LONDON, Aug. 7, 2008 (PRIME NEWSWIRE) -- Virgin Media Inc. (Nasdaq:VMED) announces results for the quarter ended June 30, 2008.
Quarterly highlights
Financial
* OCF of GBP 333m (Q2-07: GBP 315m)
* Operating loss of GBP 333m (Q2-07: GBP 3m income) including
GBP 366m non-cash goodwill impairment charge relating to Mobile
segment
Operational
* Total RGU net adds of 136,800 (Q2-07: 59,000)
* 5,300 additional increase in reported RGUs from data cleanse (Q2-
07: 4,200)
* Low on-net churn of 1.3% (Q2-07: 1.8%)
* On-net customer net disconnects of 19,500 (Q2-07: 70,300 net
reduction)
* 18,900 additional decrease in reported customers from data
cleanse (Q2-07: nil)
* On-net broadband net additions of 54,600 (Q2-07: 45,800)
* Customers taking top-tier broadband up 82% year-on-year
* TV subscribers net additions of 24,800 (Q2-07: 2,200)
* On-net telephony net additions of 3,400 (Q2-07: 56,900 net
reduction)
* BBC iPlayer launched on VOD platform, achieving 10.5m views in
June
* Contract mobile net additions of 55,900 (Q2-07: 52,800)
* On-net cable ARPU of GBP 41.63 (Q2-07: GBP 42.16)
* Record triple-play penetration of 53.1% (Q2-07: 45.2%)
Neil Berkett, Chief Executive Officer of Virgin Media, said:
"These second quarter results represent another solid operational
and financial performance as we continue to lay a strong
foundation for future growth.
"We have enjoyed another quarter of low churn and our customers
buying more products from us than ever before. Combined with a
rigorous emphasis on making the business a more efficient
organization, we have seen OCF growth and strong cash generation.
We have continued to focus on putting the customer at the heart of
everything we do and improving the quality of the services and
experience we offer. We're also pleased with the improvement in
performance of our mobile operation from the prior quarter.
"In the face of a tougher national economic environment our
business has demonstrated good resilience. We continue to focus on
improving our operational execution and driving unnecessary cost
and inefficiencies out of the business.
"We will continue to exploit our competitive advantages in leading
next generation broadband in the UK and redefining the on-demand
TV experience. The second half of this year will mark a major
milestone as we roll out our unrivalled 50Mb broadband service. We
believe this superfast service, combined with our leading video-
on-demand product, will prove extremely attractive to existing and
new customers."
Conference call details
There will be a webcast and conference call for analysts and investors today at 9am ET / 2pm UK time.
The presentation can be accessed live via webcast on the Company's website, www.virginmedia.com/investors.
Analysts and investors can dial in to the presentation by calling +1 866 966 5335 in the United States or +44 (0) 20 3023 4472 for international access, passcode "Virgin Media Inc." for all participants.
The teleconference replay will be available for one week beginning approximately two hours after the end of the call until Thursday, August 14, 2008. The dial-in replay number for the U.S. is: +1 866 583 1035 and the international dial-in replay number is: +44 (0) 20 8196 1998, passcode: 499513#.
Note to the financial and operational results for the three months ended June 30, 2008
OCF is operating income before depreciation, amortization, goodwill impairment and other charges and is a non-GAAP financial measure. Please see Appendix E for a reconciliation of non-GAAP financial measures to their nearest GAAP equivalents.
SUMMARY FINANCIAL RESULTS (unaudited)
-------------------------------------
Q2 2008 Q1 2008 Q2 2007
-------- -------- --------
GBP m GBP m GBP m
Revenue
Cable
Consumer 610.3 618.2 619.3
Business 156.8 160.7 155.8
-------- -------- --------
767.1 778.9 775.1
Mobile 143.9 139.5 146.3
Content 79.5 83.4 73.6
-------- -------- --------
Total Revenue 990.5 1,001.8 995.0
OCF 332.9 324.2 315.3
Operating (loss) income (333.1) (4.6) 3.0
GROUP RESIDENTIAL OPERATIONS
STATISTICS ('000s) Q2 2008 Q1 2008 Q2 2007
---------------------------- -------- -------- --------
Group RGUs
On-net TV 3,538.8 3,514.9 3,396.6
On-net Digital TV 3,353.5 3,311.4 3,125.3
Broadband
On-net 3,563.4 3,502.3 3,191.9
Off-net 272.7 279.5 275.2
-------- -------- --------
3,836.1 3,781.8 3,467.1
Telephone
On-net 4,063.5 4,060.4 3,993.8
Off-net 107.3 102.4 75.5
-------- -------- --------
4,170.8 4,162.8 4,069.3
Mobile
Contract 491.6 435.7 299.1
Total RGUs 12,037.3 11,895.2 11,232.1
======== ======== ========
Net RGU adds
On-net TV 24.8 36.8 2.2
On-net Digital TV 42.1 57.9 40.0
Broadband
On-net 54.6 88.4 45.8
Off-net (6.8) (7.8) 4.7
-------- -------- --------
47.8 80.6 50.5
Telephone
On-net 3.4 29.0 (56.9)
Off-net 4.9 (1.5) 10.4
-------- -------- --------
8.3 27.5 (46.5)
Mobile
Contract 55.9 59.4 52.8
-------- -------- --------
Net RGU adds 136.8 204.3 59.0
Data cleanse 5.3 -- 4.2
Total increase in RGUs in period 142.1 204.3 63.2
======== ======== ========
Note
Data cleanse activity with respect to Q2-08 resulted in a
decrease in reported customer numbers of 18,900 and an increase
in reported RGUs of 5,300 comprised of an increase of
approximately 6,500 Broadband RGUs and decreases of approximately
300 Telephone and 900 Television RGUs. These figures include a
4,600 decrease in reported customer numbers and a 9,200 decrease
in reported RGUs relating to data cleanse activity in July 2008.
The data cleanse activity is continuing in Q3-08 and may result in
further adjustments to customer and RGU numbers.
Data cleanse activity in Q2-07 resulted in an increase in reported
RGUs of 4,200 comprised of an increase of approximately 4,400
Television and 100 Telephone RGUs and a decrease of approximately
300 Broadband RGUs. Net RGU adds above exclude the data cleanse
increases/decreases.
OVERVIEW
This year, our top priority is to build a robust platform for medium and long term growth. We are strengthening our existing customer base by focusing on getting the fundamentals right and are beginning to exploit the superior capabilities of our network in order to differentiate ourselves from our competitors. We have also begun to improve the underlying economic value of the business by reducing costs and inefficiencies. Today's second quarter results, traditionally our weakest quarter for gross additions, have seen solid progress operationally, financially and strategically. This progress, alongside cost savings, has driven year-on-year improvements in OCF.
Operationally, reducing churn remains a key focus and it remained low this quarter at 1.3% and we expect it to remain lower in the third quarter than last year. We have increased our consumer pricing with no material impact on churn. We believe this reflects the improved quality of our service and propositions and a more stable competitive environment. We have continued to focus on RGU growth which feeds through into low churn and on cross-sell and up-sell, with triple-play now at a record 53.1%. The percentage of customers on our top 20Mb broadband tier continued to grow, illustrating the very real demand from our customers for top broadband speeds. The number of single product subscribers and the number of phone only subscribers have fallen by 64,800 and 24,000 respectively during the quarter, partly through churn and partly through cross-sell. So despite the second quarter traditionally being the weakest quarter for gross additions, resulting in 19,500 net customer disconnections, the quality of our customer base has improved. We remain confident about improving gross additions and as in previous years, we expect gross additions to be higher in the second half of the year than the first. Similarly, we expect to see an improvement in RGU growth in the third quarter to around similar levels that we experienced in the third quarter of last year.
Our key strategic objectives are to lead the next generation broadband market in speed and quality and to redefine the mid-market TV experience through video-on-demand ("VOD"). In broadband, our 4Mb to 10Mb upgrade program is 70% complete, we plan to launch mobile broadband in the fourth quarter and we are on track to launch 50Mb later this year. Despite a slowdown in the overall market, we have seen solid broadband net additions and improved tier mix.
Turning to TV, we were delighted to launch BBC iPlayer on our platform, which achieved 10.5m views in June. We are the only TV platform in the UK to carry this service and believe this significantly enhances our TV offering.
Within Mobile, we have successfully undertaken actions to improve prepay financial performance and have continued to enjoy success in cross-selling contract mobile to our cable customers. Our mobile service continues to win customer satisfaction awards. Virgin Mobile's contract service came top of recent customer satisfaction surveys by Which and JD Power.
The broader economic environment in the UK has become more challenging and we have seen some impact on gross customer additions. However, our business has shown good resilience as we reduce customer disconnects, drive further efficiencies across the Group and enhance our compelling product suite.
RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2008
TOTAL REVENUE
Total revenue in the second quarter was GBP 990.5m (Q1-08: GBP 1,001.8m; Q2-07: GBP 995.0m). The sequential decrease was mainly due to reduced Consumer revenue and lower Business revenue. The year-on-year decrease was mainly due to reduced Consumer revenue partially offset by growth in Content revenue.
CABLE SEGMENT REVENUE
Consumer
Consumer revenue in the second quarter was GBP 610.3m (Q1-08: GBP 618.2m; Q2-07: GBP 619.3m). Revenue declined sequentially mainly due to a small reduction in Cable ARPU as discussed below. Revenue was down year-on-year mainly due to lower ARPU, but this year-on-year decline has slowed and is now the lowest for a year.
As a result of the migration of our consumer on-net billing systems during the quarter, there was a data cleanse which resulted in a decrease in customer numbers of 18,900 and an increase in on-net RGUs of 5,300. This includes data cleanse activity in July 2008. All net additions/disconnections figures in the following discussion exclude the impact of the data cleanse so that we are showing the true organic growth or decline. As we continue to reconcile the data as a result of the migration, there may be a further data cleanse in the third quarter.
On-net cable RGU net additions were 82,800 in the quarter (Q1-08: 154,200; Q2-07: 8,900 net disconnects). The strong year-on-year increase was due to a sharp decline in churn. RGU net additions were down sequentially for the reasons discussed further below.
Average monthly churn was 1.3% (Q1-08: 1.2%; Q2-07: 1.8%). We believe this partly reflected a range of operational improvements that we have made over the last year. In addition, in the second quarter of last year, disconnections were affected by BSkyB's removal of its basic TV channels from our platform. As a result, gross customer disconnections of 187,400 in the quarter were down 29% from the same quarter last year. The number of disconnections grew by 10,900 compared to the previous quarter mainly due to a seasonal increase in movers churn, partially offset by a reduction in non-pay churn. Movers churn includes students who disconnect their services at the end of the academic year as well as well as rental movers. As usual, churn is expected to increase seasonally in the third quarter, although we expect it to continue to remain lower than the corresponding period in 2007.
Gross on-net customer additions in the second quarter were 167,900, down 13% compared to the same quarter last year. We believe this partly reflects the focus on better quality gross additions and our priority of reducing churn, along with the probable impact of a softer macroeconomic environment. Gross on-net customer additions were down by 13,500 on the previous quarter. As a result, the on-net customer base was 4.7m at the quarter-end, with net disconnections of 19,500 in the quarter.
Cable ARPU declined during the quarter to GBP 41.63 (Q1-08: GBP 41.91; Q2-07: GBP 42.16) due mainly to lower fixed line telephony usage and a shift of existing customers to lower priced bundles, partly offset by cross-sell and up-sell.
Successful bundling and cross-sell was reflected in continued growth in triple-play penetration, which reached a record 53.1% at the quarter-end compared to 45.2% a year ago. Cable RGUs per customer also grew to 2.36 from 2.23 a year ago.
On June 1, 2008, we increased some of our telephony, TV and bundle pricing which we expect to have a positive impact on Cable ARPU in the third quarter and beyond. This included a GBP 1.50 per month increase in the price of our TV "XL" package and an increase of GBP 1.00 per month on most of our other standard bundles. We have not experienced any significant churn to date as a result of these price rises, which were pre-announced.
Broadband (On-net)
Broadband net additions were 54,600 (Q1-08: 88,400; Q2-07: 45,800). Net additions were down sequentially due to lower gross additions but were up 19% year-on-year.
Our increased focus on up-sell has improved the tier mix and the number of subscribers on our top 20Mb tier has increased by 82% in the last twelve months. We now have 9.3% of our broadband subscribers on this top tier. The upgrading of our 4Mb tier to 10Mb is also resulting in an improved percentage of customers subscribing to 10Mb rather than 2Mb.
Broadband remains our premier product where our superior network differentiates us from our DSL competitors. We are fully focused on maximizing the unique potential of our cable network to improve the consumer experience and plan to launch a 50Mb broadband service by the end of the year. This will mean that by the end of the year, we plan to have four tiers of broadband service at 2Mb, 10Mb, 20Mb and 50Mb, with top headline speeds and quality of service well ahead of our DSL competitors.
Television
Total TV net additions were 24,800 in the quarter (Q1-08: 36,800; Q2-07: 2,200). Net additions were up compared to the same quarter last year which was negatively affected by BSkyB's removal of its basic TV channels from our platform.
During the quarter, we launched the BBC's iPlayer service on our VOD platform offering hundreds of hours of BBC "catch-up" content. Virgin Media is the first TV platform to make BBC iPlayer available in full screen picture quality directly to its 3.4m digital TV subscribers. Developments like this give VOD a new impetus and help establish on-demand as a genuinely mainstream TV service.
Customers are increasingly using our VOD services. On a monthly basis, 1.6m of our TV customers are now using VOD, representing a reach of 48%. Average views per user per month in the quarter were 24 compared to 14 a year ago. Average monthly views were 38m in the quarter, up 5% on the previous quarter and up 92% on the same quarter last year.
During the quarter, we added 60,700 V+ DVR subscribers to reach an installed base of 424,900. This represents a penetration level of just 13% of our digital subscribers and so the growth opportunity remains strong. In addition, based on our experience, V+ DVR subscribers and VOD users are less likely to churn.
Telephony (On-net)
Telephony net additions of 3,400 (Q1-08: 29,000; Q2-07: 56,900 net disconnects) were positive for the third successive quarter following a period of six quarters of subscriber losses and showed a large improvement on the previous year. This was driven by our successful bundling of telephony with our broadband and TV products at the point of sale, along with continued cross-selling and reduced churn. Net additions were lower than in the previous quarter, primarily due to lower gross additions.
Off-net
Consumer off-net revenue, which is included in total consumer revenue, was GBP 15.6m (Q1-08: GBP 17.2m; Q2-07: GBP 16.2m). At the quarter-end, we had 272,700 off-net broadband subscribers, with a decrease of 6,800 in the quarter. The number of off-net telephony subscribers increased by 4,900 during the quarter and we now have a base of 107,300.
Business
Business revenue was GBP 156.8m (Q1-08: GBP 160.7m; Q2-07: GBP 155.8m) with the sequential revenue decline due to lower retail voice, wholesale and other retail revenue, partially offset by growth in retail data revenue. The year-on-year revenue increase was due to growth in retail data revenue and other retail revenue, partially offset by lower retail voice and wholesale revenue.
Consistent with our strategy to replace declining voice revenue with data revenue, we continue to experience a mix-shift in retail revenue from voice to data. Retail data revenue was GBP 46.8m (Q1-08: GBP 45.0m; Q2-07: GBP 42.7m). Retail voice revenue was GBP 47.7m (Q1-08: GBP 50.2m; Q2-07: GBP 53.5m).
Other retail revenue in the quarter was GBP 17.5m (Q1-08: GBP 18.6m; Q2-07: GBP 13.3m). The majority of this revenue is from infrastructure projects which are non-recurring in nature. Our largest infrastructure project is the provision of telecoms network equipment for the new Terminal 5 at Heathrow airport, which contributed GBP 6.4m of revenue in the second quarter compared to GBP 9.7m in the previous quarter and GBP 6.0m in the same quarter last year. This revenue is expected to decline in the third quarter as the contract comes to an end. However, this contract was operating at a very low margin and, consequently, its completion will not have a significant impact on Cable OCF.
Wholesale revenue in the quarter was GBP 44.8m (Q1-08: GBP 46.9m; Q2-07: GBP 46.3m). Revenue was down both sequentially and year-on-year due predominantly to a reduction in our ISP subscriber base and contract decline in mobile accounts. Voice traffic was an additional factor in the sequential decline.
Cable OCF
Cable OCF in the quarter was GBP 298.3m (Q1-08: GBP 301.9m; Q2-07: GBP 282.5m). Cable OCF was down slightly from the previous quarter mainly due to reduced Consumer and Business revenue as discussed above as well as higher marketing and share-based compensation expenses. Cable OCF was up strongly compared to the same quarter last year, due mainly to cost savings resulting from integration activities, partially offset by reduced revenue.
Cable OCF as a percentage of Cable revenue (Cable OCF margin) was 38.9% (Q1-08: 38.8%; Q2-07: 36.4%).
MOBILE SEGMENT
Mobile Revenue
Mobile revenue in the quarter was GBP 143.9m (Q1-08: GBP 139.5m; Q2-07: GBP 146.3m), comprising GBP 139.3m service revenue (Q1-08: GBP 134.5m; Q2-07: GBP 142.3m) and GBP 4.6m equipment revenue (Q1-08: GBP 5.0m; Q2-07: GBP 4.0m).
We have successfully undertaken actions to improve Mobile prepay performance including selective price increases, better focused customer retention activity and efforts to reduce customer acquisition costs.
The sequential service revenue increase was mainly due to growth in the number of higher Mobile ARPU contract subscribers and higher prepay Mobile ARPU, partially offset by a reduction in prepay subscribers. The year-on-year decrease in service revenue was mainly due to a reduction in prepay subscribers and Mobile ARPU, partially offset by growth in the number of higher Mobile ARPU contract subscribers.
Contract net additions in the quarter were 55,900 (Q1-08: 59,400; Q2-07: 52,800) as we continued to successfully execute our strategy of using our own sales channels and cross-selling mobile contracts to our Virgin Media cable customers. At the quarter-end, we had 491,600 contract customers representing 11.5% of total mobile customers, and showing growth of 64% in the last twelve months. Our SIM-only contract propositions are proving successful and also help reduce acquisition costs. According to research by GFK, in June we were the market leader for SIM-only gross connections.
Prepay net disconnections in the quarter were 190,100 (Q1-08: 127,600 net disconnects; Q2-07: 99,300 net disconnects). The sequential decline is due to a decrease in gross connections partially offset by reduced churn. We have not engaged heavily in the low price handset end of the prepay market, resulting in lower gross connections, but instead focused on selective price increases. We also aim to attract and retain higher value longer term customers to improve Mobile ARPU and profitability.
Overall Mobile ARPU for the quarter was GBP 10.65 (Q1-08: GBP 10.04; Q2-07: GBP 10.70), up sequentially mainly due to higher prepay Mobile ARPU and improved contract mix. Prepay Mobile ARPU was higher mainly due to selective price increases.
We have agreed to new terms with our mobile network provider, T-Mobile, which reduce the wholesale rates we pay for voice and data traffic, retroactive to January 1, 2008 for voice and to April 1, 2008 for data. As a result of the new terms, we plan to launch a complementary mobile broadband proposition in the fourth quarter. We will also be able to price more competitively in the growing mobile data usage market which will be more attractive for higher value customers.
Our mobile service continues to win customer satisfaction awards. Virgin Mobile's contract service came top of recent customer satisfaction surveys by Which and JD Power.
Mobile OCF
Mobile OCF was GBP 35.5m in the quarter (Q1-08: GBP 17.2m; Q2-07: GBP 32.7m). Mobile OCF was up substantially compared to the previous quarter due to higher service revenue, lower operating costs, lower equipment costs and lower SG&A. Operating costs were down due to lower voice and data wholesales rates as a result of a new agreement with our mobile network provider, T-Mobile, which includes six months of benefit from the lower wholesale rates. Equipment costs were lower due mainly to lower acquisition costs partly as a result of lower prepay volumes and partly due to a shift in mix towards lower cost sales channels. SG&A was lower due to lower employee expenses.
Mobile OCF as a percentage of Mobile revenue (Mobile OCF margin) was 24.7% (Q1-08: 12.3%; Q2-07: 22.4%).
CONTENT SEGMENT
Content Revenue
The Content segment consists of VMtv and Sit-up.
Total Content segment revenue, after inter segment elimination, was GBP 79.5m (Q1-08: GBP 83.4m; Q2-07: GBP 73.6m), comprising GBP 28.3m (Q1-08: GBP 28.4m; Q2-07: GBP 25.9m) from VMtv and GBP 51.2m (Q1-08: GBP 55.0m; Q2-07: GBP 47.7m) from Sit-up. VMtv sells channels to and receives subscriptions from the Virgin Media Cable segment. As a result, for consolidation purposes, GBP 6.5m of inter segment revenue has been eliminated in the quarter.
VMtv revenue was up 9.3% compared to the same quarter last year due mainly to a 10.6% increase in advertising revenues. This was due to year-on-year growth in our share of the overall TV advertising market.
Sit-up revenue was seasonally down on the previous quarter, but up 7.3% compared to the same quarter last year due to increased sales volumes.
Content OCF
Content segment OCF in the quarter, before inter segment elimination, was negative GBP 0.9m (Q1-08: GBP 5.1m; Q2-07: GBP 0.1m). Content OCF declined sequentially mainly due to an increase in VMtv programming and marketing costs and seasonally reduced Sit-up revenue.
As in previous years, VMtv's programming costs are expected to seasonally increase in the third quarter, which will negatively affect Content OCF.
UKTV JOINT VENTURE
Virgin Media owns 50% of the companies that comprise UKTV, a group of joint ventures formed with BBC Worldwide. UKTV produces a portfolio of television channels based on the BBC's program library and other acquired programming, which are carried on Virgin Media's cable platform and also on satellite. Some channels are also available on Freeview.
Virgin Media accounts for its interest in UKTV under the equity method and recognized a share of UKTV's net income of GBP 5.0m in the quarter (Q1-08: GBP 6.2m; Q2-07: GBP 5.4m). UKTV's financial results are not consolidated in Virgin Media's revenue, operating income or OCF.
UKTV is funded by loans from Virgin Media, which totaled GBP 144.9m at June 30, 2008. These loans effectively act as a revolving facility for UKTV.
