Virgin Media received cash payments from UKTV in the form of loan capital net repayments of GBP 5.4m for the second quarter and net GBP 0.5m for the year-to-date. Virgin Media also received cash payments from UKTV in the quarter totaling GBP 3.9m and in the year-to-date totaling GBP 9.8m, which consisted of dividends, interest payments and payment for consortium tax relief.
Virgin Media's investment in UKTV is carried on the balance sheet at June 30, 2008 at GBP 374.3m, which includes the outstanding loans of GBP 144.9m.
OPERATING COSTS (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION)
Operating costs (exclusive of depreciation and amortization) were GBP 434.9m in the quarter (Q1-08: GBP 460.4m; Q2-07: GBP 435.1m). Operating costs were down sequentially due to lower Cable and Mobile segment operating costs.
Cable operating costs were down sequentially by GBP 16.7m mainly due to lower volume related costs, network facilities and Business costs. Mobile operating costs were down sequentially by GBP 9.6m due to lower equipment costs and the reduced wholesale voice and data rates resulting from the new agreement with T-Mobile.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
SG&A was GBP 222.7m in the quarter (Q1-08: GBP 217.2m; Q2-07: GBP 244.6m). SG&A costs were up sequentially mainly due to higher Cable SG&A. SG&A costs were down year-on-year mainly due to lower Cable SG&A.
Cable SG&A was up sequentially by GBP 8.6m mainly due to higher marketing and share-based compensation expenses. Cable SG&A was down year-on-year by GBP 19.3m mainly due to lower employee related costs as a result of reduced headcount and lower marketing costs.
OPERATING INCOME BEFORE DEPRECIATION, AMORTIZATION, GOODWILL IMPAIRMENT AND OTHER CHARGES (OCF)
OCF was GBP 332.9m in the quarter (Q1-08: GBP 324.2m; Q2-07: GBP 315.3m). The sequential increase was mainly due to the increase in Mobile OCF discussed above, partially offset by declines in Cable and Content OCF. The increase compared to the same quarter last year was mainly due to the increase in Cable OCF discussed above, partially offset by the decline in Content OCF.
OCF as a percentage of revenue (OCF margin) was 33.6% (Q1-08: 32.4%; Q2-07: 31.7%).
OCF is a non-GAAP financial measure. See Appendix E for reconciliations of non-GAAP financial measures to their nearest GAAP equivalents.
GOODWILL IMPAIRMENT
During the quarter we performed our annual impairment review for our Mobile, VMtv and Sit-up reporting units with the assistance of third party valuation specialists. These reviews are required under U.S. GAAP and involved the comparison of the units' fair value (as if each was a stand-alone entity) against the units' carrying value. As a result of this review, we concluded that the fair value of the VMtv and Sit-up reporting units exceeded their carrying value, while the Mobile reporting unit's fair value was less than its carrying value. The fair values of these reporting units were determined through the use of a combination of both market and income valuation approaches. The market approach valuations for the Mobile reporting unit have declined from the prior year primarily as a result of declining market multiples of comparable companies in the mobile industry. The income approach valuations declined as a result of a combination of an increased discount rate, a reduced terminal value multiple and reduced long-term cash flow estimates. We have completed our preliminary valuation of the individual assets and liabilities of the Mobile reporting unit and recognized a non-cash impairment charge of GBP 366.2m in the current quarter. We intend to finalize our valuation work and recognize any further adjustments to this amount in the third quarter. This impairment review considered our Mobile reporting unit as a stand-alone business and did not reflect the benefits and synergies that Virgin Media as a whole is deriving from the acquisition of Virgin Mobile. Management believe that the continued integration of the mobile product offerings with our broadband, television and telephony offerings will continue to increase customer loyalty and help reduce churn.
The goodwill impairment charge is non-cash in nature and will not affect our liquidity, cash flows or debt covenants, or have any impact on future operations.
OPERATING (LOSS) INCOME
Operating loss was GBP 333.1m (Q1-08: GBP 4.6m loss; Q2-07: GBP 3.0m income) with the year-on-year decrease mainly due to the goodwill impairment charge relating to our Mobile segment.
Amortization expense was GBP 71.3m (Q1-08: GBP 92.7m; Q2-07 GBP 77.6m) with the sequential decline due to the cessation of amortization of certain intangible assets that became fully amortized during the period. The year-on-year decline was also due to the cessation of amortization of certain intangible assets, partially offset by an increased expense related to the reduction in the remaining useful economic life of certain intangible assets effective January 1, 2008.
NET LOSS
Net loss was GBP 447.2m (Q1-08: GBP 104.4m; Q2-07: GBP 119.0m). The sequential and year-on-year increase in net loss was due to the goodwill impairment charge relating to our Mobile segment.
CAPITAL EXPENDITURE
Fixed asset additions (accrual basis) were GBP 155.7m for the quarter (Q1-08: GBP 137.1m; Q2-07: GBP 156.2m).
Fixed asset additions (accrual basis) is up sequentially due mainly to increased scaleable infrastructure costs relating to broadband speed upgrades, partially offset by reduced consumer premise equipment expenditure as a result of reduced volumes.
The total purchase of fixed assets and intangible assets was GBP 108.3m in the second quarter (Q1-08: GBP 125.0m; Q2-07: GBP 133.6m). This was down sequentially and year-on-year due to an increase in the amount of fixed assets acquired under finance leases together with the timing of cash payments in respect of liabilities related to fixed asset purchases.
Fixed asset additions (accrual basis) is a non-GAAP financial measure. See Appendix E for reconciliations of non-GAAP financial measures to their nearest GAAP equivalents.
DEBT
As of June 30, 2008, long term debt (net of GBP 33m current portion) was GBP 5,990m. This consisted of GBP 4,324m outstanding under our Senior Credit Facility, GBP 1,043m of Senior Notes, GBP 502m of Convertible Senior Notes and GBP 121m of capital leases and other indebtedness. Cash and cash equivalents were GBP 427m.
On April 16, 2008, we issued $1bn of 6.5% Convertible Senior Notes due 2016 and on April 22, 2008 used the net proceeds combined with existing cash on hand to prepay GBP 261m of "A" loans and GBP 243m of "B" loans under our senior credit facilities.
Cash interest paid (exclusive of amounts capitalized) was GBP 121.4m in the quarter and GBP 455.4m for the last twelve months.
Interest expense in the second quarter was GBP 121.6m (Q1-08: GBP 123.4m; Q2-07: GBP 128.1m). Interest expense was lower than the same quarter last year due mainly to savings from voluntary prepayments of certain loan obligations in December 2007 and April 2008, partially offset by interest on the new Convertible Senior Notes.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:
Various statements contained in this document constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. Words like "believe," "anticipate," "should," "intend," "plan," "will," "expects," "estimates," "projects," "positioned," "strategy," and similar expressions identify these forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results to be materially different from those contemplated, projected, forecasted, estimated or budgeted, whether expressed or implied, by these forward-looking statements. These factors, among others, include: (1) the ability to compete with a range of other communications and content providers; (2) the ability to manage customer churn; (3) the continued right to use the Virgin name and logo; (4) the ability to maintain and upgrade our networks in a cost-effective and timely manner; (5) possible losses in revenues due to systems failures; (6) the ability to provide attractive programming at a reasonable cost; (7) the ability to control unauthorized access to our network; (8) the effect of technological changes on our businesses; (9) the reliance on single-source suppliers for some equipment, software and services and third party distributors of our mobile services; (10) the ability to achieve our business plans; (11) the ability to fund debt service obligations through operating cash flow; (12) the ability to obtain additional financing in the future and react to competitive and technological changes; (13) the ability to comply with restrictive covenants in our indebtedness agreements; and (14) the extent to which our future cash flow will be sufficient to cover our fixed charges.
These and other factors are discussed in more detail under "Risk Factors" and elsewhere in Virgin Media's Form 10-K filed with the SEC on February 29, 2008, as amended, and our Form 10-Q filed with the SEC on May 8, 2008. We assume no obligation to update our forward-looking statements to reflect actual results, changes in assumptions or changes in factors affecting these statements.
Non-GAAP Financial Measures
We use non-GAAP financial measures with a view to providing investors with a better understanding of the operating results and underlying trends to measure past and future performance and liquidity.
We evaluate operating performance based on several non-GAAP financial measures, including (i) operating income before depreciation, amortization, goodwill impairment and other charges (OCF), and (ii) fixed asset additions (accrual basis), as we believe these are important measures of the operational strength of our business and our liquidity.
