Virgin Media Q3 2007 Earnings Call Transcript

| About: Virgin Media (VMED)

Virgin Media, Inc. (NASDAQ:VMED)

Q3 2007 Earnings Call

November 7, 2007 9:30 a.m. ET


RichardWilliams - IR

JimMooney - Chairman

NeilBerkett - Acting CEO

JacquesKerrest - CFO


BryanKraft - Credit Suisse

TomEagan - Oppenheimer & Company

BenSwinburne - Morgan Stanley

PaulHoward - Cazenove

OmarSheikh - Dresdner Kleinwort

JoeBoorman - New Street Research

David Kestenbaum - Morgan Joseph

Simon Weeden - Goldman Sachs

SteveMalcomb - Arete Research

JerryDellis - JP Morgan

SteveScruton - HSBC


Goodday, ladies and gentlemen and welcome to the Third Quarter 2007 Virgin Media,Inc. Earnings Call. My name is Lacey and I'll be your operator for today'scall. At this time, all participants are in a listen only mode. We will conducta question and answer session towards the end of this conference (OperatorInstructions).

As areminder, this conference is being recorded for replay purposes. I would nowlike to turn the call over to Mr. Richard Williams, Investor RelationsDirector. Please proceed.

Richard Williams

Thankyou operator. Good morning or afternoon to you all and welcome to VirginMedia's Q3 results call. The presenters on today's call are Jim Mooney, VirginMedia's Chairman; Neil Berkett, Acting CEO; and Jacques Kerrest, our CFO.

Please,can I draw your attention to the Safe Harbor statement on slide two and remindyou that some of the statements made today may be forward-looking in nature andthat actual results may vary significantly from these statements. I would alsoask you to refer to our latest filings with the SEC for applicable riskfactors.

NowI'll turn over to Jim Mooney.

Jim Mooney

ThanksRichard and good afternoon everyone. Well, as you know, we have just completedour second full quarter as Virgin Media and I believe we are now starting tosee the vision we all had of the great brand, the great products and solidfinancial discipline all coming together.

Thethird quarter has shown a significant improvement in customer and RGU growth asthe team has been working hard on customer segmentation, bundled pricing androlling out our mobile offering into existing double and triple playcombinations.

We haveaggressively attracted new customers and retained existing customers throughcompelling bundled price points, product quality and our strong brand marketingefforts.

Ourcustomer and RGU net add performance, are both excellent. In fact, on manymeasures, this was the best quarter since the merger of NTL and Telewest withthe power of the Virgin brand taking hold.

So,let's take a quick look at the team's accomplishments in the quarter.

We hada record quarter for customer gross adds and net adds. We also had a recordquarter for broadband net adds, telephony net adds and total cable RGU netadds. TV net adds have shown significant improvement over quarter two.

We havealso achieved solid OCF growth in the quarter, which includes certain secondhalf benefits pulled exclusively into the third quarter. These were driven bythe operational improvements we've been counting on all year long such asreduced bad debt expense, lower headcount, lower employee expenses and thelike. So, the fact that they got pulled into the third quarter is an accountingtreatment, but they're certainly all what we counted on to drive second halfOCF.

Inbroadband, we have increased our lead over our competitors with our 20 MBservice and are now looking at how we can further extend this differentiationin the coming quarters.

In TV,our on-demand services continued to be highly popular with our customers. You'llhear a lot about that from Neil in a moment. The inclusion of Setanta Sportsand our top basic TV package has also helped to successfully drive up, sell andreduce churn. You'll hear more about our intense focus on churn in a moment, aswell.

Theturnaround in our telephony growth is ahead of our expectations but veryconsistent with our segmentation and use of the mobile product to stem the tideon telephony. And, if you include our off-net business, we grew our telephonyRGUs in the quarter, which represents an excellent turnaround.

As atriple-play incumbent, we obviously have pricing within our existing customerbase that is different than our acquisition pricing. Historically, we've beenmanaging this carefully but I believe, in a little bit too much of a reactivemode and that's restricted our ability to grow our customer base through bothacquisition and reduced churn.

We havenow decided that the optimum way to create medium to long-term value is tomanage our pricing more proactively. Value for money is a core Virginattribute. With the deployment of portfolio knowledge and skills, we believe wecan manage pricing with limited impact on ARPU and OCF while driving muchstronger subscriber and RGU growth and you've seen that in the third quarter.

Rightnow some of the new entrants into our product markets are reducing theirprofits to give away products and services, really just to support theirexisting businesses. As demonstrated today, we do not need to do that. Weintend to successfully balance RGU growth, ARPU, OpEx, OCF and cash flow tocompete effectively in a competitive market.

I thinkwe have a robust and sustainable business model and it's predicated on multiplestrengths. We have compelling product bundles, which are driving the triple-playpenetration up and up and up and customer loyalty. We are selectivelyprotecting and managing our ARPU and margins.

We are making,very focused investments. We talked about VoD, mobile, etc to differentiate ourconsumer proposition. We are targeting our marketing spend to really exploitthe power of the Virgin brand. We've been attacking our underlying cost base todrive out inefficiency and support our investment in pricing. You've seen thatagain, in spades in the third quarter.

Andfinally, we are working very hard with regulators to ensure a level playingfield and are very pleased by their enthusiasm and their willingness to listento what we have to say.

So, I'mvery pleased with the lifetime value discipline that management under Neil'sleadership has put in place and endorse the value creation strategy. You cansee the positive impact the strategy has already had on Q3 customer and RGUgrowth.

Youmight have known, we just added Mark Schweitzer, the former CFO of SprintNextel, to come in and help us run the whole consumer business. So that's agreat addition by Neil.

So, letme turn it over to Neil now, who's been the chief architect of this strategy,to take you through more detail on the quarterly performance and to update youon the strategic direction of the company as we wind up 2007 and head into nextyear. Neil?

Neil Berkett

Thanks,Jim. I want to start by updating you on where we are in the transformation ofour business. After the merger of NTL and Telewest we had two options,integrate the companies under common systems and practices then make thenecessary change improvements to the combined company or try to integrate andmake changes at the same time.

Webelieved that to try to do the latter would have resulted in delay, overrunsand quality issues as we try to do too many things at once and that would havemeant that I could not sit here today and say that within the next few weeks,the integration will be largely complete. I want to use that as a philosophygoing forward. Do less and do it well.

We correctlychose to ensure that we had one combined business, based largely on thesuperior ex-Telewest system before making the necessary changes to reengineerthe business and continue to fix the fundamentals. The integration has been agreat success and will be substantially complete by the end of Q4.

Thefinal consumer billing system migration has been undertaken with just broadbandprovisioning remaining outstanding. The ERP integration, duplication removaland procurement synergies are all complete. I am particularly pleased, the wayin which the last billing migration came, given that that was one of the coreproblems we had in the old NTL business.

As aresult, we have secured substantial synergy savings. Alongside that, of course,we've invested in improving our brand and marketing, made further investmentsin customer service as well as significant content initiatives in order toposition ourselves for better customer and RGU growth which we are now startingto see.

Wespoke at the Q2 results of our phase two of OpEx reengineering andrestructuring that we would be targeting in 2008 and beyond. We're continuingto pursue our plan to reducing overall OpEx. Although, there will continue tobe some OpEx cost increases going the other way, such as the contentinitiatives we've undertaken like Setanta, as well as inflation and thenon-recurrence of some benefits this quarter.

I'mconfident that we can continue to reduce overall underlying OpEx. In fact, asan incumbent with a short-term gross margin challenge due to the existingpricing on our installed base, we absolutely need to continue to reduce OpExfurther to grow our cash flows in the short-to-medium term.

I wouldecho what Jim has said about the strength of our business model. In a fiercelycompetitive market, where others are taking hits to their profits to continueto grow, our unique cost structure and economics allow us to manage the RGUgrowth, ARPU equation, make selective investment where required and be disciplinedon OpEx and efficiency to grow this business in the medium to long-term.

Thisreengineering phase is well underway and we're putting the same priority focusand energy into fixing the fundamentals of the business as we did and toensuring that the integration went so well.

In thisphase, we are concentrating on taking the bad costs out of the business. Forexample, and I'll come back to this in a little bit more detail later on, weare focused on our product fault rates which drive down costs in multiple ways.

Clearly,engineering effort to react faults are reduced, customer contact centers take fewercustomer complaints and ultimately, customer losses as customers get fed-upwith faults and they leave us.

We'recontinuing to work to understand in depth, what really pleases our customersand what displeases them. With the introduction of best-in-class practices, wecan now tell down to each individual customer touch point, be that customerinterfaced with an installation engineer, salesperson or technical servicesengineer, what customers liked and what they didn't like about that experience.

This iswhat would enable us to make effective change and the right effective change.The integration and the reengineering efforts will provide a platform forgrowth, specifically by reducing churn through service improvement, proactivechurn prevention through segmentation and new knowledge management systems.

We willalso grow through real product differentiation, building on our existing Video onDemand platform and delivering premium broadband to drive acquisition, up-selland retention. We will place higher focus on up sell and cross sell at multiplecustomer touch points, to grow triple and quad-play and we will continue toexploit the mobile cross sell opportunity we have into our cable base.

Next, Iwant to take you through the success that we have been having at addingcustomers and RGUs in the quarter. Despite the highly competitive tradingenvironment, we have increased our customer base in Q3, due to an improvementin both gross adds and churn.

Grossadds were up 34% on the quarter two and 12% year-on-year to 257,000 on-net,providing confidence that our products are attractive to customers, representgreat value and also that our restructured sales teams are working well.

DespiteQ3 being a seasonally higher churn quarter, we were able to reduce churn to1.7% and churn has been improving throughout the quarter.

We'regetting better at saving customers, but, more importantly, we are nowproactively targeting high-risk segments of the base to improve the value ofthe products they receive. This, in essence, supports ARPU.

RGU netadds were also the highest since merger. This was achieved through thecontinued success of increasing triple-play, which has now increased byapproximately two percentage points per quarter, since merger, now at 47%.

Now, Iwant to cover ARPU. The record gross connects that I talked about on theprevious slide is testament to the compelling value of our acquisition pricing.However, as Jim discussed earlier, like many businesses some of our existingcustomers are on historic pricing plans, which don't offer as good value asthey enjoyed by new customers.

We havetwo methods of keeping these customers. Firstly, if they do call to canceltheir service, our sales team has better tools at its disposal to assist thevalue of the customer and the flexibility to incentivize higher value customersto stay. This is evidenced in our save rate in Q3, which was up to 80%.

Moreimportant though is our proactive approach to churn reduction that we nowemploy. We have segmented our base into over 60 customer types based on valueand risk of return or risk of churn, should I say. We ensure that high value/high-riskcustomers are contacted and incentivized to stay before they get themselves totrigger a disconnection.

This isthe far more effective at creating a long-term customer relationship and ahappier customer. In most cases, this can be achieved with minimal ARPU impact,for example, by adding an RGU without increasing the price the customer pays.But in other smaller cases, there is a direct impact on ARPU.

It isthe combination of our competitive acquisition offers and provision of extravalue to existing customers that have been the main cause of the ARPU declinein the quarter. We believe that this strategy will maximize value and generatelonger-term growth at the possible expense of short-term ARPU decline.

We willtry to mitigate this and protect ARPU whilst ensuring value per money bycontinuing to encourage customers to take more products from us, a skill thatwe have developed over the last few quarters. We will continue to aggressivelyup sell and cross sell and with the full quad-play at our superior products, webelieve there continues to be a lot of upside here.

A skillthat we're embedding and the tools that we're putting in place in terms of upsell give me confidence. Triple-play penetration and RGU per customer willcontinue to grow. Let's be clear here, market pricing has moved significantlydown in the last 18 months and we're taking proactive steps to deal with thisin a way that positions us best for medium-term growth, without damaging ourcurrent profitability.

Webelieve we are making the right changes for medium to long-term growth andcontinue to attack our OpEx costs. I'm pleased with the skills and tools we'rebuilding to better manage our consumer portfolio; investing in knowledge andsystems in this area is a key focus. We're instilling strong disciplines aroundportfolio value creation.

I'llnow talk briefly about each of our products, starting with broadband, which I'mpleased to say had a very good quarter. We added 123,000 customers includingoff net in the quarter, up from 86,000 in the same period last year and 50,000 last month. Althoughsome of our competitors have not yet announced their results, it does look likewe have sharply increased our market share for net adds in this quarter in excessof 20%.

Ourstrong broadband quarter reflects the quality and value of our service. Moreand more customers are joining us because they need the highest speedsavailable and the best quality of service possible. Our 20 meg product is thebest available in the market and is the natural choice for home workers, gamersand those who just want fast, reliable, quality downloads.

Thesecond chart shows the growth in broadband usage over the past few years andit's been immense with a CAGR of over 50% driven by new content andapplications and higher access speed. This is part of a virtuous circle ofcontent driving the demand for bandwidth, which in-turn drives the supply ofmore bandwidth hungry content and so on.

We areworking within our content division to acquire and develop content and applicationsthat work best with high-speeds, and example being the excellent Premier LeagueEnglish Football rights on our portal. Examples of high bandwidth Hungryapplications that have been or are about to be launched by third parties arethe BBC's iPlayer, Juiced, and 4onDemand.

Thesenew applications will continue to drive demand for faster and better broadband.Despite our strong performance in the third quarter, I'm not satisfied thatthere is enough daylight between us and DSL in the eyes of the average UKInternet user. We still have not achieved our potential given the naturaladvantage that we have over copper.

This issomething that I want to address and you will see increased differentiation incoming quarters. You will see product speeds well ahead of our current 2-4-20 meg offerings. You'll see an improvement in quality.You'll see an improvement in terms of the value added services that we've addedinto this area to differentiate us from the commoditized copper.

We knowthat DOCSIS 3.0 is a great opportunity for us and we're assessing our optionsand we will communicate our strategy in coming quarters. TV has improvedsignificantly in Q3 and we're seeing the benefits of the market changingcontent initiatives that we've undertaken to differentiate our pay TV service.

Our keypoints of difference are our unique on-demand service, inclusion of premiumsports content in our basic TV package and our market leading DVR, V+. Thepopularity of our on-demand service continues to increase, with an average of17 views per user, up from 14 inQ2 and just 10 at the start of the year.

Ourcustomers currently, have the choice of more than 4,300 hours of content permonth and we have recently added about 1,000 music videos which are availablefor free to our top-tier basic TV customers. With an average of 45% ofcustomers now using the service each month, the total number of monthly on-demandviews increased to 23 million from 19 million in Q2.

Thechurn rate of customers who've recently used the VoD service is well below halfof that of those customers who haven't.

Thefootball season started in mid-August and our top-tier TV customers have beenenjoying watching live Premier League Football Games on Setanta at noadditional cost.

Thishas had an impact on TV upgrades from lower-tier packages to the top-tier andhas favorably affected both acquisition and churn. Since the end of August,when we stepped up our marketing around the Setanta package, the weekly netadds run rate for TV has significantly improved, which provides me withconfidence for Q4.

Inpartnership with Setanta, we'll launch a sports news channel on the 29th ofNovember. We flagged a turnaround in our telephony customer trend in Q2 and I'mpleased to say that the improvement is coming well ahead of our expectations.

On-netadds were roughly flat in the quarter and we include off-net, then we added14,000 telephony customers, marking the first increase in the telephony basesince merger. For an incumbent, with well over four million customers, this isa great achievement. This turnaround has been driven through our successfulbundling strategy, a refocus on telephony by both of our sales and marketingteams and the second quarter price rebalancing.

Also,driving down our overall churn rate had a disproportionately favorable impacton telephony, as telephony product penetration is higher than the otherproducts. We believe our overall telephony offering on landline and mobile isbest-of-breed in the UK and we intend to offer more total telephony packages aspart of our bundled offering.

So, nowmobile. Our nascent mobile cross sell product continues to experience strongdemand, however, in the quarter we trialed a significantly less product to testdemand elasticity. We reduced the inclusive tariff minutes and ticks tooaggressively, in my view. This reduced weekly sales, which resulted in thereduced quarterly net adds number in Q3 versus the previous run rate. I thinkthat we went too far here and we have reverted back to the original product andweekly sales have returned to the Q2 run rate.

I ampleased to report a significant improvement in the prepay performance in Q3with net losses of 14,000 versus 99,000 in the second quarter and we've invested more into acquiringcustomers in a market environment that was more favorable than seen in theprevious quarters.

We willalways exercise financial discipline around lifetime value. If third-partyacquisition costs are too high, as they were in the first and second quarter,we will adjust our acquisition strategy. We have now owned Virgin Mobile forover 12 months and have had a great year with strong OCF growth, which hashelped us mitigate against our fixed-to-mobile substitution. It was a good investment.

Ourcontent division had good revenue growth this quarter, up 8% on the previousquarter. VMtv revenue grew due to both subscription and advertising revenuegrowth, as a result of a strong viewing performance of our channels.

Sit-upalso grew its revenue. In fact, revenue here is 11% on the same quarter lastyear. Commercial impacts, which are effectively the viewing of adverts on ourchannels, were up 19% year-to-date, both Living, our JV channel and our JVchannel UKTV Gold, continued having great viewing share or greater viewingshare than SkyOne.

On the1st of October, we launched Virgin One on Freeview, cable and satellite. Ourstrategy here is to maximize advertising revenues from the nine million homeFreeview platform and to cross promote our unique Video on Demand content andfunctionality, as well as our other products and services. Virgin One has had agreat start and was the second most viewed multi-channel on launch night.

Lookingnow to our business division, the quality of revenue continued to improve withboth the retail and data mixes better in the quarter. Although top-line growthhas been relatively modest, retail data revenues have been strong and are up16% compared to the same period last year. I think this division is often overlookedand underrated and is actually, a very successful business in its own right.

Ourpervasive national network reach and superior economics gives us a competitiveadvantage in this space and allows us to serve a market, which is difficult forour competitors to serve economically.

Wefocus on supplying managed data services to national corporates, many of whichare within easy reach of our existing network and can be connected at arelatively little cost, foregoing the need to employ expensive leased lines.This results in superior margins and cash generation relative to our peers.

Let menow turn back to our consumer products and the market that we operate in. Youcan see here, what we believe are the market growth characteristics and ourpositioning for our three main growth areas TV, broadband and mobile, splitwhere relevant between the tiers. So, let's start with premium TV.

Thismarket is not growing and requires heavy investment and content, primarilymovies and sports, to compete. Due to content locked-up by our satellitecompetitor, this makes the economics here difficult for us to competeeffectively. So, the opportunity for us here today is relatively limitedcompared to other opportunities.

Ofcourse, as you know, we are addressing some of our concerns about marketbehavior to regulators and will continue to pursue all avenues to ensure alevel playing field going forward. In basic pay TV, the market is growingnicely and is driven by choice and price.

We havewell placed here with our wide range of Video on Demand functionality andcontent. We also offer some richer content than our competitors. For example,we include standard sports and live premiership football in our basic packs.

In freeDTV, Freeview leads the market with nine million homes and growth iscontinuing, however, many of these consumers are dissatisfied with the rangeand choice of content. By bundling with a phone line and giving access toextinctive VoD content, we can offer greater choice and then we have the opportunityto try and up sell and cross sell other services. We want to take advantage ofthe appetite of consumers who get the taste of multi-channel television throughFreeview.

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

Inbroadband, we have the strongest position. It is a fast growing market and wehave the best product and the best economics due to the ownership of our ownstate-of-the-art network, which has fiber much closer to the home than all ofour competition. This means we can offer great value and quality at both thetop and the bottom of the market.

Therefore,broadband offers us the greatest opportunity aimed differentiation and shouldbe our hero product backed up in the bundle by differentiation in basic andfree TV, mobile contract and the great economics from fixed line phone. Quad-playremains an important driver and differentiator for us.

We arethe lowest cost operator in the market due to our network economics and otheroperating efficiencies. This means that we should have the highest customerlifetime value when compared to our competitors at any given market price andcustomer tenure, allowing us to be highly competitive whilst drivingshareholder value.

However,historically, our customer tenure has not been long enough to fully takeadvantage of our superior economics. And it's a no-brainer to realize that thebest and easiest way to create value in this business is to reduce our churnrate. I have made this my number one priority and will take you through how Iintend to achieve this.

On thisslide, I've set out the three leading ultimate causes of our customer'sdecision to churn. By far, the most important factor has been a lack of asingle fit-for-purpose billing system covering all our customers.

Significantly,this number one reason to churn has been removed. As I said earlier, the on-netconsumer billing system migration to the single ICOMS platform is effectivelycomplete today, with just a small area of broadband provisioning for our ex-NTLcustomers still outstanding.

We madethis project our number one priority and as such, it was completed early, onspec and the substantial resources that were employed on this project are nowfocused on our second most significant course of churn, product reliability andfirst time resolution. I want to drive quality end-to-end through ourorganization.

Thishas replaced the billing system as the number one project in the company and Iwill not let our focus deviate from this. I have restructured the organizationto reinforce the importance and priority of this and I am confident that itwill be as successful as the billing system migration was.

Ialready touched on the third reason for churn, which is the value for moneyissue around our existing customers. As I already said, we have started toactively address this issue in the quarter by implementing proactive retentionactivities based on customer value and risk of churn.

Targetingof churn is my number one operational objective and is the biggest driver ofvalue in this business. I am very confident that we know the factors that causechurn and the steps we have taken and are taking will be successful inachieving significant churn reductions in coming quarters.

Now,let me hand over to Jacques.

Jacques Kerrest

Thankyou, Neil. On my first slide, I will start with revenue. Consumer revenue hasfallen by GBP11 million in the quarter, due primarily to a reduction in ARPU.As Neil has explained, we have adjusted our acquisition and retention pricingin order to successfully return to customer and RGU growth. Business revenue isup by 4 million pound, primarily due to growth in data revenue.

Ourcontent revenue is up by 6 million with VMtv revenue up by 1 million due to thegrowth in both subscription and advertising revenue and with sit-up revenue upby 5 million due to increased retail sales. Mobile revenue was up by 12 milliondue to subscriber growth and improved contract mix and increased ARPU. The resultof all this is a GBP11 million increase in total revenue for the company.

On theslide called Q3 OCF, as you can see, we have experienced strong growth in OCFthis quarter, up 26 million to 342 million. There have been a few factors goingin both directions that have affected OCF this quarter.

Firstly,our underlying SG&A has been reduced as we have continued to make costefficiency driven by around 400 headcount reductions.

Secondly,there have been a number of favorable operational improvements which will haveongoing benefits, but have also resulted in larger onetime benefits within thequarter as set out in the slide. For example, due to operational improvementsin our billing, collections and new customer acceptance procedures resultingfrom the integration of our billing systems, our bad debt expense was GBP7.5million lower than the second quarter. Also, as a result of a revision of ourexpected payments under the company incentive scheme, the related expense was GBP8.5million lower than on the previous quarter.

Withinour content segment, we have favorable settlement of a couple of long-standingcontractual issues resulting in gains of GBP4.7 million.

Andfinally, due to some senior management departures there were a number of forfeituresin our SBCE plans that contributed towards a GBP7 million, favorable movementon SBCE expenses.

We donot expect these same benefits to recur in the fourth quarter. Accountingrules, as Neil indicated, require us to take all the benefits in Q3, eventhough some of the benefits will be ongoing, such as, better bad debtperformance, for example.

Some ofthe other major impacts on OCF in the quarter related to the investment in RGUand customer growth that you've heard Neil talk about.

We havealso made disciplined investment in acquisition cost within our mobile businessto improve prepaid growth.

Andfinally, we have continued to improve our content offering. For example, formid-August, we have added Setanta channels to our top-tier basic packages andhave also added premier ship clips to our broadband portal.

Turningto my next slide, I have set out some of the factors that will impact Q4 OCF.Firstly, we will continue to proactively invest in RGU and customer growth. Wewill be continuing to up sell and cross sell to support ARPU at the same timeas growing customers and RGUs. With respect to mobile, we will deliberatelydrive increased acquisition cost in the fourth quarter to grow our customerbase in the critical holiday season period.

Thefourth quarter is also an important time for VMtv and we will be increasing ourprogramming investment to secure improved advertising revenue for 2008. Let meremind you also, that Virgin One launched on October 1st, so there is extrainvestment in programming expense in the fourth quarter.

Finally,the benefits that I referred to in my previous slide are not expected to recurin Q4, although fourth quarter OCF will therefore be below Q3 GBP342 million.OCF for the whole second half of the year should be well above that for thefirst half of the year. It is now clear from the underlying Q3 OCF performanceand the Q4 outlook that we will not hit the guidance we gave at the start ofthe year for 50% growth in free cash flow.

Thishas been affected partly by the customer losses earlier in the year and by ourstrategic decision to adjust our proposition and impact our ARPU in order togrow our customer base going forward. It has also been affected by thelong-term investment we've made in content, such as Setanta and Virgin One. AsNeil and Jim have outlined, we've made these investments in order to betterposition us for better medium and long-term growth.

We arecurrently working through our operational plans for next year and so we're notin a position today to provide updated guidance. Nevertheless, you have heardNeil talk about the challenge we have in respect to our pricing and how weintend to continue to attack our operating expenses in order to grow OCF.

I'll finishon our net debt position. As you can see, at the end of the quarter we havejust over GBP6 billion of gross debt and we have GBP364 million of cash leadingus with a net debt position of GBP5.7 million and the stronger OCF performancein the quarter has caused our leverage ratio obviously, to decline for thequarter.

Andwith that, let me turn it over for questions to the operator. Operator?

Question-and-Answer Session


(OperatorInstructions). And our first question comes from the line of Bryan Kraft, with CreditSuisse. Please proceed.

Bryan Kraft - Credit Suisse

Thanks.I just had two quick questions. First, Neil, how far are you in that process ofgoing through the back book of customers and either re-pricing them or puttingthem or giving them more RGUs with the same money, are we 10% there, are we50%, 80% there? I’m just trying to figure out how many more quarters we may seesome ARPU degradation as you work through that process?

And thensecondly, I just wanted to see if you could comment on, there's been a lot oftalk about you guys deemphasizing the Quad-play and selling wireless in thebundle. And you sounded a little more bullish on the opportunity and how it'sbeen going. So, maybe you could just address that as well? Thanks.

Neil Berkett

Thanks Bryan. I'm not in a position to talk about the specifics of theway in which we work through our back-book pricing. I can say that we aremaking good progress. I can say that we are, each month that goes on, buildingand developing the skills around knowledge and investment in systems that allowus to do a better and better job of it.

It ismy objective to ensure that the net present value of our portfolio going into2009 is greater than the net present value of that portfolio as we enter 2008and we will continue to provide information around that progress.

Inrespect to the Quad-play, you are quite right, Bryan. I like to think about us as being the agent that providesaccess to content and applications across all four of our products. And,therefore, the Quad-play is absolutely critical to us achieving that end.

It iscritical, in fact, in terms of driving the ARPU that you were talking aboutearlier because it gives us the cross-sell and the up sell opportunity,something that we are proving to be quite good at. But within that, what I callour hero product, is clearly broadband.

And ifyou go back to the fundamentals of the DOCSIS network, we have advantage, yetat 2-4-20 meg, we're not really taking advantage of that. We candeliver 50 meg under DOCSIS 3 inpilots today.

So, youwill see us roll out higher speeds, higher applications and higher quality interms of our broadband network next year and broadband effectively spearheadsour growth and our retention in the market, because that's where we havesuperiority.

But wealso have superiority in the mid TV space on Video on Demand. So, that's a goodproduct as well. So, I will just take advantage of your question to reemphasizethe point. In our productto dealt Broadband is our hero product, but it is our hero product withinthe Quad-play.

Bryan Kraft - Credit Suisse


Neil Berkett



And ournext question comes from the line of Tom Eagan with Oppenheimer & Company.Please proceed.

Tom Eagan - Oppenheimer & Company

Feelsgreat. Thank you very much. My first question is on phone. I was wondering ifyou could talk about what you are seeing in fixed to mobile substitution? Forexample, is it lower or more favorable in your VMED footprint versus in thenon-VMED footprint? And if that fixed to mobile substitution has changed, Iknow it's early, but changed since you've offered the fixed mobile two-play andI have a follow-up? Thanks.


Okay,Tom. Clearly we're continuing to see both usage and price per minute come downin fixed line telephony less consistent with what's happening in the sectoracross the board. The good news is that we're offsetting that by ongoing growthin terms of our mobile business.

Interms of the specifics of fixed to mobile within segments, I'm not really in aposition to comment on that. We are still overlaying our mobile knowledge overthe top of our cable systems and to be able to address segmentation at thatlevel is a bit beyond us at the moment.

And tobe quite frank, it's not that relevant at the moment. The key thing is we haveacquired a mobile business that provides across the board is clearly is thenational footprint for us, an opportunity to be able to grow telephony whilstwe manage the overall decline in fixed.

Tom Eagan - Oppenheimer & Company

Right.On synergies, maybe I missed it but could you go over again, where you areverses the GBP200 million run rate by the end of the year? And then lastly, onFreeview, at the lower base there, could you talk about what early resultsyou've seen if any on migrating offering the VoD service to the Freeview subs?Thanks.

Neil Berkett

Sure, firstone first, Synergies. We will meet the GBP250 million cash per annum guidancethat we said by the 31st of December, 200 million of that being in OpEx.

If youactually look at the underlying OpEx for the third quarter and compare that tothe third quarter of 2006, you'll see that underlying it is a circa GBP25million lower. That's where you're seeing that those synergies come through,obviously inflation, investment in customer care, investment in some of thecontent for the sports portal, etc, provides you the balance to get to the 200million. So, we've delivered those results.

Jacques Kerrest

I willadd just one more thing. At the end of the year, we will give you a fullreconciliation. But also in the same vein that Neil has talked about comparing2006, we will be comparing 2005 with the fourth quarter of 2007 and you willsee that we have more than 100 million. And if you have two years of inflationsand so on, we will get to the 200 million of OpEx.

Neil Berkett

ThanksJacques. In respect to your question on Freeview, Tom, we're actually seeingsome encouraging results here. I refer to Freeview here, as the nursery ground andour ability to be able to provide either a dual or triple, i.e. all product bufferby the TV or in fact, the whole quad-play in there where we replace the DTT boxwith our own set-top box and enable Video on Demand.

About20% of our subs are addressing the space. We affectively yield manage it, aswell. We want to make sure that in a disciplined way, that we can generate theup sell and cross-sell from it, that's looking encouraging. And I do see it asa substantial growth going forward for the strategic slide we had in the pack.

Tom Eagan - Oppenheimer & Company

Great. Thankyou.


And ournext question comes from the line of Ben Swinburne with Morgan Stanley. Pleaseproceed.

Ben Swinburne - Morgan Stanley

Thanks andthanks for taking the question, guys. Just one point of clarification, Jacque,if you could help on the fourth quarter, if we remove those onetime items inthe third quarter OCF number, the result is somewhere around GBP310 million to GBP315million, is that the number that we should be looking at as a base to then sayyou'll be down in the fourth quarter because of the Virgin Mobile seasonalspend?

Jacques Kerrest

Yes,you're correct. If you take down the four items, which are mentioned on page threeof the press release, I think, you come up with 28 million and therefore, 314million. I think againstthat you're right. We're going to have investment as we indicated, inour content business and also the Virgin Mobile issue. We're also going to havegrowth in the fourth quarter and therefore, the OCF will reflect that growthgoing forward.

Ben Swinburne - Morgan Stanley

Great.And Neil, if I could just come back to your points up front about the broadbandbusiness and the DOCSIS platform and I completely agree with your statementsabout taking back mind share on that, the ability of the cable plant to providea better speed than over copper.

What doyou think the realistic timing is and how should we think about the capitalcosts around moving the network to a DOCSIS 3.0 environment? And does thatinclude a significant amount of node splitting as well, in addition to justmoving to the DOCSIS 3.0 software and replacing of modems?

Neil Berkett

Ben, wehaven't made the decision yet, as to when we will deploy DOCSIS 3.0. And infact, we are working through how we will deploy that. It is likely that we'llretain DOCSIS 1.1 as a vehicle for our lower speeds. It's a very capitalefficient way of moving into the new technology.

Andthen, you would roll DOCSIS 3.0 out for your high-end speeds. If for example,we were to move to 50 meg you may run DOCSIS 3.0 for 20 and 50 meg platform.All of that detail we'll work our way through.

Ourcurrent view is that we would roll that speed upgrade out through the course of'08 and into '09. And if we continue with that as an investment plan, if wewere not to alter that speed, then we are comfortable that we could deploy thatwithin the overall capital guidance that we give.

Toremind everybody, that's 15% of our overall revenue which is currently, circa600 million. So, if we were to change that as a profile, we would only be doingso because we believe that the net present value to be created from that wasgreater and we would talk to you about it. But we have no plans in that spaceat this stage.

Ben Swinburne - Morgan Stanley

Okay. Thanksa lot.


And ournext question comes from the line of Paul Howard with Cazenove. Please proceed.

Paul Howard - Cazenove

Okay. Thankyou, Ben, just a couple of questions. Going back to the issue of ARPU, Iwonder, whether you would be prepared to say the size of discount that you aregenerally giving to customers as you look to proactively retain them.

Andthen a second question, I just want to understand the issues around churn. Ithink you said in the quarter that you had an 80% increase in your save rateswhen a customer was threatening to leave you and yet the fall in churn wasrelatively small.

I'mjust trying to understand, how those two statements are consistent and what I'mmissing in that? Thank you.

Neil Berkett

No,what I said, Paul, in respect to the churn is that our save rate was 80%, notan 80% increase in our save rate. So that is an improvement. But we're gettingmuch better at saving our customers but also saving them with a lot moreknowledge at the front end.

So,we're deploying real-time tools to be able to -- so our advisors can actuallysee the value of customers and ensure that the save is long-term or lifetimevalue generative.

At theend of the day, if we don't alter the value that we're giving our customer byeither a price reduction or an increase in the value we're giving them, thenthey'll alter it for us and they'll walk. So, we're far better managing that ina proactive way.

Inrespect to, you spoke about ARPU. We're not in a position to talk about theindividual price changes because if you think about the number of customers, italters customer-by-customer.

Ourobjective is to mitigate price reduction in an ARPU sense by cross-sell and up-selland also to be able to provide those customers, for example, that are on ourlarge product no price increase but give them our extra large product.

So, itis a very complex portfolio management. We've imported a lot of skills intothis space, both technically in terms of building the technical capability, butalso with people from retail financial services who have similar issues, fromsome of the telcos, who have similar issues who have built some great knowledgesystems.

What wedo have is we have the confidence that we utilize lifetime value and net presentvalue in every decision we make around our pricing, whether that be acquisitionor retention.

That'show I can talk about the value of our portfolio. If you think about what it is,it's an annuity stream, which you should be able to value at any point in time.Our objective has to be to increase the value of that annuity stream overtime.

Paul Howard - Cazenove

Okay.Thank you. I just have one…

Neil Berkett

Sorry,can I just make one other point of clarification in terms of the churn? Youmade a comment that the churn hadn't moved that much in the quarter.

Thirdquarter churn is historically, the highest quarter, so to move 1.8 down to 1.7,it doesn't sound overly heroic, but I am pretty chuck with it, I have to say.Because traditionally, the September churn goes right up.

Paul Howard - Cazenove

Okay, Ijust have one follow-up, just on a separate issue. Have you had or are you ableto have any sort of recent discussions with Sky on carriage? Or is it a case ofwaiting until we're through some of the regulatory reviews?

Neil Berkett

It's agood question and unfortunately, we continue to have discussions with Sky,those discussions are ongoing. We have not managed to reach a commercialsettlement at this stage. We'll continue to do that.

I'll justpass over to Brian Hall, our General Counsel and he can just give you a generalupdate in respect to our regulatory process.

Brian Hall

You canappreciate why Neil would refrain from commenting on the day-to-day discussionsthat we have with Sky. As, we have been engaged in a substantial regulatoryefforts here working with Ofcom on the market investigation and we've also beenengaged in a substantial lawsuit with Sky.

Ofcomis still undertaking a review of the detailed facts and other information concerningtheir market investigation and we continue to work with them and we lookforward to them coming to the next stage of their investigative review.

Paul Howard - Cazenove

Thankyou for that.


Ournext question comes from the line of Omar Sheikh with Dresdner Kleinwort.Please proceed.

Omar Sheikh - Dresdner Kleinwort

Hi, everyone,it's Omar Sheikh from Dresdner in London. I've got three questions. First of all, I just wanted tomake sure I understood what you're saying about managing pricing moreproactively. If you look into the current quarter into Q1, it's veryshort-term. Is your initial focus going to be more on reducing the churn side,the retention side and or is it going to be more on the new customeracquisition side on pricing? Or, do you think you'll be able to kind of achieveor concentrate on both at the same time in the next two quarters?

Mysense from what you were saying was that your focus was initially going to bemuch more on churn and just wondered where the new customer acquisition wouldfit in. So, some clarity on that would be helpful? And that's the firstquestion.

Thesecond question was just on churn. Again, I just wondered, where you think youcould take churn to. Obviously, you've had a reasonably good performance this quarter.Historically, your trend has been as low as 1.3% back in Q1 of '06. I justwonder whether you thought getting it back down to that level was a reasonableexpectation?

Andthen, finally, on the pay TV investigation. We're about seven months into theinvestigation. I think we're due to have a document later on this month fromOfcom. I wonder, whether you could update us on where you think you are withthe process and what types of conversations you might have had today withOfcom. And whether, in particular, you thought one of Sky's main argumentsabout maybe opening up the cable network to competition might be gaining sometraction? Thanks.

Neil Berkett

Let mepick those off one-by-one. Our acquisition strategy continues, clearly we go intothe market with a bundled proposition. Sometimes we'll lead with one of theproducts and follow with an up-sell. But we're starting to get the Virginbrand, as Jim was talking about earlier, is really starting to bite. We'rehitting the market in terms of our bundles and our conversion rates areactually increasing.

So, I'mcomfortable that our level of gross adds are about right. If they move up ordown, it will be our assessment in terms of overall value creation. I'm goingto be like a stock record, I am absolutely committed to making every pricingdecision in our organization around creating customer lifetime value, notshort-term revenue ups or down. So, you need to take the annuity stream everytime, into account in making those decisions. So, that will continue.

Inrespect to churn, churn is not just about value for money. The underlyingreason for churn, the number one reason for churn in our organizationhistorically, has been our core building systems. The ex-NTL billing systemswill not fit the purpose. We've got back and the majority of that is now behindus. All of our customer service reps are actually dealing on a single streamtoday. That's a major, major achievement so it sits behind us.

Thesecondary, or as I spoke about, is driving quality into the organization suchthat our products are more reliable and if something does go wrong, we addressit first time. That's our number one focus at the moment. Those two itemsthemselves will have an impact in terms of overall churn. It will not be theeffort, we have to do around managing our incumbent customers that will drivethat forward.

Youasked the question secondly, in terms of churn targets, and ex-Telewest I thinkactually got as low as 1.1 at one stage. I think that is completely unrealistic.That was in a market where Telewest and NTL were not competing with each other,and they were the only organizations that were in the market as a triple-playat the time. We are currently at 1.7. Clearly, I believe that there isimprovement to be had and we will strive to make that improvement. The marketitself and our ability to compete will dictate how much better we get. But weknow this is the shortest route for value creation and therefore we are makingit our number one priority.

Thereason that I spoke about it immediately after the billing conversion is I'mvery proud of what the team has done in terms of those billing conversions. Itjust shows what can be done when you focus on a few big things and that's theapproach I'm taking to reducing churn.

Inrespect to the pay-TV investigation, I really don't want to elaborate on that.We are in constant discussions with the regulators. We provided our thoughts interms of that as a market along with BT, with Setanta, with Top Up TV. We lookforward to the next report that comes out from Ofcom, and then I think, we'llbe into next spring before we actually see the results.

Omar Sheikh - Dresdner Kleinwort

That'sgreat. That's very clear. Thanks.


Ournext question comes from the line of Joe Boorman with New Street Research.Please proceed.

Joe Boorman - New Street Research

Thankyou. Just a couple of questions, please. Firstly, just to change the tune alittle bit, Neil. Could you help us understand, is this really a one-offprocess on price? Do you think you go through the back-book once and then itstops or do you think they're trying to achieve a position in the marketplaceand you'll price cut if you need to in the future to keep that position as yougo forward?

Secondquestion, you mentioned 15% and maybe I'm misremembering. I always thought sortof CapEx was 13% to 15% around there. And where you're thinking DOCSIS now shouldbe nearer 15% for the next couple of years, CapEx to sales? Thank you.

Neil Berkett

Yes. Weare not a price leader. We don't intend to be a price leader. We have a premiumproduct. I think, particularly when you move into the decommoditized world ofDOCSIS 3.0, high quality, high bandwidth, great applications, great contentthat drives that value, you don't need to be a price leader.

Weintend to take the same position wherever we have a non-commoditized product.Fixed-line telephony is a commoditized product. We will move whatever themarket needs to move to be able to protect our base there.

And Ithink the way in which we will compete going forward, it becomes more-and-morewithin the bundle. So, the reduction you're seeing in terms of ARPU is areflection of the work that we're doing proactively, in terms of the bundle forour incumbent customers for our back-book. I don't see us, if the market movesagain. We would need to take a position.

But Ithink, in fact, probably more importantly, let me just come back from pricingfor a minute. Our cost to deliver to the home for the triple-play is superior toanybody else's, full stop today. So, our cost per serve, because we're on asingle platform across cable, is significantly below either a mixed operatorlike Sky, where you satellite out an IP back in, or on a copper operator that'strying to run triple-play across copper like at Tiscali.

So, ifyou have a superior economic advantage and if you have a superior technicaladvantage, then exploit it. You don't need to do that with price. Our view isthe route to value creation is to find the right price for our premium product,if that needs to be below or for some of our existing customers, but then to beable to keep those customers for longer, so that we exploit our better economicadvantage.

Interms of CapEx, you're quite right. Our guidance is 13% to 15%. It's hoveredbetween those on a quarter-by-quarter basis. That is our ongoing guidance. Whenwe're in a position to know exactly how we're going to deploy 3.0 we'd be in aposition to give you an update, but we are not altering our guidance in respectto the 13% to 15% range.

Joe Boorman - New Street Research



Ournext question comes from the line of David Kestenbaum with Morgan Joseph.Please proceed.

David Kestenbaum - Morgan Joseph

Okay,thanks. Jim, can you just update us on the strategic review process? And then,can you talk about the quad, how many quad-play subs you have and what givesyou confidence that you can start selling the quad-play more effectively?Thanks.

Neil Berkett

Okay.Jim, do you want to pick that up first?

Jim Mooney

Sure.There really isn't much to report. The interested parties have continued to dotheir work. Everyone is sort of just stalled waiting for the credit markets toopen up again. As you all know better than I do, there have been some smalldeals done, the big 300 billion glut of credit is slowly working its way out. So,I think when you look at what we showed buyers in terms of our progress for therest of this year and into next year, I think Neil and his team have clearlydelivered on that. As a matter-of-fact, we've beaten the numbers that we'veshown to the buyers in terms of great growth.

Thecash flow point that Jacques made is really the law of small numbers. Whenyou're saying you're growing cash flow 50% and it's a small number and you veryconsciously make decisions to invest in Virgin One, our VoD platform, Setanta,other content and then really go after the market with much better precision onyour ARPU management, which Neil and his team have done, that is not worrisomeat all to me, that's exactly what we should be doing.

So, Ithink if anything, we've strengthened our hand in this delay period in terms ofhow we're running the business and the results we're getting. And I think thesecond half volumes as we go into next year will be clearly superior to what wetold buyers they would be back in the summer, when we were going through themanagement presentation.

I justremained very confident that when the market is clear and none of us reallyknow exactly when that will be we'll be in very good position to take advantageof that. Neil?

Neil Berkett

David,in respect to quad-play, you can assume that the vast majority of everycontract mobile we sell circa 90% is sold into the base. So, you'll see thateffectively the quad-play or in fact the mobile penetration into a dual forthat matter continues to grow.

It'sinteresting, when you look at some of the earlier statistics within VirginMobile for contracts that were sold uniquely, i.e. not into the base, the churnrate for those contracts was approximately double the churn rate for thecontracts sold into the base.

So,early days, yes. But we are seeing the same economics moving from a triple to aquad as you were from a dual to a triple. So, that's very encouraging. As I say,still in a relatively low base, number of quad-plays is in excess of 100,000 soit's a small base, but it's encouraging news.


Andthen, next question comes from the line of Simon Weeden with Goldman Sachs.Please, proceed sir.

Simon Weeden - Goldman Sachs

Excuseme, if you've been asked this one. I think I did have a couple of questions,but most of them have been covered, to a degree. Going back on DOCSIS 3, itseems to suggest that you do expect to have 50 meg in the market commercially,next year. On what stage might that come in? And at what point, if there is apoint, at which the saving of the CapEx there makes a different to what we'relikely to see quarter-by-quarter, when would that come? Thanks.

Neil Berkett

Simon,I'm not making a guidance around the timing of launch of 50 meg. What I amsaying is we will upgrade the speeds across our network during 2008. As youwould understand, I'm sure the timing of such a rollout is a detailed planningprocess. We need to be able to maximize the opportunity in terms of clearly,speed to market that optimize the way in which we do that rollout, so as toensure we don't end up with dead capital across a 1.1 network, particularly inthe CPE space.

We willhowever, move from what is currently a 2-4-20 banding across our medium, large, extra large to fasterspeeds than that across the network, that's the statement I'm making today.

Simon Weeden - Goldman Sachs

Andthey stop this TV and will be available to customers during the course of theyear?

Neil Berkett

Yes,they will be. For example, we have circa 300,000 customers today who are on 20meg. So, we will move out two and four meg speeds and we will start to exploreover the next 24 months what our top-end speed will be and the market and ourprioritization will dictate when we do that.

Simon Weeden - Goldman Sachs

Okay. Thanksa lot.


Our nextquestion comes from the line of Steve Malcomb with Arete Research. Pleaseproceed.

Steve Malcomb - Arete Research

Hi thereguys. Can I ask three questions please? The first is on off-net, which youhaven't really mentioned that much in the presentation. And everything you'resaying, Neil, I think sounds very sensible, but it's kind of inconsistent withan off-net strategy. You said, do less and do it well. You're talking aboutputting daylight between yourselves and competitors on cable planned versuscopper planned. Do you still think doing off-net is a smart thing to do? Firstquestion.

Thesecond is on your gross adds and CPE cost and you did obviously, a very goodgross add number and your CPE cost actually fell. So your CPE progress add fella lot in the quarter? Can you tell us a little bit about the mix of gross addsand why that happened, whether it's just broadband only subs in the mix that'sdriving that down?

And thefinal question is on the guidance. I appreciate you don't want a give '08guidance at the moment. Do you think it's consistent or smart to haveshort-term free cash flow targets, which may not necessarily be consistent withvalue creation in the business along the lines that you've talked about and maybemore sensible to spend a bit more to drive the business long-term next year?Thanks.

Neil Berkett

I'llpick those up one-by-one. I didn't provide any update on off-net because thereis no real update to be provided. We are on target to enhance our product setat the back end of Q1, beginning of Q2 in next year. That's when we'll berolling out wholesale line rental and that's when we will be moving to the 4.5million home footprint of cable and wireless. That will start to deliver bettereconomics for us on that off-net and it will also perhaps, provide a criticalelement being wholesale line rental.

Myposition on off-net is that it makes sense. It is principally, a defensivestrategy in that we have circa 170,000 customers a year that move off-net to beable to provide them with our medium product because basically, copper will notallow us to provide sort of bandwidth and speed that we would do for our extra-largeproduct. It makes a lot of sense for me.

We're anational player. We spend tens of millions of pounds a year on nationaladvertising and an element of that falls on deaf ears. So, it is a low capital,low-risk, make sure it works strategy. It is not top of the pile in terms ofwhat we need to do in terms of capital investment.

Interms of your question around gross adds and CPE, it varies quarter-by-quarterin terms of how we deploy our CPE, where it's sitting in the refurb cycle, howmuch we acquire. So, any blip you see in a quarter is generally going to be atiming blip. There has been no radical change or material change into the wayin which we deploy capital through CPE. So, no real change there.

Steve Malcomb - Arete Research

Thegross adds that you're adding are pretty much the same gross adds in terms ofRGU per gross add that you normally add, is that correct?

Neil Berkett

Yeah,in fact the back end of the quarter, I was very pleased with our triple-playpenetration at point-of-sales. One of the things that’s been driving throughthat 200 basis points a quarter.

Interms of guidance, I really want to get ourselves into a position where we havea credible story. We talk about what we're doing and what the underlyingmetrics for that will be and we provide you with enough information for you tobe able to work out your own short-term position. I mean, clearly we would needto talk to the market if we've got that wrong.

I thinkit's far more important that we can articulate how we create long-term value.And the route to long-term value is enhancing the value of our annuity streamon the top-line and driving efficiencies through our OpEx on the bottom line.

And hopefullytoday, we've demonstrated how we're going to go about that and the results aswe roll through quarter-by-quarter. We can update you on our overall progressfor that. I don't want to get into the position in terms of providingshort-term guidance around the next quarter. I do want to get into the positionto be able to create credibility around what we're doing to create long-termvalue.

Steve Malcomb - Arete Research

Justcoming back to the first question on off-net, given what you've said on cable,you don't think it's given limited resources it would be more sensible todeploy those on expanding the cable footprint?

Clearlyyou have customers moving out of franchise, but you also have them moving inand the net effect of that should be pretty close to zero. If you're winningcustomers successfully would it not be more sensible to deploy some more cableplan than sort of go down the DSL routes?

Neil Berkett

Look,Steve, it's a good strategic question. In times, as all times are of makingchoices right from right, you have to need to make those decisions. I'll repeatwhat I said. I think today, off-net makes a substantial lot of sense. There isa lot of OpEx that flows over the top of beyond cable, our off-net propositionin terms of the way in which we spend nationally. We have a nationalproposition already in terms of mobile, but clearly in a capital trade-offposition, I've been quite articulate in terms of where the priorities are forcapital. The priorities for capital are ensuring we've got the best broadbandnetwork far none in this country.

Steve Malcomb - Arete Research

Okay. Thanksa lot.

Neil Berkett

Okay,just operator, last two questions. Thank you.


Ournext question comes from the line of Jerry Dellis with JP Morgan. Pleaseproceed.

Jerry Dellis - JP Morgan

Yes.Good afternoon. I've got three questions, please. Firstly, you've talked aboutrebalancing the tariffs on which your legacy customers currently reside. Whatproportion of that has been done so far? Are you in a position to tell us whenyou would expect ARPU to start stabilizing?

Secondly,looking back at this Q2 report, you actually said at that stage that cablechurn, excluding the loss of customers on from Sky Basics, was 1.6%. So, onthat basis churn has actually increased on a like-for-like basis this quarter.Is there something I'm misunderstanding there?

Andthen finally, if we consider pure overhead costs, what proportion of theintegration benefits do you think would come through at the Q3 stage versuswhat's still to come? Thank you.

Neil Berkett

Okay.Let me pick up the first couple and I'll ask Jacques to answer the third interms of percentage of overhead of integration costs coming through.

As Isaid at the beginning, Jerry, I'm not in a position. I don't want to talk abouthow far we are through the legacy tariffing. I'll repeat what I said with oneof the opening questions. We were driving lifetime value, we're driving netpresent value, and as I said, I want to drive the business such that on the 1stof January, 2009 my net present value of our overall consumer annuity stream isgreater than it is on the 1st of January, 2008.

Whatthe mix of that is in terms of RGUs and ARPU will be a subject of what'shappening in the marketplace. The most important thing is you drive and increasein terms of your month-by-month annuity stream. That's far more important thanthe number of RGU's in isolation of ARPU or ARPU in isolation of the number ofRGUs. And in a way, you had seen some of the impact of having ARPU first, RGUsecond, in terms of lack of growth in the business over the last few quarters.

With respectto your question of Q2, you're absolutely right. We did provide a walk from 1.8to 1.6 in terms of churn. Thedifference in terms of churn quarter-on-quarter is quite important. There'sseasonality in terms of Q2 to Q3. If you look at Q3 churn in 2006 you'll see wemoved to 1.8% in our Q3 churn in 2006 and we are at 1.7% in Q3 churn in 2007. So,that does reinforce the point that I made that there's been an improvement. So,you've got underlying seasonality, but overall, you've got an improvement interms of churn.

Inrespect to OpEx and integration, we won't be going into too much detail herebecause we will be doing that, as Jacques said earlier, in terms of Q4. ButI'll hand over to Jacques.

Jacques Kerrest

Thanks,Neil. The integration costs are obviously going down as we get towards the endof the year. And, as Neil has indicated, we'll give more color at the end ofthe year. But we also should tie this to what Neil said in terms of theintegration of all the billing systems, which are almost finished for thecompany it will be finished by the end of the year. So, you can imagine thatour integration costs are continuing to go down and as I said, we'll be throughwith this by the end of this year.

Jerry Dellis - JP Morgan

Sorry,my question wasn't really to do with sort of the restructuring coststhemselves. In July, you went from three billing platforms to two, sopresumably you took a chunk of cost out of the business at that stage, a chunkof ongoing overhead out of the business at that stage.

Withrationalization to a single billing system in October, presumably there's afurther chunk of cost that comes out of the Q4 stage. And what's the roughmagnitude as to what was taken out in Q3 versus what will still come out in Q4?

Jacques Kerrest

Yeah. Idon't think we are ready to give these details at this point. But rememberthat, as Neil has indicated, we're not completely through with it and thedecommissioning of the old system is going through, as we speak. We just migratedthe last NTL billing system just a few weeks ago, so you can imagine that wedidn't turn-off the old system immediately. We still have some costs going onbut we'll give more colors when we finish the 2007 year.

Jerry Dellis - JP Morgan

Okay.Thank you.

Jacques Kerrest

Okay. Lastquestion. Thanks, operator.


Our lastquestion comes from the line of Steve Scruton, with HSBC. Please proceed.

Steve Scruton - HSBC

Yes,hi. About the next generation broadband launch, DOCSIS 3 is 100 or even 160 megsin parts of Asia, do you see 50 meg as just the start? And do youanticipate a national launch or would you start say with the Telewest areas?

Neil Berkett

Thespeed that we run is our headline speed. We will be, what we think isappropriate as a commercial model in the UK. It's one of the reasons we're doing 50 meg trials andmoving them into commercial trials, checking price elasticity, checking usage,checking what some of the great contents and applications you can use usingsuch speed look like and how acceptable that is.

So,you're absolutely right. We have the capability to run much faster speeds andwe may decide to launch with 50 meg and then move higher down the track. All ofthat still to be worked through in detail. I think the most important thing interms of next-gen is that we're in a unique position to be able to deploy andwe're in a unique position to be able to continue to grow our advantage inrespect to quality and respect to speed. How we use it, we'll see.

Steve Scruton - HSBC

Thanks.And the Telewest versus NTL?

Neil Berkett

We havethe capability to roll-out on a franchise-by-franchise basis. Effectively, wewould drop 3.0 into the head ends and then you would exercise how you rolled itout affectively through CPE usage because you can't use your current CPE.

Soagain, it's early days in terms of how we would deploy and we have quite asubstantial element of flexibility there. It will all be driven by what wethink is the quickest route to value.

Steve Scruton - HSBC

Okay. Thanksvery much.

Neil Berkett

Okay.On that, I'll pass over to Jim for a close as our Chairman. But thanks,everybody, for your participation. Jim?

Jim Mooney

Thanks,Neil. So again, I'm very pleased with the way the team has gotten the businesson-track under the Virgin brand. I think Neil's point about lifetime customermanagement and managing the annuity is exactly the right point we should be on.And we are getting the volumes back up to very respectable levels while beingvery, disciplined. Financially listen, we're going to very carefully manage ourARPU going forward, we're going to use it as a weapon.

As Neilsaid, we have the lowest cost base in the country and the best product line so itwould be very foolish not to use those weapons at our disposal. So, I think theteam is off to a great start under Neil's leadership here. I'm looking for moregreat things as we go forward from the team. We've built a great team now andyou can see the power of the Virgin brand really being exploited. So, a realgood start. A lot of work to do, but I think the ship is clearly heading in theright direction, driving the volumes that will eventually lead to veryrespectable revenue growth as we get down the road some. But the lifetimemanagement of our customer base is, key to that.

So,thanks for your attention this morning and we will look forward to talking toyou again real soon. Thanks, everyone.


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