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Virgin Media Inc. (VMED)

Q3 2012 Earnings Call

October 23, 2012 8:00 AM ET


Richard Williams – IR

Neil Berkett – CEO

Eamonn O’Hare – CFO


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



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.

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