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Virgin Media Inc. (NASDAQ:VMED)

Q3 2012 Earnings Call

October 23, 2012 8:00 AM ET

Executives

Richard Williams – IR

Neil Berkett – CEO

Eamonn O’Hare – CFO

Analysts

Nick Lyall – UBS

Tim Boddy – Goldman Sachs

Bryan Kraft – Evercore Partners

Vivek Khanna – Deutsche Bank

Carl Murdock-Smith – JP Morgan

Simon Weeden – Citigroup

Tom Eagan – Canaccord Genuity

Robert Grindle – Deutsche Bank

Matthew Harrigan – Wunderlich Securities

Stuart Gordon – Berenberg Bank

Paul Sidney – Credit Suisse

Adam Rumley – HSBC

Operator

Good day and welcome to the Virgin Media Q3 2012 Earnings Release Conference Call. Today’s conference is being recorded.

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

Richard Williams

Thank you, Richie. Good morning or afternoon to you all and welcome to our Q3 results call. Please can I draw your attention to the Safe Harbor statement on slide two where we set out cautionary disclosure, which should be read with any forward-looking statements we make today. I’ll also point out that we will be mentioning certain non-GAAP measures today. The required disclosures with respect to these can be found in the slide appendices.

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

Neil Berkett

Thanks, Richard and thanks for joining the call, everybody. We’ve delivered another solid set of results in the third quarter, which were underpinned by strong customer growth. I’ll quickly run through the highlights.

Firstly, we delivered modest revenue growth of 2.8% from multiple sources. A key driver continued to be ARPU growth, which came in at 1.8%. However, operationally, we had a very, very strong customer growth with 40,000 net adds, reflecting improved churn, something I’m particularly pleased with.

Churn came in at 1.4% and disconnects were down year-on-year for the fourth quarter in a row. I was pleased to see the business division deliver another solid quarter with revenues up 9.5%. OCF was up 6.1% to £423 million, reflecting revenue and gross margin growth combined with flat SG&A. Free cash flow was down, reflecting the incremental capital investment in our broadband speed upgrade program. Eamonn will take you through the financial details in a moment.

So my next slide is a repeat of the slide we presented for the last few quarters, updated for the third quarter results. We continue to generate sustainable, modest revenue growth through multiple levers.

In respect to customer growth, we had 40,000 net adds, reflecting reduced churn. Disconnects were down 34,000. In pricing, we put through an increase in April, quite clearly this did not stimulate churn as might have been feared, in fact, quite the opposite.

Why is this? Well, firstly, we believe that our increased product differentiation is underpinning our ability to increase price. We’re doubling broadband speeds to over 4 million broadband customers. TiVo is transforming the digital entertainment experience and more of our cable customers are taking a great value mobile service from us.

We’re giving our customers great value for money with improved services. Therefore, we’ve been able to increase price without triggering increased churn. We’re making returns on our investment in product differentiation through higher prices and reduced churn.

Secondly and importantly, inflation is occurring in the UK telecom sector and has been for a while. We think this will continue. Fiber investment, rising content costs, and continued product development are underpinning value for money and price increases.

Regulation is also supportive. Ofcom is not regulating the wholesale charges for BT’s fiber. The European Commission is supportive of rising prices and rising ARPUs, reflect investments in fiber. This is all feeding into higher prices. Most recently, we have seen BT announce a 6% line rental increase and 6% – and up 6% – my apologies – and Sky announce an 18% increase.

Moving on to tier mix; this is improving across our product set. Over 40% of our broadband gross adds took 60-meg or above. Our pay TV mix improved and we saw continued growth in TiVo penetration to 30%, cementing our first mover status.

In respect to product cross-sell, we’ve improved triple play to 65% and quad play to 16%. We added 30,000 triple play and 15,000 quad play customers. The cross-sell of contract mobile into our cable base is driving 6% growth in contract mobile revenue despite the MTR headwinds.

In respect to business data, data revenue grew by 20% in Q3, and total business revenue is up 9% year-to-date. Our multiple revenue drivers gives us continued confidence that we can continue to drive sustainable revenue growth. Combined with our operating leverage, this will continue to drive strong free cash flow on a long term basis.

Let’s go into more of the operational detail and start with cable. There are obviously two drivers for cable revenue; customer growth and ARPU. As I said before, Q3 customer growth was strong at 40,000, compared to just 6,000 a year ago. I think this is a good result in the face of a challenging macro environment and increased prices and was driven by lower churn. We think this is due to the improved product differentiation, such as doubling broadband speeds and TiVo, but also our continuous improvements in customer service. Frankly, we’ve also done a better job of landing this year’s price increase.

I’m pretty happy with the net adds performance, it was actually a bit stronger than I expected. If I look over the last 12 months, our customer base has grown by about 1%. So we now have good evidence that customer growth is becoming a revenue driver.

ARPU grew by 1.8% to £48.73. This was slightly lower growth than in Q2, which as we pointed out last quarter had benefited from around £3 million of wet weather related phone usage revenue. You’ll also know that we are lapping a line rental increase that took place in Q3 2011.

With broadband, we continue to lead the market with superfast. Our speed doubling program is driving us further, leveraging off the technical and economic supremacy of our network. Over 40% of our network has been upgraded for doubling speeds and will remain on track to complete this by the middle of next year. We have grown the superfast broadband base. That is, 30-meg and above by 453,000 this quarter.

This is underpinned growth in our total broadband base, which was up by 57,000 compared to just 24,000 in Q3 last year. We now have two-thirds of our base on 20-meg or higher, and 42% are on 30-meg or higher. But as in the second quarter, the most exciting step for me is the percentage of gross adds that are coming in at 60-meg or higher, 44% this quarter. So even though customers can choose 30-meg for just £14.50 pounds a month, 44% are choosing to take 60-meg or higher.

For me, this really demonstrates strong demand for high speeds and the success of our collections. This is not a niche market. This is a mass market. We continue to see strong growth in customer data usage, adding together broadband, VOD and TiVo over-the-top usage, our customers data usage is 54-gigabits per month. This is double the 17-gig national average reported last year by Ofcom. Within the total broadband usage, with 34-gigabits, that is just for broadband usage and that’s up 48% in the last 12 months.

So, moving into TiVo, where TiVo is contributing to quality customer growth. We are the first and best mover in connected TV just as we are in superfast broadband. We offer both, superfast broadband and connected TV in great value bundles. We’re seeking to achieve with Virgin Media TiVo what DOCSIS 3.0 allowed us to achieve with broadband. We’ve added around 1 million Virgin Media TiVo subscribers in the last 12 months and have penetrated 30% of our TV base.

In Q3, having hit 1 million subscribers and achieved first mover advantage, we’re starting to manage the mix between new customer acquisition and migrations to optimize returns. We’ve been financially disciplined in making sure we invest where we’re making the best return. Clearly, the returns from attracting a brand new customer to Virgin Media with Virgin Media TiVo are superior to upgrading an existing TV customer.

So, as you can see from the bottom left-hand chart, we did slightly less migrations during the quarter, while maintaining a strong focus on new customers. This resulted in a fewer overall TiVo adds than it did in the previous two quarters, but with over 200,000 Virgin Media TiVo net additions, the base is still growing rapidly.

The success of TiVo is helping to drive strong TV performance generally. We added 52,000 pay TV subs, which more than offset the decline in our free TV base. In the last year, we’ve added over 200,000 pay TV subs and our free tier is now only 15% of the TV base.

We continue to be an important distributor of Sky Premium content as a key customer of theirs. Premium subscriptions are up 7% to 831,000. We sell HD as standard with no fee for basic to HD content. 70% of our base now has HD. We carry 37 HD channels, which is just one of the many points of differentiation between Virgin and YouView.

We continue to develop and enhance our TV offering to continue to lead innovation in the TV market and add value for customers. So we’re expanding the TiVo experience to other devices and leveraging the power of Virgin Media TiVo on the primary screen.

Virgin TV anywhere, will launch later this quarter and allow customers to take the power of TiVo wherever they go. Customers will have access to live channels on their iPhone and iPad with even more available on their PC, Mac or laptop including thousands of hours of on-demand content.

Customers will also be able to set and manage recordings and series links and even directly control their TV with their iPad. We’re also rolling out multi-room streaming in the coming weeks, a service enabling TiVo customers to screen recordings from one box in another room. We’ve relaunched our on-demand movie service under the Virgin brand with improved accessibility and multi-screen access for both PC and Mac.

The Olympics themselves were a great demonstration of Virgin Media TiVo’s editorial power. We created an Olympics collections bringing together a vast volume of content delivered through different means and simplifying and making it relevant for our customers. This was used by 71% of Virgin TV customers, more than any other platform.

In mobile, we’ve seen continued improvement in contract mix, but regulated mobile termination rates continue to distort the picture and resulted in an overall revenue decline of 3% this quarter. Contract service revenue was up 6% to £99 million, while prepay revenue declined by 22% to £35 million and now represents just 25% of total mobile revenue.

Regulated MTR cuts reduced our inbound mobile revenue by around £7 million in Q3. We expect the total impact for the year to be around £25 million. However, as we’ve said before, we expect the impact on group OCF to be broadly neutral due to the offsetting savings we make in interconnect costs.

We continue to do focus on cross-selling contracts into cable homes with well over 1 million contract handsets in cable homes now, up 25% year-on-year. This is also helping to drive quad play penetration with subscribers up 15% year-on-year and penetration now reaching 15.6%.

The business division continues to be a key driver of group revenue growth. Revenue in the quarter was up 9.5%, driven by 20% growth in data. Year-to-date growth is 8.8%, representing 44% of group revenue growth.

As ever, the nature of the business segment is that significant contracts will cause some unevenness or lumpiness in revenues from quarter-to-quarter. For example, revenue growth this quarter was helped by replacing and enhancing a contract with a key customer. So I would not expect ongoing growth to be quite as strong as this every quarter, as I’ve said before. I think the correct trend is over several quarters, rather than an individual one.

We have good visibility on future growth. The sales pipeline is looking strong and is up 12% on year ago, continuing our strength in the public sector, we’ve recently seen selected as the preferred supplier for the Yorkshire & Humberside Partnership Management Board.

In mobile backhaul, we’ve extended our current deal with MBNL to add an additional aggregation network and an extra 150 sites on top of the 2,000 sites through our existing contract. We are exploring other services with mobile operators. Earlier this year, we won the contract to provide public access Wi-Fi in London underground stations.

We’ve also completed successful trials of new small cell technology in Newcastle and in Bristol with the potential to win concessions from city councils and wholesale to mobile operators.

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

Eamonn O’Hare

Thanks, Neil. So, let me kick off with a summary of our financial performance in the quarter. As can you see from the chart, Q3 performance reflects modest revenue growth which when combined with operating leverage has resulted in another quarter of solid OCF growth.

Revenue grew 2.8% to £1,028 million, OCF grew 6.1% to £423 million, and free cash flow came in at £120 million. This financial performance was underpinned by a number of key drivers.

Firstly, our gross margin percentage expanded by a 4 percentage point to 60.8%. In addition, we again exhibited strong cost control and SG&A was relatively flat, up by less than 1% to £202 million. In terms of net interest, expense fell by almost 7% to £100 million, reflecting our enhanced credit status and refinancings over the last year.

And finally, although our cash CapEx increased by 30% to £203 million, this was driven by our broadband speed upgrade program and overall CapEx remains within our guidance. I’ll talk a bit more about that in detail later.

Turning now to revenue growth drivers in the quarter. As I’ve just mentioned, overall revenue grew 2.8%. Underpinning this growth was a solid performance in core cable. Revenue grew 2.9% to £705 million. This was driven by increased ARPU and customer growth. Mobile revenues fell by 3% as the regulated MTR impact offset contract revenue growth. You remember that last quarter, I guided that full year mobile revenue growth would not be much better than flat, and indeed that is what we have seen year-to-date. And finally, business grew by 9.5% as you heard from Neil.

So, let’s have a look at the SG&A costs in a little bit more detail. As you can see from the chart, total SG&A at £202 million grew by less than 1% in the quarter as we continue to maintain strong cost discipline and focus on driving operating leverage. As previously guided, marketing expense was front-loaded into the first half of the year, so you can see marketing in the third quarter was relatively flat at £47 million.

If we look at it on a year-to-date basis, you can see this dynamic a little bit more clearly. SG&A excluding marketing was close to flat at £473 million. However, the front-loaded marketing expense for the first half is reflected in a 24% marketing increase leading to total SG&A year-to-date up 4.5%.

Turning now to CapEx. Let me start by repeating and reconfirming that our CapEx guidance for this year and future years remains unchanged. For clarity, we’ve once again set out our guidance at the top of the slide and it is also in this morning’s earnings release.

As I did last quarter, I’ve set out for you here a reconciliation of accrued CapEx to cash CapEx for Q3 and the year-to-date this year and last. I’ve also split the CapEx into base CapEx and the CapEx we are spending on our broadband speed upgrade program.

Let me run through the key components of our capital expenditure in Q3. Accrued CapEx at £203 million increased by £20 million versus the same quarter last year, with the main driver being the £23 million spent on our broadband speed upgrade.

In terms of capital leases, we added £25 million in the quarter and this is well within our 2% to 3% guidance. CapEx creditors reduced by £24 million compared to £27 million increased last year. As we highlighted in previous quarters, there is a significant payment lag with the broadband upgrade program. In Q3, we started to see that unwind.

Year-to-date, we have accrued CapEx of £78 million, but still only spent £50 million in cash CapEx on this program. This payment lag is likely to continue to unwind through the balance of the year. And finally, total cash CapEx came in at £203 million for the quarter with base CapEx of £172 million, which is 16.17% of revenue.

I would now like to update you on progress regarding our improving capital structure. As you’re aware, we have been seeking to exploit our better credit ratings on the favorable debt markets to reduce future interest expense and lengthen debt maturities. At the start of this year, we had £3.2 billion of high coupon debt callable over the period to October 2014. The average coupon on this debt was 7.9%.

We began to refinance this in Q1, when we replaced $500 million of 9.5% bonds due 2016 with $500 million, 5.25% bonds due 2022. This reduced our interest costs and added six years to the maturity. Premium and fees for the transaction were around £50 million, which were set against the £225 million for debt related transactions as part of our current capital return to program.

Then on the 10 of October, we launched a tender offer for up to $1.6 billion for the balance of our outstanding 9.5% bonds due 2016 and up to 43% of our outstanding 8.875%, and 8.375% bonds due 2019. Once again, we’re seeking to exploit the opportunity to reduce our interest costs and lengthen maturities.

This tender is conditional on us securing the necessary financing and the roughly £130 million premium and fees for the transaction will again be set against the £225 million we have allocated for debt related transactions.

Following this tender, we will still have circa £1.9 billion of high cost callable debt, providing us with additional future opportunities to reduce our interest costs and lengthen debt maturities.

This is all summarized on the right-hand side of the chart. The gray shading highlights the debt we tendered in Q1. In light gray you can see the debt we are currently tendering for, and in red you can see the residual debt that is still callable and offers future refinancing opportunity. It’s important to emphasize that our recent actions in the debt market have no impact on our share buyback commitments this year.

Finally, I’d like to update you on our capital returns progress. As you know, we have announced £1.8 billion of total capital returns since mid-2010 including £1.25 billion of share buybacks. Since mid-2010, we’ve repurchased 73 million shares with just over £1 billion bonds. This includes around 6 million shares that we have recently repurchased under our outstanding $175 million accelerated stock repurchase program.

Our share count is now reduced from 332 million in mid-2010 to 268 million at the end of Q3. As you’re aware, we have £122 million remaining share buyback authority to the end of 2012. This represents another circa 2% of our current market cap, and at today’s prices would mean the repurchase of an additional 6 million shares.

Assuming the current share price, this means we would have repurchased around 24% of our share count in mid-2010 by the end of this year.

Finally, we remain committed to a long-term program of returning cash to shareholders and we plan to announce the next phase of our capital returns program at our Q4 results in February 2013. So that concludes our Q3 2012 results presentation.

And with that, I’d like to hand you over to Richard to kick off the Q&A.

Richard Williams

Thanks, Eamonn. Thanks, Neil. We’re ready to take your questions now. Operator, could you please begin the Q&A session?

Question-and-Answer Session

Operator

Thank you, Mr. Williams. The question-and-answer session will be conducted electronically. (Operator Instructions) We will now take our first question from Nick Lyall of UBS. Please go ahead.

Nick Lyall – UBS

Afternoon. It’s Nick from UBS. Just want to ask a couple, please. You didn’t mention quad play as one of the reasons for reducing churn. Is that just because you don’t have a large part of the base on quad play yet or is actually there’s little evidence so far that quad play churn is coming down versus, say, the triple play subs?

And then secondly, on the marketing, it seems a great number for Q3 particularly given the subs. Sky seems to have started off quite aggressively, picking up fiber and Sky (inaudible) adverse in Q4. So is that the sort of number that can be maintain that market and number into Q4 as well do you think? Thanks.

Neil Berkett

Hi, Nick. Yes, quad play continues to be a contributor. If you think about our strategy, whether that be quad play, superfast broadband, connected TV, continued improvement in terms of operations and therefore level of advocacy. All of these things drive churn and it’s a major focus for us, I mean clearly, it’s much economically – it’s stronger economically to retain a customer than to acquire a new one. The delta between quad and triple and therefore triple and dual, dual and solos continue to be broadly as we have provided to the market historically, so no change.

The guidance we gave at the end of the second quarter in respect to marketing, which we’re seeing marketing pull back to broadly the levels of 2011 for the second half of the year continues. And we are not seeing any impacts in the change in the marketing activity to date.

Nick Lyall – UBS

That’s great. Thank you.

Operator

We will now take our next question from Tim Boddy of Goldman Sachs. Please go ahead.

Tim Boddy – Goldman Sachs

Yes, thanks. Want to just to ask a bit about, how you see the opportunity looking forward to take advantage of growth in the pay TV markets? Particularly, you could characterize that the market as being split obviously today between Freeview homes and paying homes, to what extent you’re trying to go after that kind of Freeview market? I guess this is also where YouView is targeting in terms of seeing an opportunity to sell a high-speed pipe with the low cost TV service to some of those homes. And can you help us understand what impact those kind of customers would have on your profitability. Thanks so much.

Neil Berkett

Cheers, Tim. We see the connected TV market as a natural extension from our sort of superior connectivity. So more – and we refer to the segment broadly as digitally savvy and we’re seeing continued evidence both in actual customer movements, but also in terms of research that supports our hypothesis. And they will become blurring in what we typically call the pay TV market. We’ve already seen that. If you think about the way that Virgin Media TiVo customers explore and find content, whether it be free or pay, they continue to access their content through my shows which is our search and navigation discovery area; over 50% of the assets that they explore are explored through there.

We see this phenomenon continuing out of the pay TV market and into the free and into what is referred to as the hybrid market. When we launched classics or should I say when we launched collections, we deliberately launched it such that we had an entry level gap there which ultimately we filled with classics to be able to preempt the YouView move. We did that. We launched that at the beginning of this quarter.

Sales have been modest as we would expect, circa 5,000 of the total 245,000, 244,000 whatever was gross adds. I think that will climb, but I don’t see it being a significant amount of our overall adds. We now have a portfolio where for £18 you can – £18 plus line rental, you get superfast broadband, 30-meg, you get the best connected TV in the UK market and you can go all the way through to 120-meg with the best connected TV in the market, with Sky Sports, Sky Premiums, Sky Movies. And we see us playing in all of those markets. The key component for them all is superfast broadband.

If you think about where we access our profit pools, it’s all about connectivity. We often refer to the pay TV and if you like the connected TV as the key to the wallet, but not the wallet. But clearly, our discipline around ensuring that we bundle and charge for the application circa £5, I think is critical for that going forward. So, we see ourselves as a broad player and absolutely competing with YouView at the bottom, all the way through to premiums at the top.

Tim Boddy – Goldman Sachs

Thanks very much. If I just a very quick follow-up on your capital return plans, I mean, it seems given credit market conditions that are currently so benign, there’s no rush to get to your leverage target. Have you thought about pushing it out maybe 6 or 12 months which would obviously give you the scope to keep a very steady pace of share buybacks?

Eamonn O’Hare

Yeah. Hi, Tim. It’s Eamonn. I think the underlying point is we’re clearly committed to long-term program returning cash to shareholders. I think when we get through the backend of this phase we still have $120-odd million of buybacks to get through the backend of the quarter. That would be the time to reflect. And as I mentioned, we’ll be coming back to the market in February with our full-year Q4 numbers, with a lot more clarity about what the next step looks like. But as things stand, we remain on track to hit our long-term net leverage target of circa 3X by around – by the middle of next year.

Tim Boddy – Goldman Sachs

Great. Thanks so much.

Operator

We will now take our next question from Bryan Kraft of Evercore Partners. Please go ahead.

Bryan Kraft – Evercore Partners

Hi. Thank you. Just had two questions, if you don’t mind. First, how are you thinking about mobile contract growth from here? Net adds have been decelerating and I think this quarter is the lowest we’ve seen in several years. Is any of this tactical on your part or is it slower demand for what you’re willing to spend in terms of SAC and offers. My other question is, do you think the London Underground Wi-Fi project ultimately is going to be more of a direct revenue benefit or is it going to be more of a customer retention and acquisition benefit? Thanks.

Neil Berkett

Sure, Bryan. Hi. Let me take them in the order that you asked them. Mobile contract growth, we saw – specifically in the quarter, we saw sort of the first round of 18-month stroke two-year contracts coming to bear and we were keen to ensure that we focused on retention for the quarter. And every quarter to the point that you make, we decide how we’re going to spend our valuable pounds. And we can obviously move the dial in terms of SAC for contract.

My confidence in our ability to grow contract mobile is as strong as it has ever been. You will see some quarters where there are particular circumstances that would mean that net contract adds are higher or lower. The key to us going back I think to Nick’s earlier question is to ensure that we drive contract mobile into the home. I would expect net adds to be at this sort of level for another quarter or so. But I would expect contract growth in 2013 as we ensure that our platform for growth is clearly put in place.

In respect to London Underground, it was a combination of things. It was a lot of it was learning. It was working out how we could ensure that we could leverage off our superior access network in a metropolitan area and obviously London Underground is somewhat unique. It will provide an adequate return above our cost of capital by a combination of wholesaling and an element of uniqueness for our own customers. But to me, the leverage is in the learning and in the ability to show a million people a day that you can get twice as fast broadband in the London Underground using Virgin Media than you can in the average UK home.

And but the learning goes into small cells which I spoke at briefly within business and how we can explore other metropolitan areas using our access network, looking at small cells as an opportunity in conjunction with the mobile operators. So, I see it as an extension broadly in the B2B space rather than in the B2C space.

Bryan Kraft – Evercore Partners

Got it. Thank you very much.

Operator

We will now take our next question from Vivek Khanna of Deutsche Bank. Please go ahead.

Vivek Khanna – Deutsche Bank

Hi. Good afternoon. And thanks for taking my question. I have one question really on capital structure. I was just wondering with regards to any potential refinancing or just general leverage targets you’ve been very kind to indicate that your medium-term target is three times and you expect to get that by middle of next year. I was just wondering in light of that, what do you think of split between senior secured and unsecured leverage should be in the medium-term going forward? Thank you very much, sir.

Eamonn O’Hare

Yeah, well, we haven’t been explicit about that. I mean, clearly, our policy so far has been to, as you saw at the start of the year is to replace some secured with unsecured. Clearly will depend on where the market is, where the yields come from. You can see that we have quite a lot of opportunity regarding refinancing over the coming year to two and Vivek, as we sort of take the temperature of the market, we’ll make those decisions.

Vivek Khanna – Deutsche Bank

Okay. The market seems to be quite hot. So, best of luck.

Eamonn O’Hare

Thank you.

Operator

We will now take our next question from Carl Murdock-Smith of JP Morgan. Please go ahead.

Carl Murdock-Smith – JP Morgan

Hi. It’s Carl Murdock-Smith from JP Morgan. I just wanted to ask within the customer mix, you added 32,000 single-play customers this quarter. How did students of the net adds compare to this quarter last year and are you continuing to increase your share among students? And then secondly, do you think you saw any reduced churn through the period of the Olympics with people not wanting to change TV provider during that period? Thanks.

Neil Berkett

I’ll answer them in reverse, Carl. No material impact of the Olympic period. I don’t think you’ll see that as a material influence in terms of our overall metrics. The analysis we do which obviously we monitor pretty closely shows that our churn improvement was almost exclusively around product and operational performance, value for money.

In respect to singles in the market, we installed about 19,000 more solos broadband customers in this quarter versus the same quarter of last year and that was broadly driven by students. We took a higher market share of students this quarter than we had. I’ll remind everybody that our solos product carries a significant premium. We attract about 75%, 80% of the yield or price of a jewel in our solos. And students tend to take 60-meg and above rather than the 30-meg entry level.

And again, if I look at the overall portfolio, just to give you added comfort, the on-boarding ARPU for the 240-odd thousand gross adds in Q3 of 2012 was greater than the on-boarding ARPU of the equivalent period last year.

Carl Murdock-Smith – JP Morgan

That’s great. Thank you.

Operator

We will now take our next question from Simon Weeden of Citigroup. Please go ahead.

Simon Weeden – Citigroup

One of my questions has been asked. Just a quick one. I just wondered if you could reflect a little bit on the where the business is and whether or not we might be able to expect when you come back to us a different mix between dividend and buyback for the future versus what you’ve done over the last few years. Thanks.

Eamonn O’Hare

Yeah, I think, again, we to take on the consideration, I think we need to get through the back end of this space before we actually come back to the market with what this is going to look like. Short of repeating what I’ve said over the last five or 10 minutes, I think we’ll take that into consideration and when we come back to the market in February, we’ll be very clear about that.

Simon Weeden – Citigroup

Okay. Thanks.

Operator

We will now take our next question from Tom Eagan of Canaccord Genuity. Please go ahead.

Tom Eagan – Canaccord Genuity

Super. Thank you. The subscriber growth was really strong. I was wondering, were you able to increase your data market share in the markets where BT has rolled out fiber? And then I have a follow-up. Thanks.

Neil Berkett

Tom, it’s a bit early to be able to get our market share data back at any specific – what our share shows at the moment is that the VDSL rollout is not having any impact on our ability to retain or acquire in those segments, so there’s no share to be regained, Tom. So, I would expect that to continue for the foreseeable future.

You know, I’d just remind everybody that we have a 30-meg product in the marketplace, which has according to Ofcom an average speed of 31 megabits per second. It’s priced at £14.50. It is uncapped. The equivalent VDSL product is up to 40-meg which according to Ofcom delivers 33, 34 megs per minute and it ranges in price from £16 to £18 depending on the supplier. So, I do not see VDSL as the threat that the market potentially has done from time to time and as is evidenced by our market share.

Tom Eagan – Canaccord Genuity

In terms of video, did you see any customer impact from the roll-out of YouView or is that service really more of an additive service?

Neil Berkett

It’s far too soon to see any impact at all with the roll-out of YouView. But my response is, competitively we have priced a dual or triple should I say, product at £18 which is our Classics Collection, which is a 30-meg product. It is a Virgin Media TiVo product with no pay TV, plus line rental. That is cheaper than the equivalent product by our competitors who are rolling out YouView.

When you add their line rental and their 40-meg fiber product, we have a better product in place. So, I’m not – again, I’m not seeing – we’ve sort of put in place what I think will be the mitigant for YouView and I go back to my answer to Tim’s question, which I went into quite some detail around that.

Tom Eagan – Canaccord Genuity

Great. Thank you.

Neil Berkett

Cheers, Tom.

Operator

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

Robert Grindle – Deutsche Bank

Yeah, hi there gents. And, just two questions. You’ve been trialing LTE-ready small cell technology in Bristol. I assume this is for use with low power spectrum and that’s the extent of your interest in any spectrum coming up over the next few months. And then separately, interestingly you’ve teamed up with BT to sue Birmingham City Council. Is this basically a matter of principle you’re taking this case forward rather than a reaction to the relatively modest sums involved. You just want to sort of set a line in the sand? Thanks.

Neil Berkett

Cheers, Robert. I – we have no interest in acquiring expensive spectrum which is behind I guess, your question. The small cell work what we’ve been doing is really to assess our operational strength in leveraging off our fiber access network and we would see our small cell work being done in conjunction with mobile network operators. And, which is why I spoke to it earlier in respect to where we see what I think will be a significant opportunity outside macro cells.

Position with Birmingham City Council is fairly straightforward. I think the concept of BT UK and the concept actually even our part of urban funding is – which the government put in place is – it controlled is terribly sensible from a UK PLC point of view. The execution was poor. Birmingham City Council unfortunately went way outside the guidelines and in our view did not have clarity in respect to the position that they’ve put to the EU.

And as such, we think it is an important point of principle to your question that we establish that state aid is only available for white areas and whilst you never get that accurate, the last 10 or 20 houses, we’re okay with that. But state aid can only go in place in white areas. White areas define where there is not a competitive product. So, BT and ourselves are absolutely aligned in this and I expect us to win our case.

Robert Grindle – Deutsche Bank

Thanks, Neil. That’s clear.

Neil Berkett

Cheers, Robert.

Operator

We will now take our next question from Matthew Harrigan of Wunderlich Securities. Please go ahead.

Matthew Harrigan – Wunderlich Securities

Thank you. Tremendous focus of the cable engineering show in Orlando last week was Wi-Fi and the opportunity the cable companies have by virtue of having (inaudible) network versus some other guys who are not as well positioned to rapidly deploy Wi-Fi. When you look at 15 times increase in mobile data usage over the next four to five years, where do you think the gating elements are in your doing a rapid fast Wi-Fi deployment? I mean, do you feel very advantaged relative to everyone else? And you certainly intimated earlier there could be a significant revenue bucket. So could you talk a little bit further along those lines? Thank you.

Neil Berkett

I mean, we agree with your general hypothesis that there is a significant opportunity for a fixed operator with advantage in the access network which is what we have. We have fiber deeper into our access network than our competitor and there are only two access networks in the UK, I remind the audience. Our view on Wi-Fi and in particular wireless connections that we can monetize is they will be in areas which we can get some form of exclusive access, like London Underground and quite frankly there’s not too many other London Undergrounds in the UK.

But then – as I spoke earlier, I see the opportunity broadly in the area of small cells. I think as a fixed operator with a fiber access network moving from fixed to wireless, we’re in a much stronger position than a wireless operator moving from WAN to into closer to fixed. And so we have quite a significant role to play, both in terms of backhaul for macro cells, but also in respect to micro. And I – we’re unclear how much of the small cell will be substitutional for macro or how much is it additional. The fact is, we’re, as you pointed out, Matthew, there is an absolute explosion in wireless connectivity and we’re pretty uniquely placed to be able to capitalize on that.

Matthew Harrigan – Wunderlich Securities

Beautiful. Thank you.

Operator

We will now take our next question from Stuart Gordon of Berenberg Bank. Please go ahead.

Stuart Gordon – Berenberg Bank

Yeah. Morning. I’ve got – or afternoon, three questions. First of all, on the churn, which was obviously significantly better, I was wondering if you could clarify whether this was just lower incoming calls looking to disconnect or whether it was actually better churn retention when the call was made.

Secondly, on TiVo, we’re beginning to see both IPTV and cable TV companies beginning to talk about the set-top box coming out of the home and into the cloud. What preparation have you and TiVo done to be ready for any such a shift in the ecosystem? And finally, on Virgin TV Anywhere product, will your customers have access to all their content across all different platforms including Sky Premium? Thank you.

Neil Berkett

Thanks to your three questions, Stuart.

Stuart Gordon – Berenberg Bank

Sorry.

Neil Berkett

We’ve got time for a couple more if people could sort of restrict their questions. That would be good. In respect to churn, we saw both lower core volume and better retention without any increase in cost of save per customer. So, it is a very, very strong story in respect to the churn. It was associated with a continued improvement in what we call our net promoter score which measures the level of advocacy plays, the level of detractor. So churn was a – is a good new story, right back to source.

In respect to Virgin Media TiVo and our relationship with TiVo, I mean, very clearly we have a roadmap and are in conjunction with TiVo. We represent a significant proportion of TiVo gross adds, well over half, and as such, we’re in constant conversation with them in respect to what the roadmap looks like. The roadmap does look like moving initially the UI to the cloud. The user interface to the cloud and then as we move into the world of DOCSIS 3.1 and further on, we’ll see – we’ll be moving the whole set-top box to the cloud in respect to storage and that will evolve, I’m quite comfortable that the pace in which we’re looking at that is consistent with our peers, if not ahead. Again, it’s why we chose the partner we chose.

Finally, in respect to TV Anywhere, it will launch with all of our – we have the PC and Mac rights for broadly all of our content. We don’t have quite that number of rights for the tablet. So, there will be some restricted rights. But it will include all of Sky basics initially. And we’re in conversation with Sky in respect to premiums and we’ll continue those conversations over the next six months as we look to renew our premium contract with them.

Stuart Gordon – Berenberg Bank

Okay. Perfect. Thank you very much.

Neil Berkett

Thank you. I think we’ve got time for a couple more, thanks.

Operator

We will now take our next question from Paul Sidney of Credit Suisse. Please go ahead.

Paul Sidney – Credit Suisse

Thank you very much. And, just one question, please. We’ve seen a number of headwinds impacting 2012 growth, for example, MTR have seen a fixed voice usage and prepaid mobile mix which is obviously reducing. But, how do you see those headwinds changing in terms of their effect on 2013 versus 2012, please? Thank you.

Neil Berkett

If we go to, MTR is the easiest, clearly there’s a roadmap where that disappears Q1.

Eamonn O’Hare

It doesn’t actually disappear until 2014, so...

Neil Berkett

2014. But it comes right now. You can see the prepaid, postpaid mix, prepaid now on the 25% of total. So again you can plot that forward. In terms of fixed voice usage, I remind the audience that at January 1, we had some 300 and...

Eamonn O’Hare

80 million.

Neil Berkett

80 million. Thanks, Eamonn.

Eamonn O’Hare

All right.

Neil Berkett

And we spoke about the decline of that would clearly be a smaller decline in 2012 than it was in 2011 and a continued smaller decline in 2013 than it would be in 2012 and 2014 than it would be in 2013, such that if you do run your ruler over it doesn’t present a headwind at all by the time you get to 2015.

Paul Sidney – Credit Suisse

And, can I just have a quick follow-up? I think from memory you mentioned that it was falling around 20% per year. Is that something that probably we should assume that does increase in terms of the percentage for and obviously the absolute number is coming down? Is that the way we should think about it.

Neil Berkett

That’s a good way to think about it, yeah.

Paul Sidney – Credit Suisse

Great. Thank you very much. That’s very helpful.

Eamonn O’Hare

Last question...

Neil Berkett

And the last question, thank you, operator.

Operator

We will now take our last question from Adam Rumley of HSBC. Please go ahead.

Adam Rumley – HSBC

Thank you – thanks very much. You mentioned in the presentation that several of your peers have announced price rises over the last few months. But I note on one particular product you’re offering up to a 10% discount versus peers at the moment. Is that deliberate or would you – are you beginning to think more about price rises as an annual event rather than maybe a multiple event throughout the year? Thanks.

Neil Berkett

Sorry, Adam, which product you’re referring to?

Adam Rumley – HSBC

Line rental.

Neil Berkett

All right, sorry. When you say discount, I was reading it the other way around.

Adam Rumley – HSBC

Oh, sorry.

Neil Berkett

Look I – we’ve never been bashful in taking price. We are very clear in terms of we want to maintain our value for money positioning. We’re also very clear given our experiences in 2011 that you don’t take price frequently. You bundle it and you provide it with another story. This is not the audience to talk to our customers about what we’re going to do with price going forward, but I think it’s a reasonable assumption that we will continue to take price, based off our superior products and our relative strength in the marketplace and as I said in my script, I think we are in pricing repair in the UK and into fixed line telephony, into fixed line telco. I think that pricing repair is here for many years to come and it will continue to be a feature of a contributor along with many other things to our modest revenue growth.

Adam Rumley – HSBC

Thanks very much.

Neil Berkett

With that, I’d like to thank everybody for listening in on the call. Also a special thank you to the VMED staff who produced a cracking quarter. Thank you very much indeed.

Operator

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

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