some richer content than our competitors, for example, including Setanta Sports, and live premiership football, in top basic packs. We can also exploit our network capability with our wide and growing range of video-on-demand functionality and content. As you will see in a minute, customers are increasingly becoming more comfortable with accessing on-demand, allowing them to effectively create and personalize their own TV schedules.

We see similar trends in broadband with increasing use of high quality video streaming that our higher broadband speeds allow. It is our superior network capability that gives us that competitive advantage.

In free DTV, freeview leads the market and growth is continuing. However, we believe many of these consumers are dissatisfied with the range and choice of content. By bundling with the phone line and getting access to extensive VOD content, we can offer greater choice and then we have the opportunity to try and upsell and cross-sell other services. We want to take advantage of the appetite of consumers who get the taste of multi-channel television through freeview.

In mobile, we are under-penetrated in the high value contract market, which represents around two-thirds of market revenues. So this is a key area of growth for us. Our positioning is to cross-sell a great value-for-money product to our own existing cable customers at low SAC and therefore great economics. We're also in a very strong position to capitalize on convergence.

In broadband, we believe we have the strongest position. It is still a fast growing market and we believe we have the best product and the best economics due to the ownership of our own state-of-the-art network, which has fiber much closer to the home than competition. This means we can offer great value and quality at both the top and bottom of the market. Therefore broadband offers us the greatest growth opportunity and allows us to differentiate alongside video-on-demand to make sure our customers can lead the way in consuming content however and wherever they choose.

And finally, the great economics for mobile contract and fixed line phone also add to our compelling bundles.

I'll now talk briefly about each of our products, starting with broadband, which showed further strong growth consistent with our strategy. On-net customer increased to 106,000 in the quarter, up from 78,000 in the same period last year. Our strong broadband quarter reflects the quality and value of our service. More and more customers are joining us because they want higher speeds available. Our 20 megabits per second product is the best available in the market and is the natural choice for home workers, gamers, and those who just want fast, reliable downloads.

Despite our strong performance in the fourth quarter, I am not satisfied that there is enough daylight between ourselves and DSL copper in the eyes of the average UK internet user. We still have not achieved our potential given the natural advantage we have over DSL. So we are increasing from 4 megabit tier to 10 in the next couple of months and we plan to launch 50 by the end of the year, off the back of some very successful trials.

As a result, by the end of the year, our customers will have access to a genuinely super fast product. At the same time, we're investing in enhancing the quality of our service by pushing real world delivery speeds as close as possible to their advertised headline speed.

Turning to my next slide. On the left hand, you can see the growth in our peak downstream traffic per customer over the last four years. Peak bandwidth usage has more than doubled in four years. This has been driven by changes in usage behavior, the increases in headline speed we've given our customers, growth in broadband penetration, and the continuing evolution of more bandwidth-hungry internet applications. We're seeing increasing availability of music and video, both for streaming and download. This includes sites such as the BBC iPlayer, 4 On Demand, and iTunes. Penetration of both electronic devices such as MP3 players, digital cameras, camcorders and increasingly sophisticated mobile phones continues to increase.

The subsequent storage of music, photos and video on home PCs and distribution by email and P2P, all drives bandwidth demand. There's been a recent explosion in the use of social networking sites, which often involves posting of large media clips on sites such as Facebook, MySpace, Bebo. VoIP and instant messaging is also growing usage along with an exortable [ph] rise in internet shopping.

We are seeing more and more bandwidth using devices in the home, such as gaming consoles, laptops, second PCs, and homes are increasingly being networked. Online resources are also increasingly being embraced by schools, colleges and students. This is all part of the virtuous circle of driving the demand for bandwidth, which in turn drives the supply of more bandwidth hungry content and so on. It won't be too long before 8 megabits per second connections won't be enough to provide a middle England home with the speeds that they are going to need. Recently, on a Sunday, which is our peak usage day, we saw the equivalent of 313 million MP3 tracks downloaded.

So, turning to TV, we had a fantastic performance in Q4 with the best quarterly growth for seven years. We are seeing the benefits of the market changing constant initiatives that we have undertaken to differentiate our pay TV service. Our key points of difference are our unique on-demand service, inclusion of premium sports contents in our top basic TV package, and our market-leading DVR, we call it V+.

The football season started in mid-August and our top tier TV customers have been enjoying watching live Premier League football games on Setanta at no additional cost. This has had an impact on TV upgrades from lower tier packages to top tier and has favorably effected both acquisition and turn.

Finally, we had a strongest quarter ever for DVR growth with 72,000 net adds. Our reset shows the DVR customers churn less than other customers, and so we've become more aggressive in rolling this great product out with half-price promotions. Even with such strong growth, we still only penetrated 8% of our digital base. So we feel there is still a high growth opportunity here.

We had a great quarter in Q4. In Q1, we have adjusted some of our acquisition offers to emphasize our higher tier. Therefore, although I still expect a strong TV growth quarter, it probably won't be as good as Q4.

Let's look at a bit more detail at video-on-demand. We believe there's a gradual but steady transformation under way in the way people watch TV as they start to supplement their traditional linear viewing with personalized on-demand programming. Broad access is available for free to 3.3 million digital customers. Our huge library of content and the quality of service are not easily replicable, and we believe this is playing an important role in both customer retention and acquisition.

We've got over 4,000 hours, which are regularly refreshed. It includes the best of the week television catch-up, and we've got 1,000 hours of catch-up TV including East Enders, Top Tier, Shameless, Life on Mars and Hollyoaks. This is free to all of our customers. It currently includes content from BBC, Channel 4, and from our own channels. It's into this section that we will launch the BBC iPlayer later this year. This iPlayer service has been heavily promoted on the BBC platforms as a PC service. But we will be the first TV platform to launch it direct to your TV.

This service carries all the BBC programming from the previous seven days. That is hundreds of hours of content. Developments like this give VOD a new impetus and help establish on-demand as a genuinely mainstreamed TV service. iPlayer is already proving extremely popular as a PC. So much so that it's one of the major factors in increasing bandwidth demand in the UK. Being able to offer this on our dedicated on-demand digital TV platform is a huge advantage for us compared to our DSL competitors who do not own their own network and who will suffer the cost and performance consequences of this type of bandwidth-hungry content.

Over and above catch-up we have television choice on demand. This is an archive of thousands of hours and 1,500 titles. We've got the best of the UK and U.S. such Lost, Sopranos, West Wing, The OC, CSI, Six Feet Under, Little Britain Friends, and I Go On. We've done deals with the BBC, Warners, HBO, Channel 4 and others. This is free to our top-tier subscribers, which is about 50% of our digital subscribers.

We also have a comprehensive film library through our relationship with FilmFlex. FilmFlex is a JV between Sony and [indiscernible], but has contracts with all the major studios. We take the titles in the pay-per-view window, which to date has normally been nine months after theatrical release, although increasingly it is becoming closer to close to the retail release. So we're coming up to six months. Across this year, the conversation with studios, we expect to see even shorter times. We've all the major titles and Spiderman 3 was the most watched title in December.

One of our most successful services that we introduced during 2007 was the music service. Up until June we had a music video-on-demand service that was on a pay-per-track basis. We've ended a series of deals with the music labels to be able to offer this service as a direct part of our top-tier service. This has significantly changed the level of usage. During the course of this year, we hope to introduce the ability for individuals to create their own play lists.

Some of our content is available in HD, and we also carry kids special events such as the recent Ricky Hatton fight, as well adult content. As you can see usage is growing. 47% of our customers use video-on-demand at least one a month, and we believe regular VOD users churn much less than the non-users.

In Q4, we had an average of 22 views per user, up from 17 in Q3. The total number of monthly views increased to 33 million in Q4, up from 23 million in Q3. These are still relatively early days for us, and we're developing the new content to continue to expand usage. For example, we're looking at lifestyle options such as yoga or guitar playing, which the U.S. cable companies have had considerable success with. This is a one-on-one experience. You can have sitting in front of your TV set using the non-demand experience. We look to develop a very long tail of niche, but valuable content. In education, for example, we'd like to get as much of the national curriculum on our service as possible.

Video-on-demand is transformative. Consumer behavior in these early days mirrors the music industry in many ways, with the impact of the iPod changing the very structure of the business. Linear channels will survive, of course. We will need trusted aggregators, brands that introduce us to new material and get us to return to old favorites. We're doing that with Virgin 1 and Living, for example. However, there will probably be less linear channels and most will need to have a complementary VOD offering.

With our superfast fiber optic broadband service and our market-leading VOD service, we are best placed to benefit from the consumers' increasing demand for on-demand content.

We flagged a turnaround in our telephony numbers trends in Q3, and I am pleased to say that the Q4 improvement has shown great improvement. Our net adds, 39,000 in the quarter, marking the first increase in the on-net telephony base since merger. This is the best growth that both NTL and Telewest did collectively since the second quarter of 2004.

We also had 13,000 off-net adds. This turnaround has been driven through improved management focus, a successful bundling and cross-sell strategy and a refocus on telephony by both our sales and marketing team. Also, driving down our overall churn rate has had a disproportionately favorable impact on telephony, as telephony product penetration is higher than the other products.

Now mobile. Starting with contract, our strategy here, as you've heard before, is to use our favorable economics to cross-sell into that cable base. And we have a very successful quarter, with a sequential improvement in net adds to 48,000. I'm also pleased to report an improvement in the prepaid performance with a return to positive net adds. As you can see from the chart, there has been steadily improving performance throughout the year, and we do typically expect the best performance in the fourth quarter due to the Christmas holiday season. We will always exercise financial discipline around lifetime value. If the third party acquisition costs are too high, as they were in the first and second quarter, we will adjust our acquisition strategy accordingly.

OCF in the quarter was 18 million, which was up 25% on the same quarter last year, due partly to our increased focus on the more profitable contract market. As expected, Mobile OCF was down on the previous quarter due to seasonably high acquisition costs associated with the higher gross adds in the Christmas fourth quarter holiday season.

Turning now to the Business division, we have expanded the revenue disclosure here, as you can see from the slide. Revenue was 163 million, up 3 million on the previous quarter due to the growth in projects, which is included in Retail Other and Wholesale.

Most of the projects increase was derived from our LAN solutions infrastructure contract at Heathrow Airport's Terminal Five. This contract will finish in the first quarter of 08, and we will see a reduction in revenues in 08. However, this contract which is about seven years old and dates from the old NTL days is at an extremely low margin. So we did not see any material impact on OCF.

Wholesale revenue was up compared to the previous quarter due to strong performance in mobile, carriers and systems integrators, partially offsets by a decline in ISP revenue. We anticipate that wholesale revenue will also fall in 2008 due to the continued reduction in our ISP subscriber base and contract decline in mobile accounts. We are seeing a good year-on-year growth in retail data, which is up 7% compared to the same quarter last year. We continue to see a very positive shift from retail voice to retail data, as we continue to focus on data services, and we expect to see revenue growth in this area in 2008, a major value driver.

As a result of all of this, it is likely that total business revenue will fall in 2008, although we expect the important retail data revenue line to increase. As I say, this is where the value lies.

Turning to my next slide, I will talk about the strategy of our business division. On this slide, you can see what we regard as our sweet spot, the growth potential and differentiation from our competitors and the different products we offer. Our main target market is medium-sized enterprises and the small and large national organizations. We believe we have a competitive advantage because, as in consumer, our fiber is typically much closer to business customers' premises than our competitors. This means we can take much better margins and can afford to invest more in customer services and in account management.

We choose not to compete hard for business from multi-national companies or the larger national organizations. But in our target market, we've seen some competitors begin to exit, and so the number of competitors is falling, along with some consolidation. Our aim is to be the natural choice to fulfill the communications requirements of UK business, public sector, and service provider organizations by delivering the best customer experience.

And now turning to Content division, content revenue was 114 million, which was 43% up on the previous quarter, but down slightly on the same quarter last year. Content revenue consists of revenues from our channel businesses, VMtv, and our home shopping business, sit-up. VMtv revenue was up 1% on the third quarter, but down 21% on the same quarter last year. This is due to the new carriage contract with Sky, whereby VMtv saw a significant drop in subscription revenues from Sky. The new contract began in January 07, and so next quarter we will not get the same year-on-year impact. As you know, we are in a legal dispute with Sky over the terms of this contract.

As expected, sit-up saw a significant increase in Q4 revenues compared to the previous quarter, due to the Christmas holiday season, which is traditionally the strongest sales quarter of the year. Revenue growth was up 6% compared to the same quarter last year, which is a strong performance in a competitive market.

Content OCF was a loss of 6 million. As expected, this was lower than in Q3 due to the seasonality seasonally higher programming costs in order to drive viewing over the Christmas holiday season. In addition, third quarter OCF was included some one-off benefits that were not repeated. Compared to Q4 last year, OCF was down by 8 million, mainly due to the new Sky contract.

Malcolm Wall, who run that content division, also had responsibility for our portal, although these revenues are included in our Cable segment. Our portal is the tenth most visited site in the UK and is growing page impressions and advertising and search revenues driven by investment in content such as the Premiership football clips that we've all the rights for.

Let me now hand over to Jacques to run through the full financials before I return to summarize. Jacques?

Jacques Kerrest - Chief Financial Officer

Thank you, Neil. Let me start with Q4 revenue which we have set up on this slide as compared to Q3 2007. Consumer revenue is up by £14 million driven by both increased ARPU and customer growth. This is the first time in a year that consumer revenue has grown and I think reflects a lot of hard work we have put into returning to customer growth in the second half of 2007 and growing ARPU in the fourth quarter.

As you have heard, business revenue was up by £3 million due to growth in LAN solution and wholesale. Despite this, we expect revenue for both these items to decline in 2008. VMtv revenue was essentially flat and sit-up is up due to the seasonally strong fourth quarter.

Mobile revenue was down by £7 million despite the increase in customers due mainly to lower prepaid ARPU. This was partly due to lower revenue for roaming charges, which is seasonally higher in the summer months. All this means that total revenue of just over £1 billion was up £45 million on Q3.

So let's turn to OCF, which was down £21 million from the previous quarter to £321 million. Cable OCF of £310 million was up £6 million, as strong revenue growth was partially offset by the non-recurrence of some of the Q3 benefits that we talked about last quarter. Mobile OCF was down by £14 million as we have heard due to seasonally higher acquisition costs.

Content OCF was down by £13 million due to seasonally higher programming costs and a non-recurrence of some of the Q3 benefits that we talked about last quarter.

Let me now give you some comments about the OCF outlook for the first quarter of 2008. We are expecting a sequential increase in employee incentive and SBCE costs in Q1. This is because a large part of this are performance-related and at the start of the financial year as compared to the fourth quarter of 2007, our expectations are that a greater percentage of the performance targets will be achieved in 2008, compared with 2007.

As Neil has said, we are also expecting lower business wholesale revenues and this will affect OCF. As a result of both of these items, we expect Q1 OCF to be lower than the £321 million achieved in Q4. As I said, this is mainly due to the treatment of bonus and SBCE costs. We remain absolutely focused on growing OCF and cash flow as we move forward by growing our customer base, managing ARPU and continuing to attack our cost base.

On the final slide, we've set out our debt position at the end of the quarter. At the end of Q4, we have £4.8 billion of senior credit facilities split between tranches A, B and C, £1 billion of senior notes, and £92 million of capital leases and other. During the quarter, we made a voluntary pre-payment of £200 million against our senior credit facility using available cash reserves.

We have set out, on the right hand side of the slide, the maturity profiles of our various elements of the debt. The first payment due under our A tranche is for £265 million and it's due in September 2009. This tranche fully matures by the end of 2011. And the B and C facilities of bullet repayments due in 2012 and 2013 respectively. Our senior notes are due for repayment in 2014 and 2016.

With £321 million of cash at the quarter-end, which was helped by a very strong working capital performance, this give us a net debt of £5.6 billion and a leverage position of 4.4 times annualized OCF. Our weighted average cost of debt is 8%.

At this point, let me turn it over to Neil to wrap up before we take your questions.

Neil Berkett - Acting Chief Executive Officer

Thanks, Jacques. So let me summarize with this final slide by showing your our six main assets, many of which are often under-appreciated. I've already talked at length about our core assets, the network and our consumer mobile business with its millions of customers providing a valuable annuity stream. In addition, our B2B business has over 600 million of annualized revenues and by leveraging our pervasive network, we believe it has been able to earn higher margins than its peers.

Next, our content division owns directly and through UKTV the two most viewed basic pay TV portfolios in the UK, as well as a portal that is one of the most top 10 visited websites in the UK.

Finally, the history of this company means that there are significant tax assets that can be utilized organically or potentially inorganically. The two most important assets are, firstly, 13 billion of unutilized capital allowances, which are highly flexible and can be used to offset any UK profits in any company within our tax group; and secondly, the 3 billion of UK NOLs, which can be used to at least considerably shield our UK cable profits.

And with that, let me hand back to the Operator so we can take your questions. Operator?

Question And Answer


[Operator Instructions] The first question we have comes through from the line of Steve Malcolm of Arete Research, please go ahead with your question.

Steve Malcolm - Arete Research

Yeah, hi there Neil and Jacques, it's Steve from Arete. Standard three questions, if I can, please. The first is just on churn, can you just give us a little bit more detail on, sort of, we think about the old franchises NTL and Telewest, I guess, the NTL in particular had churn was that where you saw most of the benefit this quarter? And do you think, I know you've made that step improvement, you can hold it for the rest of the year and for 08 and then even take it down from there?

The second is on the stature on [ph] 50 meg, can you just sort of give us an idea of what the rollout plans are on the existing technology, and with regards to DOCSIS 3, and what coverage you think you have on 50 meg? And also, how do you intend to exploit and try and put blue water between yourselves and your competitors in the next 12 months, so the consumer sees the benefits, I guess, beyond the simple speed message? And that's [indiscernible] thanks a lot, [indiscernible].

Neil Berkett - Acting Chief Executive Officer

Okay, let me pick that up. First issue on churn, we tend not to look so much now at the two separate portfolios, as the products have moved together, we really have a portfolio. And, Steve, as you pointed out, obviously Telewest churn was better than NTL churn. The most dramatic improvement in the NTL portfolio on a churn sense has been in the non-pay space. And that we now have non-pay performance across the two portfolios, the two franchises, which are pretty much on par. This is a major focus for us. We want to have an organization that celebrates keeping customers as much as it celebrates getting new ones, and we've really honed in on what I think is quite a dramatic improvement in churn, and we'd like to see it improve further.

In respect to the 50 meg, we'll be rolling that out at the back end of this year, by the end of the year 70% of the national franchise will be available, and then completing by the balance of by into 2009. So basically 9 million homes would have access to 50 megabits by the end of the year. We'll kick off with a wide band deployment and then swap the cards out to DOCSIS 3. So we're not left with it means we can get ahead of the curve in a technology sense, but we're not left with stranded capital. We'll run the 20 and 50 meg on the eventually DOCSIS 3 network. We'll run our lower speeds on continued DOCSIS 1, again protecting our capital base.

In respect to competitive advantage, I mean, you can start to see already why higher bandwidth is becoming important in this country. The likes of the BBC iPlayer, a lot of our DSL competitors were complaining about the impact that had on their networks in January. Sure, we felt it, but nothing like they felt. And obviously with the ability for us to start to do that streaming or for those downloads to appear on video-on-demand, we're in a much stronger position. Trials were showing a lot of HD downloading, some heavy gaming and there's just a natural increase in data consumption that gives us our high degree of comfort, that as a premium product this will be well utilized.

Steve Malcolm - Arete Research

So, the third question has just come back to me, you mentioned the push by BT to increase LLU price; I mean, what would be your strategy around that? Is it BT does get its wish and LLU prices rise, I mean, I guess, you that assume rental prices would rise generally. Would you look to pass some of that on? Would you keep some of it back to try and win some goodwill of your customers? What would your strategy be?

Neil Berkett - Acting Chief Executive Officer

Well, I think whatever we do with our marketing strategy, Steve, we'll wait and assess that. Clearly, we've got optionality if that was to occur. If we felt we created greater cash flow and value by passing some of it on to the customers, then we would do that. Conversely, if we felt we got better cash flow and value by passing it onto our shareholders directly, we would do that. Whatever we would do is we would with hopefully the economic and the value discipline that you're seeing in our organization, we'd do the right thing.

Steve Malcolm - Arete Research

Okay, great. Thanks a lot.


Thank you. The next question we have comes from the line of Wilton Fry of Merrill Lynch. Please go ahead with your question.

Wilton Fry - Merrill Lynch

Yes, it's Wilton from Merrill Lynch. Just a couple of questions, if I may. Firstly, can you tell us what steps you're taking to unlock some of the value around the assets, in particularly the tax assets in the business division and content? Obviously, given the increasing importance on linear TV, is selling UKTV an option you would consider? Alternatively, could you parcel up some of the capital allowances, dispose of the business division, for example? You do say in your slides that's consolidating a consolidating market and that obviously could be a nice thing for you to do. The second question, one really for, Jim, you introduced Neil at the start of the call as the CEO, does this mean you've got the job full-time and if not, can you tell us when the Board will make that decision? Thanks.

Neil Berkett - Acting Chief Executive Officer

Okay. Let me my answer to your first question will be fairly brief. Clearly, there's sort of an underlying questions there about sort of M&A, which I obviously can't comment on. But we will continue to explore other ways and means in which we can monetize our tax assets, we have a work stream running now in terms of looking at internal ways in which we can do that.

James F. Mooney - Chairman

Yeah, and this is Jim. I would just echo that. I think that work stream is very aggressive and looking across the board at all our opportunities to enhance shareholder value. Regarding the CEO position, the Board is undertaking that very shortly here. The judgment period obviously includes the performance, which everyone is very pleased with. So I expect that to be addressed very shortly.

Wilton Fry - Merrill Lynch



Thank you. The next question we have comes through from the line of Bryan Kraft of Credit Suisse, please go ahead with your question.

Unidentified Analyst

Hi, this is Mike Mererino [ph] for Bryan. I just wanted to see if you could elaborate any on the voice price increases that occurred? Thanks.

Neil Berkett - Acting Chief Executive Officer

We in fixed line voice, there was a tweak to some pricing in the middle of the quarter, about half of that was passed back. So we increased some usage pricing and then passed about half of that value back in terms of fixed pricing. We haven't cited exactly the ARPU impact of that. It obviously had some improvement in the quarter. I mean, fixed line telephony, we will continue to ensure that our package pricing is competitive in the marketplace. We will continue to look for ways and means in which we can operate this fixed line telephony business as the cash cow that it is. So you'll see some elements of pricing movement through 2008 as well.


Okay, thank you. The next question we have comes through from the line of Mr. David Kestenbaum of Morgan Joseph. Please go ahead with your question.

David Kestenbaum - Morgan Joseph

Okay, thanks a lot. Nice quarter, guys. Can you talk about the housing environment, how is that affecting you guys in the first quarter as you go forward? And on the EBITDA margin you've got about 39% on the cable business, can you give us some sense of how high you think those can get? I mean, some of your competitors in Europe are closer to 50%, where that can go? And then finally on ITV, can you talk about what you hope to achieve by appealing the regulator's decision? Thanks.

Neil Berkett - Acting Chief Executive Officer

Sure, Dave. Housing market, I mean, we're not seeing any impact on our business in terms of housing market. If I step back from that a bit, I think if anything, a slowdown in the housing market could even potentially benefits us because don't forget we only cover 12 million of the 24 million homes. So, unless people move, which means that the element of our churn, which is movers, would be impacted. So the housing environment we do not see as an issue. It's really too soon to tell any way. Your question around margins, I guess you were seeking guidance there. So I'm afraid, I won't comment directly, although Jim may want to make a couple of points.

James F. Mooney - Chairman

The only point I would make there is we are doing benchmarking. We are benchmarking against the European cable companies. So look at our efficiencies. Neil kicked off a whole effort on operating efficiencies and structure. So, that will all be encompassed in the answer to that, which we are not ready to talk about today.

Let me just address the ITV issue. Neil, I'm just going to mimic what Neil said forever here. The ITV issue is part of a much larger issue in terms of capturing, cornering the market on content. When you try to sign up for exclusive content, and you therefore prevent all the other players in the marketplace from even purchasing that content, that is the definition of a dominant player and the abuse of power. And when you try to buy 20% of a major content player that fits into that same, under that same umbrella. So we're just cooperating with the regulators. We're very concerned about that and giving us them our opinion on that. So, it just fits all into that same bucket of dominance and abuse of power.


Okay, thank you. The next question we have comes through from the line of Mr. Benjamin Swinburne of Morgan Stanley. Please go ahead with your question.

David Gober - Morgan Stanley

Hi, this is Dave Gober for Ben. Just three quick questions. Kind of heading back to the EBITDA point, aside from the reduction in churn in the fourth quarter, what other kind of what cost drivers helped to keep those margins up? Also, on kind of a related question in terms of churn, do you guys think that the telephony additions run rate from the fourth quarter are sustainable through at least 1Q or possibly into 08? And finally on the broadband market, what do you guys think that your share of broadband within your footprint was in the fourth quarter?

Neil Berkett - Acting Chief Executive Officer

Okay, Dave, let me pick them up one at a time. In terms of OCF, as you quite rightly said, I mean, churn will start to drive an improvement in OCF and clearly the Q4 churn won't show benefits, material benefits, until into the next quarter and beyond, there's obviously a lag there. But in terms of major drivers in quarter, I've probably labeled three cost drivers. We completed the billing conversion in October, not only did that drive efficiencies through our castings a bit of [ph] first time resolution et cetera, it also substantially reduces our IT costs. Second one we had already mentioned, the TDM switches that we moved across to BT Wholesale, there was an in-quarter impact of that which will obviously flow through to 2008.

Closed our venue area in terms of venue sales channel in the quarter, that has a positive impact, both in MPV and in costs in period. And as we keep on saying, and I'm going to repeat the point that Jim made, we are an incumbent and we will continue to look at efficiencies through benchmarking to address our cost base. There's two ways to drive free cash flow in our organization, one is through the MPV of the annuities stream, RGU, ARPU, churn mix and the other is to drive down our cost structure, we'll continue to do that.

Broadband, we did roughly 18% of country broadband for the quarter. So by definition, that would be about 40% on mix.

David Gober - Morgan Stanley

Okay, thank you.


The next question we have is from the line of Mr. Joe Boorman of New Street Research, please go ahead with your question.

Joe Boorman - New Street Research

Thanks. This is Joe Boorman with [indiscernible]. If we go over to the impact of roaming in Q4 in mobile, Neil, would you still expect kind of reported revenue growth next year? I [indiscernible] how much of that is roaming? And secondly, it seems from the Competition Commission finding that they would agree more with Sky's wider view of the TV market than yours. [indiscernible]. I wonder if you have any thoughts on that? And then lastly within the cable business only, it looks like cash OpEx per sub in Q4 was sort of 6 and a bit percent lower than it was in the same quarter last year. Are you I am assuming you think it will fall again in 08, but is that because of subscriber growth, or do you think you can get the absolute... ?

Neil Berkett - Acting Chief Executive Officer

Sorry, Joe, can you run the last one through me again?

Joe Boorman - New Street Research

Yes, it was about your cash cost per sub was lower in 04 this year than last by sort of 6 and a bit percent

Neil Berkett - Acting Chief Executive Officer


Joe Boorman - New Street Research

I'm assuming you think that will be lower again next year, but is that because of subscriber growth only, or you'll get the absolute level of cash costs down as well?

Neil Berkett - Acting Chief Executive Officer

Okay, cheers. Look, Joe, in respect to mobile, there's a whole range of things that are happening in the mobile market; obviously roaming is one of that. With any reduction we see in roaming, we'd be comfortable in terms of offsetting as we grow our contract business, obviously ARPU in contract is greater. And we will continue to manage our prepay business in the mobile business for cash. So you'll see us, as we've said, come in and out of the mobile prepay subs market, just purely to us that's the cash machine [ph], contract is the strategic engine for us.

I don't quite follow your logic in terms of Competition Commission. They have clearly ruled that there is an element of dominance, whilst they did not, we don't agree with their position around plurality. We broadly agreed with their position in terms of Sky's position of within ITV of dominance, i.e., of influence. Our argument is they should have gone down lower. And I don't see that in conflict at all with the position we're taking around the market investigations. In fact, as Jim said, It's quite complementary.

Cash cost per sub, obviously it's driven on both areas. We wouldn't envisage to continue to drive our overall cash costs in absolute terms south, we'll reinvest some of that, as we've said, from time to time, whether that be in additional applications, features or content or a bit of inflation, but we will want to drive that down, and clearly we want to drive our subs up. So you would want to see that ratio continue to improve.

Joe Boorman - New Street Research

Thank you.


Okay. The next question we have is from the line of Mr. Paul Howard at Cazenove [ph]. Mr. Howard please go ahead.

Unidentified Analyst

Thank you for that. Just a couple of questions; firstly on broadband. I wonder whether you can give us some segmentation of your current base and also of new gross additions in terms of the speed they're taking at the moment. And then secondly, I think there was a report out today suggesting that you were back in talks with Sky on carriage, carrying Sky's basic channels. I wonder if you can confirm that and perhaps add anything in terms of the timing and the scope of those negotiations? Thank you.

Neil Berkett - Acting Chief Executive Officer

Sure, Paul. Paul, we don't provide a breakdown of our tier mix in broadband. I think it's an interesting question. Let me take it onboard because clearly it's part of our strategy going forward to upsell. We'll have a look at whether we can give you a bit more granularity and insight into that going forward, but to-date we haven't disclosed that. I can say that we are moving our tiers such that medium and top tiers are improving.

Unidentified Analyst

I guess what I'm trying to understand is how much customers value speed over price at the moment? Whether they already understand the difference on the speed front?

Neil Berkett - Acting Chief Executive Officer

Again, without going into the granularity, I can only be directional and that we are seeing an increasing value placed on both speed and quality. I can't over emphasize the quality piece as much as the speed piece. Quality of service is becoming an increasing issue in the UK. We will continue to build a network such that we can virtually double the quality of service that DSL provides. So we are definitely seeing a substantive market where a quality broadband product that gives their customers not just speed, but access to content and access to applications that they would not otherwise be able to get without that quality. Absolutely key to our sort of anti-commoditization stance, low tiered DSL is a commodity. Broadband through DOCSIS through Virgin Media is an added value services. Absolutely, the direction we're going in driving ARPU accordingly. You raised the issue with Sky, there was an issue. I think I read the same article. You know, we've got continued interest in securing Sky Basics back onto our platform that is being evidenced since the close of the first quarter. It would be inappropriate, I think, for me to talk about where we are at in terms of any dialog we have with Sky. The door is always open, but we will do a deal if the price and the terms are right.

Unidentified Analyst

Okay. Thank you.


Okay, thank you. The next question we have is from the line of Mr. Jerry Dellis of JPMorgan. Please, go ahead.

Jerry Dellis - JP Morgan

Yeah, good afternoon. Three questions, please. Firstly just associated with the cable margin. I guess that margin has been stable at 39.5% for a couple of quarters now. Are you comfortable that you'll be able to keep it there, I guess, as the mix of broadband adds shift a little bit going forward from upselling your existing subs maybe to a higher proportion of new customers coming on board?

Second question is just how confident are you that some broadband customers during 08 and 09 won't just choose to trade down their package as the speeds available at every price point step up? What element of that sort of trading down have you essentially accommodated in your plans? And then finally, just in terms of churn, I guess, the Q4 churn rate was sort of down 30 basis points year-on-year. Is that a realistic or reasonable expectation for what we're likely to see in sort of Q1 to Q3 in 2008, please? Thanks.

Neil Berkett - Acting Chief Executive Officer

Wide ranging. Jerry, the impact of broadband mix is more broadband as a percentage of our total mix, or broadband up the tiers is only going to improve gross margin and therefore would improve the cable margin going forward. I don't see any negative impacts of a shift in that broadband positioning at all. I could only see positives.

In respect to spin-down, we're just not seeing it, in fact quite the reverse. As we upgraded our 10-meg to 20-meg, which we've done for that customer segment, we did that earlier in 2007, broadband at 20-meg is bigger than a [indiscernible] segment than broadband was at 10-meg. So I think providing that the differential is substantial enough, then you won't get the sort of a spin-down that we've spoken about. As I say, we're in the process now of upgrading our four to ten. The feedback we're getting from that customer base is very, very positive. And we are now building a spread across our broadband such that 2, 10, 20, and ultimately 50, you've got some decent chunks and reasons that keep the customers to upgrade. And spinning down, you would now notice quite a substantial deterioration in terms of overall speed. That's the whole idea of getting some more stretch there.

Jerry Dellis - JP Morgan

So, and just a final question on the churn rate.

Neil Berkett - Acting Chief Executive Officer

Oh, I'm sorry. Thank you. The best that Telewest as a standalone business ever did was 1.1. That was in a market which is quite different from the market today. I would like to see us continue to improve all of our metrics. That's what we continue to strive to do, to drive value. Clearly, with the major focus we had on the fourth quarter, you're quite right. We did see a 30 basis point movement. I would not expect that movement quarter-on-quarter. I think I'd be more than, I'd be absolutely a hero if I could do that.

Jerry Dellis - JP Morgan

Okay. Thank you very much.

Neil Berkett - Acting Chief Executive Officer



Thank you. The next question we haves comes to you from the line of Omar Sheikh [ph] of Dresdner Kleinwort. Please go ahead.

Unidentified Analyst

Hi guys. Just three quick ones. First of all, on iPlayer, I just wonder whether you could give us an idea of whether the instruction of the player within the boxes will be or as part of the TV product will be a Q1 or Q2 event. And just wondered also whether the BBC will be promoting its availability on cable when it does become available? Secondly, just want to clarify Q1 guidance for TV. And did you say that TV net adds would be down in Q1 versus Q4, or were you just talking about the V+ box net adds? And then just finally, I guess I got to ask about tax losses. I mean, you talked about ways in which you could realize the value organically or inorganically. I think most of us understand that there are ways inorganically that you could do that. But I just wondered what you tell us even in broad outline terms of how you can do that without an M&A transaction? Thanks.

Neil Berkett - Acting Chief Executive Officer

Okay, let me pick them off. iPlayer will be a Q2 launch, early Q2 and we're running some very successful sort of pilots etc. at the moment. The exciting about iPlayer is not just that you'll be able to access the iPlayer asset through our body PG [ph], you'll access it with red button and it will be promoted by the BBC. So you'll be on the Beeb and the Beeb will say press your red button now if you want to access iPlayer; sorry, if you are a Virgin Media customer, press your red button now because obviously it won't be available on the other distributors. So, yeah, BBC will be promoting both on air and as they promote iPlayer, it will be on your 3-year ISP through our portal and on Virgin Media. Obviously a great win for us, working well with the BBC on that.

In terms of the guidance, I was saying around Q1 TV, yeah, I think we've strengthened the quality, the value of our TV proposition into the first quarter. So, in sort of value terms, I would expect it to be the same or even more, but in quantity terms I would expect that TV RGUs to be less in the first quarters than in the fourth quarter.

Omar [ph], I'm not in a position to, and I think you'd appreciate it, to talk about any specifics around what we're doing to explore our modernizing ethics [ph]. The point I was making, the reason I raised, it was to say that we have created that work stream. We are working on it and at an appropriate point of time we'll be able to talk about it.

Unidentified Analyst

Great, thanks.


Thank you. The next question is from the line of Mr. Richard Barker [ph] of Credit Suisse, please go ahead with your question.

Unidentified Analyst

Yes, thank you very much. Richard Barker [ph], here in London. Guys, I just wondered if you couple questions about one about business, one about mobile. One the business side, I mean, you talked about wanting to optimize the value of your B2B operations and I just wonder given the focus and the effort that you're putting in to the consumer business, whether you think maximizing the value of that asset is something that is best achieved in house or whether you'd be looking or you consider at least, bringing in a partner to help you? And on the mobile side, I just wondered if you can give us an update on the extent of the success you're having in cross-selling mobile to your existing cable customer base? Thanks.

Neil Berkett - Acting Chief Executive Officer

Sure. In respect to business, I mean, clearly I think the UK market is probably ripe for some form of consolidation. The reason for raising businesses and asset is clearly we've got optionally; but it's a very strong asset for us. Richard [ph], I know you wouldn't expect me to comment on any activity in that area.

Mobile, you can assume that 90 to 95% of our contract mobile adds are sold into the media base. We have very, very limited contract sold as [ph] mobile sold into the marketplace. So the 360, 370,000 contract mobiles that sit on the books today, well over 300,000 of those are sold into the base. And we're using out the economics, if you like, of a lower set to be able to drive that forward. And that's very important for us. So, not only is that driving profitability in tune to mobile OCF, it is really securing the MPV and the longevity of the customer. We're seeing the same downturn with respect to churn between a quad and a triple as there is between a triple and a dual and a dual and a single. So it's a very important strategy for us. Yeah, sorry, Richard [ph], yeah?

Unidentified Analyst

I was just going to say to come back on that, I mean, does that mean that you are seeing effectively one kind of household taking multiple handsets, and you are getting a kind of an offbeat benefit from that?

Neil Berkett - Acting Chief Executive Officer

Starting to, obviously, we are always in debate, Jacques and I about how we treat mobile in terms of disclosure. We still think it's appropriate to look at it as a separate business. But over time that will become fused. And yes, you will see during 2008 more and more sort of family packages around multiple handsets into the home, incentives to doing that. I mean, I don't need to roll that through, you can think about what the tariffs might look like.

Operator, we've probably got time for one more question. Thank you.


Okay, thank you. That question is from the line of Mr. Patrick McKellen of Schroeder's [ph]. Please go ahead with your question.

Unidentified Analyst

Good afternoon, gentlemen. Just two questions; firstly, on your mobile OCF, the decline you saw in Q4. I was wondering if you would tell me or spell out the decline between structural and seasonal. You mentioned on your Q3 call that you're going to be reaching the tariff packs. Second question concerns fault reduction, which is in the third pillar of your tenure and churns slide on slide number 9. Fault reductions, could you give us some milestones you are looking to be meeting in 2008, CapEx to achieve those milestones? Thanks.

Neil Berkett - Acting Chief Executive Officer

Sure. Thanks, Patrick [ph]. The OCF performance in the fourth quarter was structural. Fourth quarter clearly in the UK market is a substantial market for gross adds and therefore the movement from Q3 to Q4 was almost solely made up from an increase in SAC.

In terms of fault reduction, let me take on again the question we had earlier on tiering, whether it makes sense for us to be to provide some granularity in terms of faults, we're pleased with the progress we're making. We're instituting sort of customer charter around reliability. We really started this and made some real improvements in this from the second quarter of last year. It's interesting, if you look at the fault rate of both NTL and Telewest at time of merger, the Telewest fault rate was superior, i.e. lower, of that of NTL, but if you go back a couple of years from that, it wasn't. So a management team under Howard Watson, our CTIO, attacked that fault rate in ex-Telewest and brought it down. Howard and his team is basically the same team who are attacking it in the combined entity. We didn't make, if I'm brutally honest, the progress that I expected in the back-end of 06 and into early 07, but again I think we were doing too many things. From the time that we really started to focus and say we've got to move product reliability to the top of the agenda, to get our billing platform behind us and it becomes our major process; we've seen the dial move.

In respect to CapEx, we do not envisage we've given guidance on capital. We don't envisage changing that guidance, roughly 13 to 15% of revenue. At the moment we're at the upper end of that both in terms of what we require, fault reduction around new platforms etc. both in broadband and TV, but also in terms of the rollout of DOCSIS 3. We're comfortable with that capital guidance.

Unidentified Analyst

Okay. I mean, just going forward, certainly it's the metric that's important for you guys in terms of fault reduction, so if those become a metric important for us as well, so would you plan releasing [ph] a metric on fault reduction going forward?

Neil Berkett - Acting Chief Executive Officer

Yeah, let me explore what we can do. I mean, obviously you're aware that once you start moving more metrics in, you've got to backwards over a period of time, and in an organization that's just gone through a merger, [indiscernible] quite difficult.

Unidentified Analyst


James F. Mooney - Chairman

Okay. Well, let me just wrap this up. First of all, again, thank you very much for listening. When you look back at the last few years, obviously as most of you know, we had two years of basic instability or change with the merger of Telewest and NTL, and then the integration of Virgin Mobile. So now with nine months of relative stability, you can see what's happened. The team has harnessed the great products we have, really fine tuned the strategy, and the results are starting to show up. So I'm real proud of the team. I want to thank all the Virgin Media employees for their contribution. We are really hopeful and excited about 2008. It's about growing the business, about driving the efficiencies of the business, about holding on to our great customers via the churn focus that Neil has spearheaded since day one. So, rolling all those things together, we think we really have a great product and a great distribution platform to work off of. So, we are looking forward to the challenges of 2008. We look forward to talking to you again in April regarding the first quarter, or early May. And as we continue to drive the efficiency, the operating efficiencies, I think all the good things will come in terms of restoring very solid cash flow growth on top of the RGU growth that we are beginning to build.

So, that is the game plan and again, appreciate your attention today. Have a great day.

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