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Virgin Media (NASDAQ:VMED)

Q2 2012 Earnings Call

July 24, 2012, 8:00 a.m. ET

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

Simon Weeden – Citigroup, Inc

John [Crease] – Memorial

Robert Grindle – Deutsche Bank AG

Carl Murdock-Smith - JP Morgan Chase & Co

Walter Fry – Merrill Lynch

Frank Knowles – New Street Research

Timothy Boddy - Goldman Sachs Group Inc.

Steve Martin – Areton Research

Nick Lyall - UBS Investment Bank

Bryan Kraft – Evercore Partners

Tom Egan – Cannacord

Matthew Harrigan – Wunderlich Securities

Richard Williams

Good afternoon to you all. It's great to have your presence in London. Good morning to those listening in from the states. Welcome to our Q2 results.

We've got a presentation from Neil and Eammon. It should last about 35 to 40 minutes, and then we'll open with questions from the floor and from the phones.

Please may I ask that we draw your attention to this Safe Harbor statement on slide two where we set our cautionary discloser, which should be read with any forward-looking statements we make today. Also, we will be mentioning certain non-GAAP measures today. The record disclosures with respect to these can be found in appendices to the slides.

I forgot to introduce myself. I'm Richard Williams, Director of Investor Relations for those of you who don’t know me. And with that, I'll turn you over to Neil

Neil A. Berkett

Thanks, Richard, and welcome everybody here in London and for those that are on the phone or watching on the webcast.

I think we delivered in the second quarter another solid state of results. And in most aspects, I think I can say I'm very pleased. Clearly, we have a seasonally weak quarter in the second quarter in terms of net adds but there was a balance across the business metrics, both financial and operating that I think reflect our steady, but sure progress.

We saw improvements in both revenue and in terms of OCF growth for the quarter. And clearly, the quarter was marked by a significant consumer price increase and it has landed very well. We advised our consumer customers early. We advised them more transparently than we did last year. And as a consequence of that, we've seen the price increase land and reflected in terms of ARPU. But I think even more importantly, churn has improved for the third quarter in a row, down some 5% on churn for Q2 2011.

Clearly, I'm slightly disappointed with a net adds performance of a minus 15,000. But I must remember that we put through the price increase and the consumer environment remains challenging, both in terms of consumer confidence and the competitor's activity. While we're absolutely confident that we're executing well and have invested at the right time in terms of our product differentiation, we don’t expect the market to change anytime soon.

I spoke of balance. Business revenue continues to be a key driver for us, up some 10% representing 36% of group revenue growth and I'll talk more about that later.

The overall result was a 5% increase in terms of OCF after a flat first quarter, and free cash flow of $128 million, up 5% in name, and Eamonn will give the granularity of that in his presentation.

We remain confident that we're pulling the right levers for growth. And I think you can see examples and evidence of that in this quarter both by way of the price increase by clear tier upgrades and by business revenue performance. And I'm encouraged that our business remains robust.

This slide, I think we've now shown for three quarters in a row quite deliberately and updated it for the facts as they state at the end of the quarter. And the reason we've done that is we continue to generate modest sustainable revenue growth through multiple growth levers. And the revenue growth in the quarter is up 4.2% over Q2, 2011. And I've said, helps substantially both the cable price increases and business revenue growth.

In terms of customer growth, we saw the base grow in the last year, albeit a small net loss of customers, consumer customers, in what is a seasonally weak quarter for us.

Disconnects were down some 9,000 despite the price increase and gross adds were up 12,000.

In terms of pricing, of course price rise landed well and clearly has contributed to ARPU growth. But it's really important that we don’t look at our price implementation as price for pricing's sake. It is absolutely critical that we provide our customers value for money so they continue to see as they have clearly done in this quarter, we represent strong value for money in a challenging economic environment. And I'll talk more about that later.

And clearly, we've also seen in the last few weeks, our competitors start to raise their prices. I maintain the strategy that we employed of continuing to raise prices while providing value for money has been the right one and has generated returns.

Our tier mix is improving across the whole of the products here. And I think one of the highlights, and I'll talk about this later is despite the fact that we have been telling the world that we're doubling our Broadband speeds of the gross Broadband connections in the second quarter, 40% of those customers elected to take 60 mink and above.

PayTV mix continues to improve being driven by TiVo And 25% of our base, a million subscribers this week now have Virgin Media TiVo.

Our product cross sell continues, Triple Play continues to grow now above 65%. And importantly, quad play grows to above 15%. Mobile cross sell is clearly driving both revenue growth and customer lifetime value for our media customers.

And business data is up 16%. It's now some 16 quarters of double digit business data growth. And I'm very pleased that our virgin media business is now delivering on its' promise.

Let's look at cable, and pricing, and volume in a little bit more detail. So clearly there are two drivers to cable revenue growth, ARPU, and customer growth. And as I said, the price increase landed very well. Certainly met our expectations if not exceeded. And despite technical discounting that takes place, the ARPU uplift and the lower churn underpins our belief in pricing rationality in our market. But good evidence of this, BT, talk, and Sky have all raised prices this year. In fact, Sky raising their line rental to new customers by 18%.

And also recently, a couple of weeks ago, Neelie Kroes, a European commissioner, suggested that network owners will be allowed to make appropriate return, i.e., this will continue to underpin pricing rationality in Europe and in particular in the U.K. market giving both ourselves and the other network provider a framework in which we can provide an economic return for the investments we're making in our networks.

Net disconnects moving onto volume, more than half down from 36,000 to some 15,000 in what is always our seasonally weakest quarter. Nevertheless, gross ads did climb some 7% to 182,000. And I think that's reflecting modest success to date of our new product collections.

I'm also pleased, as I said, to see churn reduce year-on-year for the third quarter in a row with debt disconnects down 5% to 196,000.

And clearly, we've seen a nice improvement in ARPU growth over a couple of weaker quarters, up 3.1% to 48 pounds, 82 reflecting the price increases. But also, reflecting mix improvements partially offset obviously by phone usage declines, and promotional, and retention discounting.

A little bit about collections, we've been looking for a while as to how we can simplify the choice of a converged bundle for our customers. And we launch collections during the second quarter with the date of ten that Richard Branson adds.

As part of collections, we tripled our entry level Broadband speeds to make 30 Mb, i.e. Superfast Broadband as standard. And we make TiVo as standard. Superfast Broadband, 30 media TiVo, HD all for an entry level price of 25 pounds. These collections are enhancing mix, Triple Play, simplicity, and ARPU, but driving demand for the higher tiers. For example, 60% of those taking a collection in the second quarter chose Premiere, or VIP. So Premiere is 60 Mb. Premiere is for that Pay TV XL excluding Sky premiums.

Both of these factors, and in fact Triple Play as well, we saw Triple Play increase some 16,000 Triple Play net ads in the quarter. This was a loss of 4,000 in Q2 last year. And both of those facts that the onboarding ARPU for new customers is growing nicely. And it is growing at a greater rate than the pricing inflation that we're putting in the market, a healthy statistic in terms of predicting customer lifetime value in the future in terms of unity streams. It's simple bundles for customers, and it's simpler for them to understand and for our staff to sell. So the majority of customers are now asking for a collection by name. And 70% of new Triple Play customers took it as part of a standard collections bundle. So really starting to drive simplicity through our customers and prospects.

Because also collections appeal to our existing customers. And we're successfully migrating existing customers to these collections, and as a result of that also seeing upgrade in terms of higher tier. This is enhancing customer value and obviously ARPU.

On to Broadband, overall band. We continue to lead the market in Superfast Broadband. The doubling the speeds program that we announced last quarter is driving this further and accelerating the mix improvement while leveraging off the technical and economic supremacy of our network. Remember, we're doubling the speeds for all of our customers over the next 12 months and not just the privileged few. And really leveraging as I say both our economic and our technical advantage.

We've grown in the Superfast Broadband base that is our 30 Mb and above by 460,000 customers in this quarter compared to 139,000 customers. Now clearly, that includes some of the doubling of your Broadband speeds. But our normal flow of gross Broadband ads and our increased flow of upgrades is included in that number. Now over 30% of our Broadband customers take 30 Mb and above actually half, 50% of our customers take 20 and above.

But I think the most exciting statistic that certainly exceeded my expectations is that even in a quarter where we've been doubling our Broadband speeds and the entry level of Superfast Broadband in this country is now 30 Mb and 14 pounds, 50, over 40% of gross ads took 60 Mb and higher. Now I expected it would come off the 47% to 50% of Superfast that we were having. But I did feel that it would come off much more than that. It really shows us that this digitally savvy market that we refer to that we're tapping into with both Superfast Broadband and connected TV is a mass market. It is not niche. It is not up-skyer. And it does prove, or it proves the fears of doubling speeds that would significantly slow our net up sale and acquisition tier mix were completely unfounded.

The technical program to double speeds is well on track. We now have some 22% of the network covered.

Now I'm often asked if BT's role out of fiber is affecting our market share. BT fiber is now available in around 6 million of our 13 million homes that we pass. However, when we look at those areas where it's rolled out versus where it isn't, we see no significant deterioration in Broadband acquisition or in Broadband churn. We believe this is because the BT Infinity is largely appealing to back book BT existing customers or customers of other Broadband providers who are using the BT network anyway. In fact, we believe that our on net Broadband subscriber market share has remained flat over the last year despite BT's roll out of fiber. And when you convert that flat market share into an economic market share, our economic market share continues to improve. We carry our higher ARPU. We calling our higher ATPU. We carry our higher free cash flow ARPU customer as a result of the economic advantage that we have in our network.

And by doubling our Broadband speeds, we're leading the market in Superfast Broadband. We have clear advantages now in both network, i.e. technical, and in price, i.e. leveraging our economic advantage. We're very well placed to benefit from this rapidly growing market.

Now doubling the Broadband speeds has provided a couple of very, very interesting advantages for us. Our 30 Mb tier is now only price at 14 pounds, 50, which compares very favorably to the price for similar speeds of our competitors. We're 3 pounds, 50 cheaper than the competitor's kept product for example. Our 60 and 100 Mb tiers are also significantly cheaper than our competitors.

And I think this is further proof of the shift to Superfast Broadband underpinning pricing rationality. We've gone from a place where in the ADSL world, our team met product was at a significant price disadvantage to a Superfast world where our 30 Mb product is at a significant price advantage. And where the resellers have less incentive to a disrupt on price.

Now BT don’t announce their latest fiber statistics until tomorrow, but as at last quarter, we had about 60% national market share obviously on a 50% footprint of Superfast Broadband customers in a market that is accelerating fast as you can see on the graph above.

Onto TV where the strength of virgin media TiVo is contributing to the quality of our subscription revenues as well as to the efficacy of our customer base, and alongside continuing progress in growing, the Pay TV base, our premium base, and our HD base. TiVo continues to perform very strongly in the second quarter. In fact, net ads of 262,000 was even stronger than that in the first quarter despite raising the annual or the monthly subscription from 3 pounds to 5 pounds.

At the quarter end, TiVo was 939,000 homes, which is a quarter of our total TV base, either 30% of our Pay TV base. And we will reach or have reached a million TiVo subscribers this week. It's a pretty strong achievement for a product that was only advertised above the line this time a year ago. It's further evidence as I said earlier in our appeal to the growing digitally savvy segment. It's not just for the few. It is actually increasingly for the all.

And this shift in terms of connected TV and Superfast Broadband coincides with our investment and our advantage that we've created in terms of our network, both economically and technically. TiVo continues to drive mixed improvements as TiVo customers are more likely to take higher tier products. So 65% of TiVo customers take Premiere or above. They take extra-large TV or above.

We continue to do a good job also as a distributor of Sky premium content. We're now a key customer for them. Sky premium subscriptions are up 9% year-on-year.

And HD penetration continues to grow nicely as well. Now that HD is standard for new customers, penetration is up to 2/3rds of our base.

Clearly, with the launch of YouView and other over the top connected TV services, the market is changing rapidly. I feel we are very well positioned to continue to grow in this space. New platforms, new entrance, new services are driving fragmentation of content. And although providing greater customer choice, also have the potential of creating confusion for customers with multiple providers through a single device. Consumer demand for simplicity in this environment will continue to grow, hence our success with collections.

Connected TV services require the best connectivity. Given our speed and spectrum advantage, which I hope you're all familiar with, we're uniquely positioned to deliver the most optimized and consistent service.

And in the same way as we've created first mover and best mover advantage, in [inaudible] three and therefore Superfast Broadband, I believe we have the opportunity. Clearly we have already created first mover for connected TV and not by 10 or 100,000, a million installed subscribers. And we have best mover in connected TV.

TiVo is a significantly superior product to the impending YouView. It has far greater intelligence search, recommendation, and discovery tools, which means that our customers wherein combined with a far greater array of content whether that be free, over the top, or pay will have a significantly superior product and well-priced and well positioned as part of our essentials 25 pound bundle.

TiVo braces over the top applications and clearly these are distributed by a dedicated IP pipe. Separate from the dedicated IP pipe or spectrum such as video on demand, separate from the broadcast taking advantage of our connectivity advantage.

Our satisfaction ratings as measured by net promoter score for the massive customers that now exist, the million customers, is still 19 percentage points higher than TiVo plus XL customers. Our customers love it. We bundle TiVo with our superfast broadband in a very simple and great value bundles as you saw when I talked you through our collections. And we have an exciting product roadmap ahead of us with the next step being the launch of iPad companion app with live streaming in the fourth quarter.

And our decision to actually leverage off a mass player, i.e. TiVo who is distributing millions of TiVo applications around the world, I think we will reap the advantages going forward because we will be at the forefront of application and technical delivery of the back of a scale player, i.e. a global player that I think will insure that we continue to be clearly first mover but best mover.

Mobile, more of the fast. The vast majority of the 54,000 connections we made in contract in the quarter were sold to virgin media customers. We saw continued improvement in the overall contract mix. And that's offsetting the pre-pay declines and in fact the MTR cuts to deliver modest reported revenue growth.

Contract revenue is up 15%. Customers are up 22%. And the contract handsets in cable homes are up 32% year-on-year. Now the regulated MTR cuts are distorting the underlying growth rate. The negative impact on revenue in the second quarter was around 6 million pounds. Without this mobile revenue, it would have grown by around 7%. But of course, from our point of view, that's a valid statistic because as a fixed line telephony operator as well, the MTR cuts whilst they impact our revenue, are OCF and gross margin neutral given the off settings in terms of the overall group.

We expect the MTR cuts for the whole year to be around 25 million pounds. And the successful cross sell is continuing to drive corp place subscribers up 18% to 742,000 just over a 15% raise. Bu the main benefit that we see in terms of mobile is the impact it has on lifetime value for our overall customer base. And we continue to see higher levels of advocacy and higher levels of retention in our quad play customer than we do in a triple or a dual.

Now business revenue, as I said earlier, in a tough competitive environment, in a tough economic environment, which are two statements that I think I've probably said three or four times now in respect to the consumer market, whilst we're pleased with our progress in the consumer environment and the consumer market, I am actually delighted with our progress in terms of business revenue being driven again by the same needs for data consumption with an enterprise. And so our refocused strategy in operational improvements are driving strong momentum in winning and delivering new business.

Data revenue's growth is 16% underpinning total revenue growth of 9.8% or circuit 10% in the quarter. It's not a key driver for the overall group revenue growth making up 36% of total growth. And I expect it to continue to be a key revenue driver going forward. It's being driven by revenue from key infrastructure contracts that we've already won such as MBNL and London Group for Learning.

The key to our growth opportunity that there are only two access networks in this country. The critical success factor to decent economic returns, the B to B is having an access network. Just look at the poor economic returns of cable and wireless, the second largest B to B enterprise. Those economic returns are not going to fundamentally alter because Vodafone does not have access to an access network. In fact, a little statistic, we have nine times the length of fiber of cable and wireless.

And just finally, let's talk a little bit about the public sector opportunity. Public sector remains a key growth opportunity for the business division to market worth over 2 billion pounds. And it's dominated by the incumbent. With a strong position especially on net, we were able to leverage our consumer network. We have a 20% market share circa of the local government and the local education market. And a 15% share of health and emergency. And we'll like to replicate that in other areas of government including central government that's absolutely focused on selling what we've got. That's the key to our economic returns is insuring that our virgin media business team sell our access network and our access network predominately.

And being awarded a position on both the PS and connectivity, and the services frameworks, which is central to the government's ITT, ICT strategy will help us as it will become the default route to market.

Now our low cost space and our advanced network capability makes us a credible alternative to the incumbent. And there is an appetite across central government to disrupt the status flow.

Now we have already created an identical if not better economic model for enterprise to what we have for consumer. It is an annuity strength. It is a predictable annuity strength. And it has the same economic returns as consumer in the way in which we market and sell. So its contribution to overall revenue growth for the business is equaled by its contribution of OCF and free cash flow.

So just before I hand over to Eamonn, I think it's been a solid quarter. I think we've managed to deliver well against the price increase. I think the market that we're in in the consumer space will continue to be tough. And the competitive environment will continue to be tough. But we are pleased that the strategy that we have employed has resulted in a 4% revenue growth for the quarter and a 412 million pounds OCF.

Eamonn O’Hare

Thanks, Neil, and good afternoon everyone. And good morning to our colleagues in the U.S. Let me kick off with a summary of our financial performance for the quarter.

As you can see from the chart, Q2 performance reflects improved revenue growth, which combined with operating leverage has resulted in solid OCF and free cash flow growth. You can see that the revenue has come in at just over a billion pounds, 1 billion 27, growing at 4.2%. And that was quite pleasing, it was the first time ever that Virgin Media’s had a second quarter where the revenue’s exceeded a billion pounds. OCF came in at 412 million pounds, 5.1% growth and free cash flow at 128 million pounds, just shy of 5% growth.

And the financial performance in the quarter was underpinned by gross margin expansion. The gross margin, as you can see, is up 4.7% to 60.7%. We again exhibited strong cost control.

SG&A came at 212 million pounds, an increase of 3.8%, but excluding marketing span, costs were actually down almost 3%.

Interest expense at 98 million pounds, that was down 10% and reflects the ongoing enhanced credit status of the business and recent refinancings.

And the low cash CapEx at 186 million pounds was up nearly 16%. This was driven by our broadband speed upgrade program and over all CapEx remains within guidance. I’ll talk a little bit more about that in a little more detail later.

Turning now to the revenue growth drivers in the quarter. As I just mentioned, overall revenue grew 4.2% versus 2.4% in Q1 this year. Underpinning this revenue growth, we had solid performance in the core cable business, revenue of 706 million pounds and growth improved to 3.5%. It’s worth mentioning that core cable revenue in the quarter was slightly flattered by better-than-expected phone usage revenue, and this is due to unseasonably wet weather. And this probably, in our view, added approximately 3 million pounds of revenue in the quarter.

Mobile revenue at 136 million pounds, grew by 2.9% and as Neil has just mentioned, excluding the MTR headwinds, the underlying growth was more like 7%. This now leaves the Mobile business, at the halfway point of the year, in a pretty solid position; 2% growth year-to-date.

But given the impact of further MTR declines, we are not expecting full-year revenue growth much better than flat. However, as you are aware, our key metric in the mobile business is contract net adds, which Neil has just mentioned increased by 54,000 in the quarter, driving Quad-play mix up from 15.4% - up to 15.4% from only 13.2% a year ago.

And finally, it was pleasing to see business with revenue of 166 million deliver strong growth at 9.8%, reflecting the 16% growth in data as you just heard from Neil.

Let’s have a look at the SG&A costs in a little bit more detail. Total SG&A of 212 million pounds was driven by marketing expand, and increased almost 4%. However, excluding marketing costs, SG&A was down 2.5% at 157 million pounds as we continue to maintain our strong discipline on costs and focus on driving operating leverage.

Marketing costs in the quarter committed 54 million pounds and that was an increase of 28% year on year. Although, marketing spend remained elevated in the quarter, growth is lower than the 50% we saw in Q1.

The key driver of the marketing spend in Q2 was the launch of the new collections fronted by David Tennant and Richard Branson, which as you heard from Neil has enhanced mix, triple play, and ARPU.

And finally, as communicated at the start of the year, marketing spend has been front loaded into the first half. And as a result we don’t expect second half marketing spend to be significantly higher and hitched to 2011.

Turning now to CapEx. Let me start by repeating and reconfirming the guidance we gave at our Q4 and Q1 results. It’s actually read at the top of the slide, and I’ll just voice it over for emphasis.

Excluding the incremental 110 million investment in 2012 for the broadband speed upgrade, Virgin Media’s cash capital expenditure will remain within current guidance of 15 to 17% of revenue for 2012 and for future years. In addition, it is expected that the cost of assets required 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.

Now, I have set out for you here in this chart, as I did last quarter, a reconciliation of our accrued CapEx to our cash CapEx for Q2 and Hitch 1 this years and last. I’ve also split out the CapEx into base CapEx and the CapEx we are spending on the broadband speed upgrade.

So let me run through the key components of our Q2 capital expenditure. As you can see, accrued CapEx at 238 million pounds increased by 63 million pounds with the main drivers being 33 million pounds on broadband speed upgrade and 28 million pounds higher CP spend driven by TiVo. Remember, we are not selling TiVo in any great quantity in Q2 last year.

In terms of capital leases we added 30 million pounds in the quarter, within our 2 to 3% guidance. CapEx creditors increased by 23 million pounds, compared to 9 million increase last year.

As in Q1, the main movement here was the B2B speed upgrade where we accrued 33 million pounds, but only spent 16 million pounds in cash CapEx. This payment lag is likely to unwind in the second half. And finally, total cash CapEx came in at 186 million pounds for the quarter with base CapEx of 169 million pounds at 16.5% of revenue.

Finally, I’d like to update you on our capital return progress. As you are aware we have a nice 1.2 million of capital returns since mid-2010, including 1.25 billion of shared buybacks. Since mid-2010 we have repurchased 7 million shares, sorry 67 million shares for just over 1 billion pounds. This includes 4.2 million shares repurchased in Q2 for 60 million pounds.

Share count has reduced from 332 million in mid-2010 to 274 million at the end of Q2. And today, we have a nice additional accelerated stock repurchased for the sum of $175 million. This is a further trench of our existing Board authority. $175 million represents circa 3% of our current market cap and the current prices would mean the repurchase of an additional 7 million shares.

Post this latest transaction; we will have 122 million pounds remaining buyback authority to the end of this year. This represents another circa 3% of our current market cap. Assuming current share price, this would mean we have repurchased 25% of our share account in mid-2010 by the end of this year.

So that concludes our Q2 2012 results presentation. And with that I’d like to hand back to Richard who will kick off the Q&A.

Question-and-Answer Session

Richard Williams

Okay, thank you. I think we have some microphones. Let’s start with Simon. Can you say your name and your institution please?

Simon Weeden – Citigroup, Inc

Yes, it’s Simon Weeden, and apologies for keeping out phones on a bit of a technical financial question, but working capital moved quite heavily adversely in the quarter and therefore also year-to-date. So I just wonder what the outlook at the second half is the way you expect to end the year?

Eamonn O’Hare

Yes Simon, good question. Q2 is seasonally a low point in working capital. As you can see for the three months ended the quarter, the working capital is a negative 72 million. A couple of key drivers in there, about 20-odd million of incremental receivables, about half of that may be 15 million pounds of that was because of one of our largest banks actually ran into some technical glitches at the end of the quarter, and we ended up having payments kind move over the quarter. That was kind of one big driver.

We also had about 20 million pounds of a pretty traditional PAYE International Insurance in the bonus payment, which is also a big piece of the driver as well. And then we had some other withholding tax and other pieces of onshore options, et cetera.

The second half of the year, typically unwinds, and my expectation is, it will unwind to a degree. I don’t expect the working capital for 2012 for the full year, to be any worse than it would be for 2011.

Richard Williams

John?

John [Crease] – Memorial

Thank very much, John [Crease], Memorial. Am I aloud one or two, I can’t remember.

Richard Williams

Can we just have one, and then we’ll comeback.

John [Crease] – Memorial

Just for the one, that will teach me for asking the question. Okay, how probable do you think it is that BT will withhold primary league football from you? And if that happens, what’s the plan from your side, please.

Neil Berkett

It’s the $64 question. Our private conversations and their public statement would – you would reach the conclusion that they will provide wholesale access to football. What hasn’t been discussed, of course, is commercial terms. So at the moment, it is our expectation that they will provide. Clearly, we’re not naïve and that we have explored other options, which I’m clearly not going to talk about today given that we’re yet to through those negotiations.

I do not see the BT acquisition of football rights as being a game-changer in respect to our competitive position. We have continued to explore a strategy that would allow us to be inclusive, but if needs be, not. So we don’t have any more information than what I’ve just disclosed.

John [Crease] – Memorial

Thank you.

Richard Williams

Robert?

Robert Grindle – Deutsche Bank AG

Thanks, it’s Robert Grindle from Deutsche Bank. The question is about business data, a very good quarter this quarter. It seems that wholesale was massive, and drove a lot of the growth, whereas wholesale was negative last quarter. It seems to jump around a lot, maybe give us a bit of color as to what’s driving that line to give confidence that it stays up longer term?

Neil Berkett

The principal driver of that is NB&O, which is still somewhat lumpy as we go through the installation process of the rings and starting the installation process of the circuits. While the accounting treatment smooths it somewhat, it doesn’t smooth it completely. And therefore, that is the principal without going into the detail delta between Q1 and Q2.

But as I said at the end of Q1, we do not expect to have anywhere near the lumpiness in overall business revenue growth that we saw in 2011, which I think from memory was plus 14, minus 1, plus 1, plus 14. It sounds like a tennis score almost. But, as I said, I think business revenue will be predictable, albeit potentially not at the rate we’ve seen in the last quarter or two.

Richard William

Carl?

Carl Murdock-Smith - JP Morgan Chase & Co

Hi, Carl Murdock from JP Morgan Chase & Co. Just picking up on your commentary about the bad weather, trying to look forward to this quarter, obviously the month started with some bad weather, although it’s hard to remember on a day like today. Also we have the David [inaudible] director of boxing fights, and then also you have the Olympics. What are your kind of broad expectations on how those events might impact ARPU and telephony revenues this quarter? Thanks.

Neil Berkett

I think I’ll pass over to Eamonn, but I think trying to predict the weather is a little bit difficult. I think the one thing I can say, is in my prediction in the long-term is that we will get a lot of rain. Unseasonably wet weather is becoming a little bit more predictable.

Eamonn O’Hare

I think you have to think about telephony usage on an annual bases rather than on a quarterly basis. And even with hugely unseasonal wet that we had in the second quarter, we’re talking about 3 million quid. So I don’t, at the moment, predicting material, seasonal intra-quarter sort of impacts the ARPU.

Carl Murdock-Smith - JP Morgan Chase & Co

Boxing and Olympics?

Neil Berkett

Well, it’s hard to know what’s going to happen with the Olympics. It starts on Friday, we’ll just have to wait and see. I mean, in some ways it could be a positive because of the multi-channel streaming, it will be a hit in my view with our customers. But it’s hard to know how people are going to behave through what will be an unprecedented time in London, so we’ll just have to wait and see.

Richard Williams

Walter

Walter Fry – Merrill Lynch

Hi there it’s Walter Fry from Merrill Lynch. I was wondering if you could help me. Going into the results, consensus free-cash flow for the full year was 441 million, and you done 74 million for the first half. How do we draw that up to get to the second half numbers? Thanks.

Eamonn O’Hare

I think you quoted the wrong figure for the first half.

Walter Fry – Merrill Lynch

On page 13, if you look at the numbers, our floating cash-flow minus CapEx gets you to 74, so that takes into account all the others by the new definition of simplified free-cash-flow.

Eamonn O’Hare

Do you want to just repeat your question?

Neil Berkett

What page are you looking at?

Walter Fry – Merrill Lynch

It should be page 13.

Eamonn O’Hare

Perhaps maybe I could be just a little bit of help just in a broader sense. We did say we would have CapEx a little bit front loaded in the first half. You’ve seen that with the accrued CapEx. I hope we have led [inaudible] in the slide quite a bit of detail about what’s happening around the re-tiering, because that has a very different dynamic and it’s a one-off spend of 110 million pounds this year. And as you kick off that program, what you are getting is, you’re getting a little bit of a lie between when you commit to that capital and when you actually pay for it because simply it’s a one-off program as you kick off through the first couple of quarters. As I mentioned, we’ve kind of committed in the quarter 33 million pounds, and we’ve only spent 16 million pounds. I expect that dynamic to actually catch up with itself in the second half. So what you are going to see is, you are going to see the working capital creditor on CapEx actually start moving the other way for you.

I think the key thing to focus on, that are our guidance that outside of the 110 million pounds, or cash CapEx, we are expecting to be within guidance, not expecting, we will be within guidance of the 15 to 17% of our revenue. And that’s the kind of the true north of where we’re trying to manage the business to.

Walter Fry – Merrill Lynch

Thank you.

Neil Berkett

Walter, I think the figure you quoted [inaudible]. The figure you quoted for consensus is an all free-cash-flow definition, and for the first six months that was 216 million pounds.

Walter Fry – Merrill Lynch

So how would you adjust consensus free-cash-flow for actual free-cash-flow?

Eamonn O’Hare

Well the consensus free-cash-flow is actually less net interest, less CapEx, that’s how we collect it.

Richard Williams

Frank?

Frank Knowles – New Street Research

Yes, it’s Frank Knowles from New Street. Just wanted to – last quarter you talked a lot about the time limited headwinds and notably fixed-to-mobile calling and how that’s declining. I just wonder, do you see that accelerating somewhat [inaudible] started offering a very big bundle of free fixed-to-mobile minutes – is that something that you thing is going to change the second half of the year?

Neil Berkett

We are not seeing any quarter-on-quarter change to the underlying trend that we’ve seen in terms of fixed line telephony usage, it continues to decline in minutes at about the same rate as it did last year. And it is our prediction that it will continue to decline at that rate for the next two or three years until the issue goes away. I think you will see from time to time, including ourselves, initiatives that mitigate that – we’ve had several products that we’ve put into the customer base to encourage customers to migrate from the usage base to a fixed base, and some of those things do include a greater allocation of fixed to mobile through the point that you made. But I think structurally you are not going to see anything materially different from what we’ve discussed.

Richard

Tim Boddy on the right to the front please.

Timothy Boddy - Goldman Sachs Group Inc.

Thanks, Tim Boddy at Goldman. Some of the shareholders I talked to at – there’s kind of an argument as to moving your listing to the UK, and potentially changing the mix of your shareholder administration towards more dividend to less buy back. Can you just walk us through your thinking about such a move, what would actually have to happen for that to place and how long it would take? Thanks.

Eamonn O’Hare

Yes, I think that I could help you with that a little bit – you know, we have made quite a lot of moves in the last number of years to actually make the company a little bit more UK centric the way the operations are. We’ve moved to the secondary listing, and you’ll see the composition of a Board as much more UK dominate – clearly management presenting in London is clearly a step towards that direction. And I have worked hard with Richard and the team, and Neil to try to get more U.K. [inaudible] funds into the show register and that percentage is actually increased over the past couple of years.

Moving to a full listing, that’s another big step and I – it would need very careful consideration, there are not insurmountable issues, but there are some very, very tricky issues. Investor flow back is one big issue because our register is still prominently dominated by U.S. holders, some of which can’t actually own UK stocks, so that’s tricky. I think tax is quite complicated. We have a complicated tax structure – the good news is we have a very positive value accretive tax structure, but it’s quite complicated and that needs to be filed through quite carefully. There are considerations around the convertible note in terms of the indentures there, so that needs to be followed through as well. And there’s some corporate government stuff as well because the shareholder rights under a U.S. listing are very different perhaps under UK listing. So I’ll give you a couple of examples in the things that you need to consider and that, you know, we actively do thing about and consider, and I hope that gives you a bit of flavoritism.

Timothy Boddy - Goldman Sachs Group Inc.

I mean, is there a sort of a moment that would tip you over the brink and make you think it was worth going for it?

Neil Berkett

I think it’s fair to say, Tim, that the subject is debated from time to time, but there are no immediate plans to move to a full listing in the UK. But as Eamonn said, it is a possibility in the future if we were to find our way through the issues we had.

Richard Williams

We will take one more question from the floor from Steve in the back, and then we will go to the phones just to float to the guys on the phones. Just one from the gentleman there, thank you.

Steve Martin – Areton Research

It’s Steve Martin from Areton. I’ll ask a question on buybacks and leverage if that’s okay. Looking beyond this year – I mean, you’ve got a target of approximately three tons levered by mid ’13 if I look at consents. Have you thought slightly above that, but there is various definitions you can use. So as we sort of look at our expectations for buybacks beyond this year, how should we thing about the trajectory and the speed? You know, will you stop to hit 3.0 debt, will you be happy with 3.1, 3.2 times – you know, how do we think about the rate to which you buy back stocks and you don’t move to more dividends beyond the end of this year? Thank you.

Eamonn O’Hare

Yes, good questions, Steve. Let me help you and the rest of the audience with that. I mean, clearly when we set out on the journey to get to circa three times net-debt leverage, which was, you know, going back a couple of years – you know, the definition you can construe in different ways. So it can be one a one quarter multiplied by four basis. If you take the EBITDA at one quarter and multiply it by four, it’s called an LQA, or you can do it on the last 12 months business, which is slightly less flattering if you want to get to that number.

I think we want to get to a place where we’re not simply going to succeed on that metric in one quarter and then suddenly, because of seasonality, find ourselves in a different zip code the following quarter or quarter after. I think the definitions start to converge around the middle of next year, and that’s why we have always been comfortable with that. It doesn’t need to be exactly 3.00, no, it can be a little bit below that, it can be a little bit above that – I mean, companies have to learn the right practical environment and you don’t raise that in chunks of less than 3 and 400 million and quite at a times. So, you have to be realistic about that, but I think the key message is that we’re on track to hit that circuit three times by the middle of next year, and I – that will, to your point, allow us to open up into a new phase of capital returns.

Richard Williams

Okay, do we have any questions on the phones? Please, is that possible, somebody give me a nod.

Operator

(Operator Instructions). We have a question from Nick Lyall of UBS, please go ahead.

Nick Lyall - UBS Investment Bank

Hi, it’s Nick from UBS. Just one on potential wholesale, please – I think in the latest .com presentation, it talked, again, about looking at infrastructure, and the flashbulb numbers in particularly impressed it from yourselves. So, is there any feeling that you think you are going to have to argue against .com, maybe at least talking or discussing wholesale use of Virgin Network? Thanks.

Neil Berkett

Hi, it’s Neil. To date, we have I think over the last three or four years, undergone several reviews in respect to the U.K. broadband market, and each one of those reviews the regulator has concluded no requirement of for opening up Virgin Media Network wholesaling. The latest position from Europe also supports that, in fact, I would argue that an unencumbered Virgin Media in the U.K. unencumbered from a need to wholesale, Virgin Media in the U.K. was a positive thing for U.K. POC, and that would provide infrastructure, true infrastructure competition to the encumbered and that argument to date has stood firm for both the U.K. regulators, politicians, and European. But going forward I still don’t see any immediate shift in that, but obviously, there is always a voluntary position, and again, I’m not pleased for the avoidance of doubt not flagging anything there that – I’ve always maintained that an organization that is regulated in an unwilling participation is an organization that is not particularly well run, and therefore, I think if it was a true economic opportunity for us to wholesale at any point in time we would explore it.

Nick Lyall - UBS Investment Bank

Thank you.

Richard Williams

Can we take another question from the phones please?

Operator

We move on to Bryan Kraft from Evercore. Please go ahead.

Bryan Kraft – Evercore Partners

Hi. Thank you. What are your thoughts on a line rental price increase later in the year? And just regarding TiVo, how are you thinking tactically about achieving your goal, fully penetrating the base in a few years in terms of, you know, pricings, CPE, different ways of tiering the product? Thank you.

Neil Berkett

Bryan, line increase, I mean, we don’t – we don’t – with all due respect, we don’t tend to announce price increases at these conversations. So whatever we were to do in respect to overall pricing strategy, rather that be a line rate increase or an increase on any of our products, we would, as we always do, take into account the impact we think that would have both financially, but also the impact it would have on our customers and therefore the overall competitive environment.

I think we’ve demonstrated that we’re not bashful in taking price, but nor are we, you know, when we’ve learned that we’ve crossed the line, I think we understand elasticity pretty well. So we’ll make a judgement as in when.

Your question in respect to TiVo rollout is a really interesting one because we obviously played with elasticity when we went from 3 pounds to 5 pounds, we can control the right subject to the competitive marketplace by being more stringent on installation fees than not. And so we are constantly, not on a daily basis, obviously, but certainly on a quarterly basis, thinking through the advantages in having a TiVo-only middleware plays the economic drag that it would have particularly on our CapEx, plays the the ARPU uplift and increase in terms of customer advocacy. So I think you’ll see us do a bit of all those things in the next two or three years.

What we do know is that in the quarter just gone, we had an extremely high compliance rate of the 5 pounds in the 90s. We had installation rates of somewhere in the 20 or 30s because of the competitive marketplace for new customers, higher than that for existing customers. And we saw 262,000 TiVo installations. So healthy financial return, healthy volume. I guess we could play again and I did say, we probably will at some point in time to try and find that optimum point between rapid rollout and optimum financial return.

But I might not have been overly helpful there, I was just trying to give you the themes that we go through when we’re thinking about making those decisions.

Bryan Kraft – Evercore Partners

If I could just follow up, Neil. I mean, I guess maybe what I’m trying to get at is if we assume that not everyone is willing to pay 5 pounds a month for the product, you know, as you get to a certain level of penetration, maybe you have a more price-sensitive segment of the base and therefore it doesn’t warrant the same capital investment. Do you have the option of using a less expensive CPE solution, i.e. you know, non-DVR boxes, maybe using some of the older CPE and putting – even if it’s a less robust TiVo middleware in those boxes, are those options that you have to get there? And are those options, you know, part of the thought process that you’re considering?

Neil Berkett

Yes, they are, Bryan. So we are already exploring non-Cisco, Stroke, Samsung devices that circa 100-and-something pounds to roll out elements of our middleware. We’re launching in the fourth quarter a companion app on the iPad that will ultimately move to a full application across multiple devices. So to the core of your question, certainly as we go further out in time, I would predict that there will be more efficient ways of delivering a TiVo service to a customer who’s not prepared to pay for a DVR box.

Bryan Kraft – Evercore Partners

Thank you.

Richard Williams

Can we take another one? Thanks Bryan. Can we take another question from the phone please?

Operator

We move on to Tom Egan from Cannacord. Please go ahead.

Tom Egan – Cannacord

This is super, thank you. I have a question on the churn on broadband subscribers. Of the M-level video subs that are churning out, what are you seeing in terms of [inaudible] on the [inaudible]. Thank you.

Neil Berkett

We haven’t – I’ll try and help you, Tom, because we haven’t – we haven’t given any granularity of what’s happening to that base. And clearly, some of that base is moving in – from – from free TV to PayTV, moving from M to M-plus. The whole idea of creating essential collections at 25 pounds, which was super-fast broadband and TiVo, was to help us look at that base. We may explore other options to look at that base as you’re starting to see the level of decline in the – in the free TV bases reduced in the last quarter.

And obviously, some of them are leaving us and those that are leaving us because they don’t value super-fast broadband at 14 pounds 50, I suspect we’ll – at the core, I suspect will continue to leave us because they were acquired under a, you know, under quite a different regime in terms of the products [inaudible] and go-to-market.

Having said all of that, I am very, very encouraged by the right of our PayTV growth, 38,000 PayTV subscribers in the second quarter, I think was a very strong performance. If you look at Q4 and Q1, both were circa 50,000 PayTV subscribers, which I think compares very favorable to the incumbent PayTV provider and in fact the new entrant into PayTV.

So what we’re doing around our product strategy is super-fast broadband and TiVo is working and we’ll continue to explore ways and means of retaining value in the 16% of our TV base that still sits as [inaudible].

Bryan Kraft – Evercore Partners

Right. Neil, have you see any change in that connect rate, so to speak, of the – of the M-level video that are turning out on data? Have you seen any change, say 2Q either versus the last quarter or last year? Thanks.

Neil Berkett

I'm sorry. I’m struggling to pick up every word. I think I got the – I think I got the intent of your question though. The right of – the right of churn in the second quarter that you’ve seen in that segment reduced over has sequentially been broadly the same churn on a quarter-by-quarter basis. And as – I’ll just go back to my more broad question – answer should I say, which is we are exploring ways and means in which we can economically retain that base, but we won’t do that at any cost. It’s just that I – we haven’t disclosed the granularity of that mix and we get into that detail and I think I’ll end up twisting myself inside out.

Bryan Kraft – Evercore Partners

Great. Thank you.

Richard Williams

Thanks. We’re going to take one more question from the phones and then I think we’ll take one from the floor if anybody of hasn’t asked a question yes. So one more from the phones please.

Operator

We move on to Matthew Harrigan from Wunderlich Securities. Please go ahead.

Matthew Harrigan – Wunderlich Securities

Thank you. Can you just say any thoughts you have on the gigabyte Wi-Fi 80211 AC in terms of your possibilities for that or how it might impact the playing field of the UK and some of the CE companies and some of the offers in the UK – or the U.S. are obviously getting pretty interested?

Neil Berkett

I’m sorry, Matthew. I only picked up about half of that. Let me try rather than asking you to repeat the question. Our view on Wi-Fi is that you need to find an opportunity that you can monetize it. And therefore, purely rolling it out as a – as an extension of what you’re current offering is, I think is problematic. Although, you do need to take into account what competition is doing. And it is our view that creating a partnership taking us from fixed through Wi-Fi, through small cell to macro cell is the right way in which we can provide to our customers a truly competitive service that you can monetize. And so, if you take London Underground, it’s underground and there’s only one Wi-Fi operator there and therefore it is defined in terms of your ability to monetize it both in a retail and a wholesale sense.

What you will see us doing is working with mobile operators or mobile operator creating if you’d like that seamless flow from fixed to Wi-Fi to small cell to macro and obviously including LTE. I'm sorry, Matthew, I didn’t get the specifics of your question. I hope I answered it broadly.

Matthew Harrigan – Wunderlich Securities

No, I was actually just asking more about AC and if it’s faster than Wi-Fi, but it sounds like you encompassed that in your plans. Great answer. Thank you, Neil. I appreciate it.

Neil Berkett

Cheers, Matthew.

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