Virgin Media 2016 Results

16th February 2017

[Updated 28 March 2017]

Virgin Media Reports Preliminary Fiscal 2016 Results

39% Increase in U.K. RGU Net Additions to 304,000 in 2016; Best Annual RGU Result Since 2009

Rebased Cable Subscription Revenue Growth of 4% in Q4

567,000 Project Lightning Premises Added Since Launch, including 314,000 in 2016

Expect to Add 700,000 to 800,000 Lightning Premises in 2017

Virgin Media Inc. ("Virgin Media") is the leading cable operator in the U.K. and Ireland, delivering 14.1 million broadband, video and fixed-line telephony services to 5.7 million cable customers and mobile voice and data services to 3.0 million subscribers at December 31, 2016.

Operating highlights:

•          567,000 Project Lightning premises built since Q1 2015 launch, of which 86,000 were added during Q4 2016

◦          Customer penetration and build costs broadly in-line with business plan, ARPU is slightly ahead

•          In addition to Lightning build, we also made a nonorganic adjustment of 256,000 homes passed in Q4 to include commercial premises that could subscribe to residential or SOHO services

•          Delivered 148,000 customer net additions in 2016, up 74% YoY, driven by attractive propositions and over 70,000 additions from new build activity, reflecting the phasing of Lightning build

•          Q4 customer net additions of 31,000, reflecting record Q4 sales in the U.K. that were partially offset by elevated churn due to the effect of the U.K. price rise in November 2016

◦          Customer churn increased from 14.3% in Q4 2015 to 14.8% in Q4 2016

•          2016 RGU net additions increased 20% to 252,000, including Q4 RGU net additions of 28,000

◦          Full-year RGU results improved across broadband internet and video aided by a marketing focus on product superiority, with lower telephony growth due to higher Q4 churn

◦          We expect our Q1 2017 RGU additions to be significantly higher than our Q4 additions due in part to lower churn

•          Demand for our market-leading fibre broadband service remained robust with 49,000 additions in Q4

◦          Added 40% more broadband RGUs in the U.K. in 2016 versus the prior year

◦          The average speed taken by our U.K. broadband base has increased 22% YoY to over 100Mbps and monthly consumption has increased to 160GB per month  

•          Video RGUs in the U.K. improved 35,000 YoY to 2,000 additions in 2016, supported by the Q4 launch of Virgin TV, which provides enhanced user-interface and programming, and growth from new build

◦          Utilising Liberty Global's next generation 4k set-top box, launched new V6 set-top box for existing customers in December and for new customers in January 2017; this 4k box has 6 tuners, a 1TB hard drive and a faster processor

•          Transformed our mobile offering in the U.K. with the launch of 4G services in November 2016; 4G subscriptions taken by over 5% of our U.K. mobile base by end of 2016 

◦          Delivered 16,000 mobile additions in 2016 reversing the prior year loss

◦          120,000 postpaid gains in 2016, partially offset by expected prepaid attrition

◦          Renewed our MVNO agreement with BT for five years with attractive terms; enables a stable transition to full-MVNO

•          Integration of Arqiva WiFi is underway following acquisition in Q4; its relaunch under the Virgin Media brand in February 2017 is expected to present strategic benefits to our B2B and consumer operations

•          Complementary mobile and broadcast investments in Ireland leaves us well positioned to leverage convergence opportunities with our fixed consumer business

◦          Strengthened our broadcast business by merging newly acquired UTV Ireland with TV3 Group; together they had a 35% share of the TV advertising market in Ireland during 2016

Financial highlights*:

•          Rebased revenue growth of 3% in 2016 to £4,806 million and 1% in Q4 to £1,226.5 million, driven primarily by growth in cable subscription revenue

•          Cable subscription revenue, approximately 70% of total revenue, increased 3.5% in 2016. The 4% increase in Q4 rebased cable subscription revenue arises from a 2% increase in RGUs and a 2% improvement in Q4 ARPU per RGU on an FX-neutral basis

◦          Growth was partially offset by a reduction in revenue of £19 million during 2016, including £7 million in Q4, as a result of a change in the regulations governing payment handling fees

•          Mobile revenue reflects our innovative Freestyle proposition which delivered 467,000 subscribers in 2016.  Billed as "the U.K.'s most flexible mobile contracts", Freestyle allows customers to purchase their handsets upfront, delivering a substantial revenue boost upon signing. The annual increase in handset revenue pursuant to our Freestyle proposition, reported in other revenue, totaled £41 million

◦          Mobile subscription revenue declined by £44 million in 2016 and by £11 million in Q4 reflecting a 9.5% rebased revenue decline for each period as increases in our airtime revenue (mobile subscription revenue less the implied amortisation of mobile handset revenue) of £25 million in 2016 and £9 million in Q4 driven primarily by an increase in our postpaid base were offset by the impact of a £69 million revenue reduction in 2016 and a £20 million reduction in Q4 associated with our Freestyle proposition

◦          Mobile business (including interconnect and mobile handset revenue) delivered rebased revenue declines of 2% for 2016 and 9% in Q4

•          Rebased business revenue growth of 2% in 2016 and decline of 5% in Q4 was impacted by an £11.5 million revenue benefit in Q4 2015 relating to the settlement of disputes with mobile operators

◦          B2B (including SOHO) rebased revenue growth was 3% in 2016 but declined 3% in Q4; B2B performance was driven by higher underlying data volumes and an increase in amortization of deferred upfront fees on B2B contracts. This growth was more than offset in Q4 and partially offset in fiscal year 2016 by an £11.5 million revenue benefit recorded in Q4 2015 related to the settlement of disputes with mobile operators

•          Other revenue increased 14% in 2016 and decreased 4% in Q4 on a rebased basis

◦          Full year growth reflects a £41 million YoY increase in mobile handset sales pursuant to our Freestyle proposition

◦          The Q4 decline was impacted by a continued decline in mobile interconnect revenue and moderately lower mobile handset sales

•          Operating income decreased 7% in 2016 to £351 million and declined 12% in Q4 to £98 million

◦          Operating income impacted by OCF changes as further described below, increases in depreciation and amortisation, higher related-party fees and allocations, and higher impairment, restructuring charges and other operating items, net

•          Rebased Segment OCF growth of 5% in 2016 to £2,167 million and 8% in Q4 to £583 million

◦          Full year growth benefited from increased revenue and operating cost control, offset by higher programming spend and the negative impact of a £12 million retroactive reduction in local authority charges during 2015

◦          Q4 2016 Segment OCF margin of 47.6%, represented a 230 basis points expansion YoY

•          Phasing of 2017 OCF growth to follow a similar trend to 2016 with H1 growth expected to be impacted by higher subscriber acquisition costs

◦          Segment OCF in 2017 and beyond will be impacted by higher network charges, which we estimate will increase by approximately £30 million during 2017 due to a revaluation of our rateable value by the Valuation Office in 2016. We believe that the proposed increases are excessive; we will challenge the underlying methodology and assumptions and remain in dialogue to mitigate the increase

•          Property & equipment additions increased in 2016 to £1,317 million, including £468 million in Q4

◦          P&E additions as a percentage of revenue increased to 27% in 2016, in-line with our guidance range, as compared to 22% in the prior-year period, primarily due to investment in new build

◦          During 2016, our construction cost per added premises (line extension and planning costs) approximated £600, which was in-line with our overall Project Lightning business plan

◦          2017 P&E additions are expected to range between 31% and 33% of revenue as new build increases  

•          As of December 31, 2016 our fully-swapped third-party debt borrowing cost was 5.2% and the average tenor of our third-party debt (excluding vendor financing) was over 7.5 years

•          The increase in Other debt of £58 million during Q4 is primarily related to the handset receivables securitisation financing we completed in October

•          In December, we issued a $3.4 billion Term Loan I due 2025; the proceeds were used to refinance existing bank and bond debt including the full redemption of Term Loans D and F, our 5.375% USD Senior Secured Notes due 2021 as well as the partial redemption of 6.00% GBP Senior Secured Notes due 2021 

•          Based on our results for Q4 2016 and subject to the completion of our corresponding compliance reporting requirements, (i) the ratio of Senior Secured Net Debt to Annualised EBITDA (last two quarters annualised) was 3.56x and (ii) the ratio of Total Net Debt to Annualised EBITDA (last two quarters annualised) was 4.49x, each as calculated in accordance with our most restrictive covenants

•          As of December 31, 2016, we had maximum undrawn commitments of £675 million. When our December 31, 2016 compliance reporting requirements have been completed and assuming no changes from current borrowing levels, we anticipate that all of our unused commitments will be available to be drawn

•          Subsequent events:

◦          Issued £675 million 5.00% GBP Senior Secured Notes due 2027 in January; the proceeds were used to redeem the remainder of the 6.00% GBP Senior Secured Notes due 2021

◦          In February, refinanced Term Loan E with an £865 million Term Loan J due 2026

*The financial figures contained in this release are prepared in accordance with U.S. GAAP.