Virgin Media: Q2 2013 Selected Operating and Financial Results

Virgin Media:Q2 2013 Selected Operating and Financial Results

Virgin Media Delivers Continued OCF Growth in Q2 2013

LONDON--(BUSINESS WIRE)-- Virgin Media Inc. ("Virgin Media" or the "Company"), the leading cable operator in the United Kingdom ("U.K."), today provides selected, preliminary unaudited operating and financial information for the three and six months ended June 30, 2013. On June 7, 2013, Virgin Media became a wholly-owned subsidiary of Liberty Global plc ("Liberty Global") (NASDAQ: LBTYA, LBTYB and LBTYK) pursuant to a cash and stock merger (the "Liberty Global Transaction"). A copy of this investor release is available on the websites of Virgin Media (www.virginmedia.com) and Liberty Global (www.libertyglobal.com). In addition, Virgin Media's June 30, 2013 Form 10-Q is expected to be filed by August 9, 2013.

Operating and financial highlights for the three months ("Q2") and the six months ("YTD") ended June 30, 2013, as compared to the results for the same periods last year (unless noted), include:¹

Operating and Financial Performance:^*

• Increased RGUs² by 169,000 to 12.2 million and customers by 67,000 to 4.9 million over the last twelve month ("LTM") period
  
  

  • Superfast broadband RGUs (30 Mbps and above) of 2.8 million at Q2, up 1.5 million since Q2 2012

  • TiVo customers reached 1.7 million (44% of TV base), a 720,000 increase since Q2 2012

  • Pay TV customers represent 88% of our TV base, up 5,000 in Q2 and 131,000 over LTM

  • Triple-play penetration now approaching 66%, with RGUs per customer at 2.51x

• Generated revenue of £1,027 million for Q2 and £2,069 million for YTD
  
  

  • Reflects rebased³ revenue growth of 1% for Q2 and 2% for YTD

  • Solid underlying performance in cable, with rebased growth of 4% in Q2 and 6% YTD, which offsets rebased revenue declines in mobile and business

• Delivered Operating Cash Flow ("OCF")⁴ of £427 million for Q2 and £844 million for YTD
  
  

  • Rebased OCFgrowth of 4% for Q2 and 6% YTD

  • OCF margin rose 80 basis points ("bps") to 41.6% for Q2 and 120 bps to 40.8% for YTD

• Achieved operating income of £67 million for Q2 and £217 million for YTD

• Capital intensity decreased for the Q2 and YTD periods
  
  

  • Property and equipment additions⁵ have declined 4% for Q2 and 5% for YTD

  • Capital expenditures⁶ as a percentage of revenue fell from 18% to 17% for Q2 and for YTD

• New management team focused on driving performance and integrating operations
  
  

  • Tom Mockridge - Chief Executive Officer

  • Robert Dunn - Chief Financial Officer

  • Dana Strong - Chief Operating Officer

  • Paul Buttery - Chief Customer, Technology and Networks Officer

  • Maurice Daw - Chief People Officer

  • Paul Richmond - Executive Director Corporate Affairs and Media

  • Peter Kelly - Managing Director of Virgin Media Business

• Although early days, we expect significant upside to the initial estimated synergy targets

• Long-term capital structure in place with a fully-swapped borrowing cost of 6.1%⁷
  
  

  • 95% of the 6.50% Convertible Senior Notes have been exchanged

  • Weighted average maturity of total debt is now approximately seven years

^* For definitions and reconciliations of certain financial and subscriber metrics, please see pages 9 -14. OCF and all other metrics generally have been presented herein using Liberty Global's definitions for all periods presented. To the extent applicable, we have provided explanations and reconciliations of the differences between Liberty Global's definitions and our former definitions. The 2013 figures in this release combine amounts from "Predecessor" and "Successor" Periods. The combination of Predecessor and Successor periods is not permitted by generally accepted accounting principles in the United States ("GAAP") and has not been prepared with a view towards complying with Article 11 of Regulation S-X. For further details concerning the Predecessor and Successor Periods, see page 9, and for additional information, see note 1 on page 12.

Virgin Media Operating Statistics Summary^*

^* For footnote disclosure, please refer to pages 12-14. Statistics and figures are generally calculated in accordance with Liberty Global policies for all periods presented. For further discussion of differences between Liberty Global's policies and policies previously utilized by Virgin Media, please see footnotes 14 and 17. See page 11 for a comparison of Average Revenue per Customer Relationship under Liberty Global's policies to the policies previously utilized by Virgin Media.

Operational Performance

Cable

At June 30, 2013, we provided a total of 12.2 million cable subscription services ("RGUs") to 4.9 million unique cable customers, consisting of 3.8 million television, 4.3 million broadband internet and 4.2 million telephony RGUs. During Q2 2013, total RGUs and customer relationships fell by 34,000 and 23,500, respectively, as a result of sequentially higher churn due in large part to student movers at the end of the academic year.

However, the U.K.'s underlying pricing environment remained relatively stable as demonstrated by the price rise that we implemented in February 2013, as well as more recent actions by our competitors. This contributed to higher average revenue per customer relationship, up 3% year-over-year to £48.80. Gross disconnections fell year-over-year for the seventh quarter in a row resulting in lower monthly churn¹⁸, down from 1.4% to 1.3%. Our Collections bundles, which combine superfast broadband (30 Mbps and above) with our next generation TV service powered by TiVo, continued to resonate with customers, with 41% of triple play customers now taking a Collections bundle. The mid-tier Essentials and Premiere Collections remain the most popular.

Our leadership position in the provision of superfast broadband continues with our estimated share of the U.K. market at approximately 62%. We increased our RGU base that subscribes to our 30 Mbps and higher speeds by 249,000 in the second quarter, with over 40% of new broadband subscribers taking our 60 Mbps or higher products. As a result, we finished Q2 with 2.8 million superfast broadband customers representing 64% of our total broadband RGU base. This performance has been supported by our program to double more than 4 million customers' broadband speeds, which was completed during the second quarter. We have also been actively upgrading our 100 Mbps service to 120 Mbps and by July 24, approximately half of our 100 Mbps customers have been upgraded and the remaining are on track to be completed by the end of the year.

During Q2, we also continued to drive the penetration of our TiVo set-top box, which combines live TV with on demand and web-based content. We increased our TiVo subscriber base by 155,000 to 1.7 million during the quarter. This represents 44% of our video RGUs, as compared to 25% at Q2 2012. Also, we continued to enhance Virgin TV Anywhere, our cloud-based entertainment service, with the addition of 32 live streaming channels. We now offer 75 live streaming channels on PCs and 53 on iOS devices. This service also provides TiVo customers with increased functionality, as they can remotely connect to their TiVo boxes to manage their recordings wherever they are, for no additional fee.

Mobile

During Q2, total mobile subscribers grew by 30,000 to over 3 million. Our overall mix improved as we increased total postpaid mobile subscribers by 49,000 to 1.8 million, while the number of our prepaid mobile subscribers was reduced by 19,000 to 1.2 million. We continued to focus on cross-selling mobile into our cable base and as a result, quad-play penetration¹⁹ is now approximately 16% of our residential cable customer base. Quad-play churn remains meaningfully lower than monthly cable customer churn.

Business

Although our business division has been challenged in recent periods by competitive and economic factors, we believe it is gaining momentum. We expanded our sales team during the first half of 2013 and this has begun to translate into an improved sales pipeline. In this regard, the total value of orders taken during this quarter is the strongest in two years. However, we expect business revenue to be muted for the remainder of the year, reflecting lead time from contract to installation and the June 7, 2013 change in our accounting policy regarding the recognition of installation revenue, as further described in note 3.

Financial Summary

The following tables reflect preliminary unaudited selected financial results for the three and six months ended June 30, 2013 and 2012, respectively.

Financial Results

For the three and six months ended June 30, 2013, we reported revenue of £1,027 million and £2,069 million, respectively, as compared to £1,027 million and £2,033 million, respectively, for the corresponding prior year periods. We generated rebased revenue growth of 1% for Q2 and 2% YTD. The principle revenue driver for both periods was our cable business, which accounted for over 70% of our consolidated revenue during both the Q2 and YTD periods. Supported by a price increase implemented in February 2013, our cable business was able to deliver year-over-year revenue growth for the three and six months ended June 30, 2013, of 4% and 6%, respectively.

Our cable revenue growth was largely offset by revenue declines in mobile and other consumer, as well as a decline in our business segment. Representing approximately 12% of our total revenue, our mobile revenue declined 6% year-over-year to £124 million in Q2 and 3% to £257 million YTD. Although we increased our base of postpaid mobile subscribers by over 150,000 in the LTM period, this growth was more than offset by a decline in prepaid subscribers, a reduction in chargeable usage and the effect of regulatory changes to mobile termination rates ("MTR") which occurred in April 2012, May 2012 and April 2013. As compared to the corresponding prior year periods, the MTR change reduced the amount of inbound mobile revenue we received during the three- and six-month periods by approximately £4 million and £11 million, respectively.

We generated business revenue of £148 million in Q2 and £311 million YTD, reflecting a reported decrease of 11% and 8%, respectively. This decline was attributable in part to the continued decline in voice revenue, certain contract renegotiations with key partners over the last year, non-recurring revenue relating to a contract termination in Q2 2012 of approximately £4 million, and deferral of installation revenue in the Successor period following a change in accounting policy. As further described in note 3, this change was made to conform to Liberty Global's policy and, as a result, approximately £5 million of installation revenue in the Successor period was deferred, net of the amount amortized into revenue. In terms of rebased revenue, which adjusts for, among other items, this policy change, business revenue for the three- and six-month 2013 periods decreased 8% and 7%, respectively.

On a reported basis, OCF for the three and six months ended June 30, 2013 increased 2% to £427 million and 5% to £844 million, respectively, as compared with the same periods in the prior year. This was primarily due to lower marketing expense in our selling, general and administrative costs in both Q2 and YTD. Our reported growth was impacted by the revenue factors discussed above and a £7.5 million benefit in Q2 2012 following a broadband rate appeal settlement. Our rebased OCF growth, which takes into account the policy change for business install fees and favorable acquisition accounting adjustments to reflect a capacity supply contract at estimated fair value, was 4% and 6% for the three and six months ended June 30, 2013, respectively. Looking forward, we expect that the costs associated with our integration with Liberty Global, among other factors, will impact our OCF in the second half of 2013.

In terms of our OCF margin, we realized a margin of 41.6% and 40.8% for the three and six months ended June 30, 2013. This reflects increases of 80 and 120 bps, respectively, over our OCF margin of 40.8% for Q2 2012 and 39.6% for YTD 2012.

With respect to our capital intensity, we experienced modest year-over-year decreases in our property and equipment additions. These additions declined year-over-year by 4% to £228 million and 5% to £448 million for the Q2 and YTD periods. The year-over-year reduction was due in part to lower spend on customer premises equipment. Measured as a percentage of revenue, we finished the three and six months ended June 30, 2013 with property and equipment additions of 22%. These results reflect improvements of 100 and 150 bps over the corresponding prior year periods. For additional information on how our property and equipment additions reconcile to our capital expenditures as reported in our consolidated cash flow statements, please see page 10.

Capital Resources

The following table details the sterling equivalent of the carrying value of our consolidated third-party financial debt as of June 30, 2013: