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Virgin Media (VMED)

Q4 2011 Earnings Call

February 08, 2012 8:00 am ET

Executives

Richard Williams -

Neil A. Berkett - Chief Executive Officer, Chief Executive Officer of Virgin Media Investment Holdings Limited and Director

Eamonn O'Hare - Chief Financial Officer and Director

Andrew M. Barron - Chief Operations Officer

Unknown Executive -

Analysts

Timothy Boddy - Goldman Sachs Group Inc., Research Division

Nick Lyall - UBS Investment Bank, Research Division

Unknown Analyst

Robert Grindle - Deutsche Bank AG, Research Division

Paul Sidney - Crédit Suisse AG, Research Division

Simon Weeden - Citigroup Inc, Research Division

Stuart Gordon - Berenberg Bank, Research Division

Carl Murdock-Smith - JP Morgan Chase & Co, Research Division

Henrik Nyblom - Nomura Securities Co. Ltd., Research Division

Wilton Fry - BofA Merrill Lynch, Research Division

Michael Bishop - Barclays Capital, Research Division

Frank Knowles - New Street Research LLP

James Ratzer - New Street Research LLP

Presentation

Richard Williams

Good afternoon, everybody. Good morning to those listening on the phones from the United States. Welcome to Virgin Media's Q4 Results and Strategy Update Presentation. I'm Richard Williams, IR Director. To my right, firstly, we've got Neil Berkett, our Chief Executive; and Andrew Barron, Chief Operating Officer; and Eamonn O'Hare, Chief Financial Officer.

We're going to have Neil and Eamonn review our Q4 results firstly. That will probably last for around half an hour, possibly a little less. Then, we're going to give you a bit more of a detailed strategy update. That will probably last [indiscernible], and then we will have a Q&A session.

I'll draw your attention to the Safe Harbor statement on Slide 2, where we set a cautionary disclosure, which [indiscernible]. I also point out we will be mentioning certain non-GAAP measures today. The required [indiscernible] with respect to these are found in the appendices to the slides.

And so with that, I'll hand you over to Neil.

Neil A. Berkett

Thank you very much, Richard. Today's session takes place at a time of significant change in our industry. Whether that be U.K. households, consumers or in fact, enterprise. And the market for more sophisticated mix [indiscernible] service is actually happening apace Q4 results. I offer some encouraging evidence that Virgin Media is successfully positioned and positioning itself to exploit this opportunity.

In our strategy session, I'll speak more about how we're going forward in this respect and how we continue to build on this momentum. And ultimately, monitor opportunities that a mass market of digitally enabled customers, business and consumers actually present.

Having said that, I fully acknowledge that strategic and operational progress will not always translate into linear, i.e immediate progression in terms of our overall quarter [ph], not for a minute suggesting that we won't stand up and be accounted [ph] every 90 days. What I'm saying is that at times, strategic progress will be lumpy and strength in some aspects of our operating metrics will sometimes be offset by a more muted performance in other areas. And I think Q4 is a case in point.

Because in this quarter, we did continue to make some strong progress in the face of some time-limited headwinds, but that our positions -- this positions us very well all for 2012 and beyond. It's really starting to come through in some better operational performance. As I say, it won't always come through perfectly in across all of the aspects, i.e, firing on all 8 cylinders of our operating performance. Because there were some very strong operating positives in the quarter. Churn improved. So for the first time in 6 quarters, churn's come back to the level it was for the same quarter in the previous year. Business finished very strongly with circa 7% revenue growth for the full year in line with our guidance that we gave at the half year. I'll try not to make the ride quite so lumpy in 2012.

We had a record quarter for contract net adds, 100,000 net adds. Gross adds, 85% of contract were sold into Virgin Media homes. And we finished the year with 5% OCF growth, 21% free cash flow growth, which I can now say is exactly what we expected at the beginning of the year when we set our budgets. And I have to say in 2011, for that to have been achieved, is a credit, I think, to the Virgin Media team and to our people, to achieve a budget in such a tough economic environment.

But yes, there were some mixed statistics, too, in the quarter. Another quarter of 2% revenue growth, principally driven by consumer ARPU. But as we've explained, and I will do further, that's in the face of a pretty tough comparator. And mobile revenues were also down, and that's in the face of prepay decline, which is a structural decline, and obviously, the MTR headwind.

Strategically, however, we continue to make very, very strong progress in rolling out our differentiated products. TiVo had a fantastic quarter. We've now reached a penetration of 12% of our base, and we've only been running at it for 6 months since we started our above-the-line advertising. I think it's fair to say, having read the reports this morning, that far exceeded everybody's expectations.

We're also having very strong demand for superfast broadband, 30 meg and above, 133,000 net adds for the quarter. The combination of TiVo and superfast broadband is providing very strong differentiation, and it gives us confidence that we can execute the price [ph] rise that we had already announced [indiscernible] that we put in place for April.

So strong data growth results also in business revenue being up 7%. So I'll talk about how data growing in double-digit figures and revenue in turn [ph] and for that to continue.

So overall, I think we produced a strong performance for the quarter, and one that continues to prove that our business model of producing modest revenue growth, and superior free cash flow is intact.

So turning now to the revenue growth. Another year, sustained modest revenue growth. We delivered 2% growth in the quarter and 3% for the full year with a solid full year results, both across cable and Business.

And as we guided at the beginning of the year, Business revenue was roughly double that of Consumer, and we expect Business revenue to continue to outpace Consumer over the next planning cycle.

Cable revenue grew at some 3% for the year, weaker in Q4 because of the lower ARPU growth that I've explained. Mobile, clearly mildly at a negative for the year, and again, dragged back by the prepay decline and the overall MTR cuts. Pleasing to see, however, that contract mobile now outpaces prepay decline. Business, as I say, finished very strongly with 7% growth in the year. So with that, let's go into more detail.

So cable revenue clearly has 2 pillars, customer growth and ARPU. So let me start with the first pillar, growing customers. We have delivered positive customer growth for the full year per our guidance at the half year, which was encouraging considering the poor net adds performance in the second quarter. So we ended the year relatively strongly with some 15,000 net adds in the fourth quarter, similar to that, that was achieved in the fourth quarter of last year. So we've seen gross adds that were relatively solid for both the year and for the quarter, but disconnects had been up for the first 3 quarters. And we've seen that improvement in terms of churn for the fourth quarter. So clearly, it's early days to call this a trend, but it's very encouraging. And I think it's no coincidence that it coincides with our strong differentiation in terms of superfast broadband and TiVo coming together.

Finally, we can see that we've been improving the customer mix with a shift in mix towards Triple's and Quad's. We also feel that we're starting to move in terms of customer loyalty and look to continue the churn going forward.

Second pillar of cable revenue growth is obviously ARPU. ARPU was the key driver in the full year for cable revenue performance in 2011. Cable revenue, up 3%, driven by 2.3% growth in ARPU. However, the fourth quarter ARPU growth was clearly weakened at 0.7%, reflecting, as we've said, a tough comparator quarter. And we've pointed that out in our Q3 results. It's actually important though to notice that the gross margin level [indiscernible] actually grew by 1.2%, so the average marginal average contribution per unit grew at 1.2% whilst ARPU only grew at 0.6%. And let me just explain why that was the case.

Certainly, in terms of overall ARPU, 35p of snow-related activity. Sometimes snow is a wonderful thing when you're a fixed line telephony operator. But it occurred a bit late for Q4, and actually isn't heavy enough so far for Q1. But we did all benefit from it in the fourth quarter of 2010, and we pointed that out obviously at the conclusion of that quarter. But also, there was a couple of events that occurred. If you'll recall in Q3 of 2010, there was very intense activity between Sky and BT over the launch of [indiscernible]. We benefited from that with some quite subdued advertising. We had a big uptick of Sky Premium customers from Q3 to Q4 in 2010. Revenue fine, ACPU very, very small subject to regulatory reform.

So that's the principal reason that we see the delta between the ARPU and the ACPU. I think there was a pay TV or a pay -- a fight movie that occurred in the same quarter. But obviously, a significant contributor in the quarter is the continual headwind that we face in terms of declining telephony usage, which I'll talk about a little bit later in the strategy session and the mitigants that we have been having in place for quite some time.

So onto broadband. And here, we see our tier mix continues to improve, and it continues to improve and demonstrate to us the elasticity that exists in the market in respect to the various tiers. And we now run with circa GBP 5 per tier differential, and we can see that starting to flow through in terms of our underlying subscription revenue streams. So in the fourth quarter, we had another quarter, the third quarter, I think, around half of which broadband gross adds took 30 meg or above. This compares to only 32%, taking as it was 20 meg and above this time last year. So we added 133,000 superfast customers in the fourth quarter with an associated ARPU. 17% of our base is now 30 meg and above, 28% of our base is 20 meg and above, with the price differential being very small. This combined usage and preparedness to pay has given us the confidence to double our customers' broadband speeds, which we announced a few weeks ago.

Onto TV as a product. Here, the strength of TiVo is contributing to the quality of our subscription revenues, alongside continual progress in growing the pay TV base. And I'll remind everybody that it was only 2 or 3 years ago that we had 28% of our TV customers that were free, M, and that is now 18%. We don't sell the product anymore, and you will see that continue to drop.

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