Virgin Media Q1 2017 results

Compelling Propositions and Lightning Underpin Solid Volume Growth

Financial Performance Reflects 2% Rebased Revenue Growth and Investments in Marketing and Sales


Virgin Media Inc. ("Virgin Media") is the leading cable operator in the U.K. and Ireland, delivering 14.2 million broadband, video and fixed-line telephony services to 5.8 million cable customers and mobile voice and data services to 3.0 million subscribers at March 31, 2017.

• Delivered 65,000 customer net additions in Q1, up 36% year-over-year ("YoY"), driven by promotional activity surrounding our compelling bundles and the launch of our 4K "Virgin TV V6" set-top box
◦ Lightning represented over a third of our customer net additions in the quarter, which improved penetration across the total life-to-date Lightning premises
◦ Customer disconnects decreased sequentially due to a diminishing impact from the November 2016 price increase in the U.K.; however disconnects remained elevated YoY resulting in twelve month rolling customer churn of 15.0% at the end of Q1
◦ RGU net additions increased 70% to 158,000 with improved performance across the U.K. and Ireland
◦ Our 82,000 broadband internet net additions in Q1 reflect strong demand for our superior fibre broadband service in the U.K. and a return to internet subscriber growth in Ireland
◦ We extended our speed leadership in the U.K. with a new 100 Mbps entry-level tier and a new 300 Mbps top tier that offers ~4x higher speeds than alternative VDSL services
◦ Returned to growth in video RGUs with 39,000 net additions in Q1 compared with an 18,000 net loss in Q1 2016, fueled by the highest quarterly TV growth in the U.K. since Q4 2007, reflecting our enhanced Virgin TV proposition which was launched in November 2016
◦ Take-up of Virgin TV V6 has been robust and customer satisfaction for the new device is significantly higher than for our other set-top boxes in the U.K.

• In Ireland, we rebranded our video services to "Virgin TV" and launched the popular Netflix app on our set-top box in January 2017, offering convenience and more on-demand content

• Existing mobile subscriber migrations stimulated strong growth in our 4G base following launch in November 2016; 4G service taken by 21% of our total U.K. postpaid mobile base at the end of Q1
◦ Q1 postpaid gains of 37,000 (27,000 in the U.K. and 10,000 in Ireland) largely offset by attrition of low-ARPU prepaid subscribers
◦ Delivered 3,000 mobile additions in Q1, including a record 10,000 additions in Ireland

• Our focus on the under-penetrated SOHO market within Virgin Media Business is delivering results; Q1 SOHO customers and RGUs increased by 92% and 144% YoY, respectively. The increase was partially driven by the conversion of residential subscribers to SOHO subscribers, coinciding with the launch of a new home office product in Q2 2016
◦ In May, we launched a 350 Mbps broadband tier for SOHO and SME customers in the U.K.

• In Q1, we announced a reorganisation of our U.K. business into three new customer-facing units: Consumer, Business and Mobile, along with Lightning, Virgin Media Ireland and our support functions
◦ Dana Strong was appointed President and COO with responsibility for our Consumer unit
◦ Peter Kelly continues to lead an expanded Virgin Media Business, with Jeff Dodds being appointed Managing Director of Mobile. Tony Hanway remains responsible for Virgin Media in Ireland.
◦ Refocused approach to Project Lightning; appointed a new management team responsible for network construction in the U.K. led by Rob Evans as Managing Director of Lightning

• Rebased revenue growth of 2% to £1,214 million in Q1 2017
◦ This increase was driven primarily by rebased growth in cable subscription revenue, partly offset by a decline in mobile subscription revenue as described below

• Rebased growth in cable subscription revenue of 3% in Q1 was driven by a 2% increase in average RGUs and a 1% improvement in Q1 ARPU per RGU on an FX-neutral basis
◦ Positive impact of price increases to ARPU was offset by new and existing customer promotions, net base movements to lower tiers, telephony usage declines and a £7 million reduction in Q1 revenue due to a change in regulations governing payment handling fees
◦ Lower payment handling fees will no longer impact YoY growth from April 2017

• Mobile subscription revenue declined by 11% on a rebased basis to £96 million in Q
◦ The migration of customers from subsidised handset propositions to our Freestyle offer (comprising split handset/airtime contracts), led to a net reduction in total mobile subscription revenue of £14 million in Q1, as the handset revenue arising from Freestyle is recognised up-front and reported in other revenue. This effect is also reflected in lower YoY mobile ARPU.
◦ The decline in mobile subscription revenue is net of a £3 million increase in revenue driven by growth in our SIM-only subscriber base

• Rebased business revenue ("B2B") growth of 1% to £171 million driven primarily by higher data revenue, supporting gross margin expansion at Virgin Media Business
◦ Including SOHO, B2B rebased revenue growth was 5% in Q1. The increase in SOHO revenue was partially driven by the conversion of residential subscribers to SOHO subscribers
◦ Other revenue increased 2% in Q1 on a rebased basis
◦ Higher installation and other revenue was partially offset by a continued decline in mobile interconnect revenue and moderately lower mobile handset sales

• Operating income decreased by £29 million to £60 million in Q1 primarily as a result of increases in depreciation and amortisation and higher related-party fees and allocations


• Rebased Segment OCF increased 1% to £523 million
◦ YoY revenue increase was offset by higher programming costs, marketing spend mainly related to our Virgin TV V6, Virgin Fibre and Virgin Mobile campaigns and higher network expenses
◦ Sequentially, Segment OCF declined by £60 million primarily due to (i) a £12.5 million decline in seasonal revenue including mobile handsets, pay-per-view TV usage and advertising, (ii) a £24 million increase in marketing costs related to the phasing of our brand marketing campaigns, (iii) a £7.5 million increase in staff costs and (iv) £7 million higher programming costs and £4 million higher network expenses

• Property & equipment additions increased to 27% of revenue or £330 million in Q1, as compared to 22% or £257 million in Q1 2016, primarily due to our investment in Project Lightning
◦ Capital expenditure on new build and upgrade totaled £87 million in Q1, most of which was related to Project Lightning and the balance on line extensions to business customers
◦ Customer premises equipment ("CPE") additions grew by £46 million to £126 million in Q1 due to higher customer acquisitions and the rollout of our new WiFi Hub and our Virgin TV V6 set-top box to existing customers
◦ Our Project Lightning added premises totaled 102,000 in Q1 and 355,000 over the last twelve months, but we expect that the management transition and related review is likely to result in a slower build pace than what we previously expected for 2017
◦ In light of the ongoing review of Project Lightning, we currently expect that we will be at the lower-end of, or fall below, our 2017 P&E additions forecast range of 31% to 33% of revenue

• As of March 31, 2017 our fully-swapped third-party debt borrowing cost was 5.0% and the average tenor of our third-party debt (excluding vendor financing) was approximately eight years


• During the first quarter of 2017, we completed the following refinancing activities:

◦ In January, we issued £675 million 5.00% GBP Senior Secured Notes due 2027 to redeem the then outstanding balance of our 6.00% GBP Senior Secured Notes due 2021
◦ In February, we entered into an £865 million term loan due 2026 (Term Loan J) to prepay Term Loan E
◦ In March, £521 million of our 5.50% GBP Senior Secured Notes due 2021 were exchanged into new GBP Senior Secured Notes due 2025

• Based on our Q1 results, 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 3.70x and (ii) the ratio of Total Net Debt to Annualised EBITDA (last two quarters annualised) was 4.64x, each as calculated in accordance with our most restrictive covenants


• As of March 31, 2017, we had maximum undrawn commitments of £675 million. When our March 31, 2017 compliance reporting requirements have been completed and assuming no changes from March 31, 2017 borrowing levels, we anticipate that all of our unused commitments will be available to be drawn

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

The full Liberty Global fixed income release for Q1 2017 can be found here.