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Virgin Media, Inc. (VMED)

Q2 FY08 Earnings Call

August 7, 2008, 9:00 AM ET

Executives

Richard Williams - Director of IR

Neil Berkett - CEO

Charles K. Gallagher - Sr. VP of Finance

Analysts

Wilton Fry - Merrill Lynch

Jerry Dellis - J.P. Morgan

David Gober - Morgan Stanley

Matthew Walker - Lehman Brothers

Presentation

Richard Williams - Director of Investor Relations

Good morning or afternoon to you all and welcome to Virgin Media's Q2 Results Call. On today's call, we have Neil Berkett, our CEO; Charles Gallagher, our Senior Vice President of Finance; and Jim Mooney, our Chairman.

Please can I draw your attention to the Safe Harbor statements on slide two, and remind you that some of the statements made today maybe forward-looking in nature and that actual results may vary significantly from these statements. I would also ask you to refer to our latest filings with the SEC for applicable risk factors.

Now, I'll turn to you over to Neil.

Neil Berkett - Chief Executive Officer

Thanks Richard and thanks everybody for joining the call. I'm pleased to say again that we have delivered another solid set of results.

Let's start by looking at some of the key improvements compared to a year ago. We've delivered our best ever underlying OCF of ₤330 million, which is up 6% year-on-year. SG&A is down 9% year-on-year.

Our actual Unite ends [ph] are up a 132% and as promised, we've kept churn low at 1.3% which is down 50 basis points in the last 12 months. In fact, slightly better than we expected it to be. Triple-play is now at a record 53%, that's up 8 percentage points up on this time last year. We are also the only major broadband provider in the U.K. to grow net ads compared to the same quarter last year. We've grown our broadband base by 11% over the year. More importantly, we've grown our 20 megabit top tier by 82%.

Our video on demand usage has virtually doubled at a 92% year-on-year growth. And we've grown mobile contracts that brought subscribers by 64%. So let's also look at our strategic progress and how that fits in with our role operational progress.

Our strategic priorities are firstly to lead the next generation broadband market and speeding quality. And lead and redefine the TV experience through our on demand platform.

Thirdly, to leverage our position to mobile as the third screen. We continued to make progress... great progress in quarter two at 4 to 10 megabit broadband upgrade program is now 70% complete and will be finished in the next couple of months.

Our plan is to launch 50 megabits in the fourth quarter remain on track. And we have also significantly enhanced our TV offering, the launch of BBC, iPlayer. Video on demand usage remain strong and the iPlayer launch has had a dual effect of using VOD usage and freeing up peak time capacity on our broadband platform.

We continued to see strong growth in mobile contract customers to the cross sale through our cable base. And we are leveraging our position in mobile with the launch of a mobile broadband service later this year. In terms of operational progress, reducing churn remains our number one operational priority. This was down 50 basis points year-on-year. As expected, the June price rise did not result in a material increase in churn.

Broadband net ads continued to be strong. The number of 20 megabits subscribers is growing well, so is TV. We are pleased that our efforts to repair subscriber losses in telephony through smart pricing and bundling are continuing.

We are effectively managing our best book of customers, using cross sale and up sale to mitigate pressure along with the press rising June, just narrowed the gap between the back book and front book pricing. Well, over half of our customers are now triple-play, is contributing to improvement in year-on-year revenue trends.

As I said before, we are managing a long-term lifetime value. And we are well on track to measurably grow the lifetime value of that customer base of the first of January 2009 compared to the beginning of 2008. Therefore giving a great growth impetus going into 2009.

Finally, data fitting from substantial cost savings, particularly in SG&A just speeding through into improved margins in OCF. We continued to focus on right sizing our business and hit the right cost and organizational structure to position us for long-term cash flow growth. Particular this quarter, we have agreed a new wholesale deal with T-Mobile in our mobile division, it sees us receive immediate and future cost benefits. But most importantly, it allows us to offer more competitive mobile data products.

Going forward, we will continue to target substantial cost reductions in a number of areas as we continue to reengineer the business. With the number of ongoing work streams to help deliver this, and when we are in a position to share more detail with you, we would do so. We clearly have an opportunity to expand OCF margins in the next few years.

Well, let's get into the detail. Our top priority is reducing churn. And it was 50 basis points lower than last year, which is a great achievement. Of course, Q2 last year did include the impact of a lot of sky basics but as you can see, there is still considerable year-on-year improvement. The biggest improvement has been in voluntary controllable churn. There are several contributing factors and I'll highlight just three. We've achieved substantially improved key touch points with our customers. Now have a single fit for purpose billing system covering all of our only customers. And that has defeated some of quality of service issues we used to have.

Secondly, I have also restructured the organization to reinforce the importance of both product reliability and this time resolution. Both that cool answer statistics and all right have measurably improved in the last year.

Thirdly, value for money that pick some voluntary churn and we are successfully addressing this through effective management of our back book. In addition, non-pay disconnects are down 27% year-on-year that thing improved credit controls and focus on quality growth. As expected, churn is up by 10 basis points sequentially due to a seasonal increase in movies churn, which includes student churn and rental moves.

You can see that non-pay churn is down on the previous quarter, despite the softer economic environment. Put through a price rise in June and as predicted have not seen any material increase in churn. As usual, we do expect the seasonal churn increasing Q3 which is typically 20 basis points. But we expect it to remain lower than Q3 last year. A churn improvement is sustainable. Targeting churn remains my number one operational objective and reducing it is the biggest driver of value in this business. Churn reductions with margin and value so reducing churn in 2008 through to 2007 should give us a greater growth impetus going to 2009.

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