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Virgin Media O2 publishes quarterly results for Q3 2021

Lutz Schüler, CEO of Virgin Media O2, said:
“We are firing on all cylinders as a new company, just 150 days old. We have real commercial momentum with the launch of new converged bundles, sustained network rollout and subscriber gains across fixed and mobile. We remain firmly on-track to achieve our synergy target by mid-2026.

“We’ve driven a return to top line growth in Q3, while investing in connectivity, customer service and digital programmes for strong performance over the long term. With the core foundations already in place, we are fired up and focused on our mission to upgrade the UK.”

Strong demand for connectivity driving sustained subscriber growth

Fixed net adds were 38,000, with a sixth consecutive quarter of growth in both Project Lightning areas and the existing footprint. Q3 broadband net adds were 42,000 reflecting the continued demand for faster broadband speeds. The average speed across the company’s broadband base was 202Mbps at the end of Q3, 4x the national average of 50Mbps. Supporting thousands of businesses through the pandemic with the SOHO customer base up 38% YoY.

Contract mobile net adds of 108,000 and total mobile connections of 686,000 in Q3 were due to strong growth in IoT and contract connections as COVID lockdown restrictions eased and trading returned to normalised levels.

  • Strong commercial momentum: +38,000 fixed customer adds taking fixed-line base to 5.7 million and +108,000 contract mobile additions taking our total mobile base to 41.6 million in Q3
  • Invested £1.4bn of capital YTD in network infrastructure and customer experience to fuel future growth and boost connectivity across more of the UK
  • Unrivalled UK gigabit broadband rollout reaching 12.8 million premises and 5G services available in 210 towns and cities; targeting 50% population coverage in 2023
  • First joint mobile and fixed product, VOLT, live in the market, just four months after company formed
  • Delivered transaction adjusted revenue growth of +1% YoY and £913 million of transaction adjusted EBITDA in Q3

Investing to upgrade the UK’s digital infrastructure
Gigabit speeds are now available to half of all UK premises predominantly due to Virgin Media O2, the UK’s largest gigabit speed provider by a wide margin. The company’s gigabit footprint now reaches 12.8 million premises and is on track to provide complete network-wide coverage of its 1.1Gbps speeds by the end of 2021.

FTTP upgrade pilots are underway as part of the company’s plan to deploy full fibre across the entire network with completion in 2028. In addition, demonstrating the power of the business’ existing network, successful real-world 2.2Gbps trials are successfully taking place in Edinburgh and Birmingham using current DOCSIS 3.1 network technology, delivering speeds 43x faster than the UK average.

Project Lightning network expansion saw 67,000 new premises passed in Q3, taking the company’s cumulative Lightning build to 2.6 million.
5G and 4G service investment is continuing. The company is targeting 50% population coverage of 5G services by 2023 and is strengthening the 5G experience offered over the O2 network by rolling out infrastructure based on customer need. It is leveraging its leading position in low-band spectrum with the targeted deployment of the 700MHz band. Boosting 4G capacity also remains a key focus for investment; the company has upgraded 4G capacity in 85,000 postcodes since the start of the year.

 Improving customer experience and pushing forward with product innovation
Reinforcing its position as the UK’s leading converged challenger, Virgin Media O2 launched its first joint bundles for consumer and SOHO customers after just four months as a combined business. The new “Volt” bundles offer new and existing customers more speed, more data and more value when taking Virgin Media broadband and eligible O2 Pay Monthly plans. O2 retail stores have been rebranded and upgraded to offer both fixed and mobile services on the high street and O2’s Priority loyalty scheme, which provided £4.3 million of value to O2 customers in Q3, has been extended to Virgin Media broadband customers with the launch of Volt bundles.

O2 maintained industry-leading loyalty with contract churn at 0.9% and building upon a variety of customer and network experience accolades over the years, O2 was named Network of the Year and Best Online Retailer at the recent Mobile Industry Awards.

Continued investment in customer service and digitalisation has contributed a 92% reduction in Virgin Media complaints and lower call waiting times with fixed customer relationship NPS increasing 6 points since Q1 2021 and transactional NPS improving 5 points during Q3 for service interactions in the digital care channel. The company has hired 1,000 UK based customer service agents since the start of the pandemic and has launched a recruitment drive to fill 400 roles including engineers, apprentices and retail positions nationwide by the end of 2021.

Virgin TV 360, the company’s latest TV platform is driving higher satisfaction and overall usage. The NPS of Virgin TV 360 is almost 20 points higher than the predecessor V6 set-top box and 90% of subscribers are making use of integrated apps. Innovation is continuing with the upcoming launch of an IPTV service which will offer a seamless app and streaming-based experience.

Positive revenue coupled with investment in long-term growth drivers
Revenue1: Total transaction adjusted revenue increased 0.7% YoY to £2,603.7 million in Q3. Mobile revenue was broadly flat YoY at £1,465.6 million, with a 7.4% YoY increase in handset revenue fueled by increased upgrade activity following mobile hardware launches from Samsung and Apple being offset by lower service revenue due to the continued impact of a change in the distribution channel mix. Consumer fixed revenue increased by 1.0% YoY supported by a 2.4% YoY increase in fixed-line customers partially offset by a 2.1% YoY decline in transaction adjusted fixed-line customer ARPU due in part to the short- term impact from annual best tariff notifications, which will ease from February 2022. B2B fixed revenue was affected by the phasing of installation activity for high-capacity data services within Wholesale, while Other revenue increased 25.7% to £113.9 million underpinned by growth related to the company’s smart metering programme.

Adjusted EBITDA1: Transaction adjusted EBITDA decreased 0.6% YoY to £912.7 million, excluding £11.0 million of opex cost to capture “CTC”. This performance was due to a change in the revenue mix and increased investment in future growth drivers of digitalisation, product development, increased sales and marketing expenses ahead of the peak Q4 trading period and higher programming costs. Transaction adjusted EBITDA margin returned to a more normalised level of 35.1% compared to 36.7% in Q2 2021.

Adjusted EBITDA less Capex1: The company has continued to deliver substantial transaction adjusted EBITDA less capex2 of £385.4 million in Q3, excluding £20.1 million of opex and capex CTC, while investing in capital projects to deliver future growth. Property and equipment (“P&E”) additions increased 11.3% YoY to £500.1 million, as the company continued to invest in its fixed and mobile infrastructure. In addition, ROU asset additions decreased YoY to £27.2 million in Q3. Overall capital intensity (P&E and ROU asset additions as a % of revenue) was 20.3% in Q3, compared to 18.6% in Q3 2020, partly due to spend being H2 weighted in 2021.

 Free Cash Flow: Adjusted free cash flow was £227.1 million for the four month period since the company was formed and an outflow of £57.4 million in Q3.

 Guidance: Full year 2021 pro forma transaction adjusted EBITDA growth is expected to be flat to positive. 2021 cash distribution to shareholders of at least £300 million, while maintaining leverage at the upper-end of the 4-5x range.

 Strong capital structure to support business growth
At 30 September 2021, Virgin Media O2’s fully-swapped third-party debt borrowing cost was 4.6% and the average tenor of third-party debt (excluding vendor financing) was 7.7 years.

The company launched its first Green Bonds in June 2021 comprising $850 million 4.75% Senior Secured Notes due 2031 and £675 million 4.5% Senior Secured Notes due 2031. The proceeds were used to redeem £1,124 million Term Loan P and partial redemption of the 5.5% Senior Secured Notes due 2026 in July. The 2031 Green Bonds were subsequently tapped in July, and an additional $550 million was issued and used to repay the remaining 5.5% Senior Secured Notes due 2026. The net proceeds of the Green Bonds will be allocated to projects in accordance with the VMED O2 Green Bond Framework. It is expected that projects with energy efficiency benefits will make up a large majority of the eligible spend.

At 30 September 2021, and subject to the completion of the corresponding compliance reporting requirements, the ratios of Net Senior Debt and Net Total Debt to Annualised pro forma adjusted EBITDA (last two quarters annualised) were 3.38x and 3.71x, respectively, each as calculated in accordance with the most restrictive covenants, and reflecting the Credit Facility Excluded Amounts as defined in the respective credit agreements. Vendor financing, lease and certain other obligations are not included in the calculation of the company’s leverage covenants. If these obligations were included in the leverage ratio calculation, and Virgin Media O2 did not reflect the exclusion of the Credit Facility Excluded Amounts, the ratio of Total Net Debt to Annualised EBITDA would have been 4.76x at 30 September 2021.

At 30 September 2021, the company had maximum undrawn commitments of £1.0 billion equivalent. The company has signed commitment letters with several banks and financial institutions to increase the Revolving Credit Facility to £1,378 million. When compliance reporting requirements have been completed and assuming no change from 30 September 2021 borrowing levels, it is anticipated that the full borrowing capacity will available, based on the maximum the company can incur and upstream which is subject to a 4x net senior test.

(i)Revenue transaction adjustments relate to the reversal of the deferred revenue write-off as further described in FN (iv)(b)

(ii) ROU asset additions include £309.6 million in YTD 2021 relating to the renewal of the CTIL agreement in January 2021

(iii) Adjusted FCF for the 4-month period since the formation of Virgin Media O2 was £227.1 million

The following table provides a reconciliation of net profit (loss) to Transaction Adjusted EBITDA for the three months ended 30 September 2021 (actual) and 2020 (pro forma) and pro forma results for the nine months ended 30 September 2021 and 2020:

The following table provides a reconciliation of our net cash provided by operating activities to Adjusted Free Cash Flow for the three months and four months ended 30 September 2021:

(iv) In connection with the completion of the joint venture, the opening balance sheet of the combined business was reported at its estimated fair value. As such, certain amounts were adjusted to reflect the new basis of accounting. These transaction adjustments therefore reverse the effect of the following:

(a) Deferred commissions and install costs write-off of £33.6 million and £31.5 million for the three months ended 30 September 2021 and 2020 and £66.2 million and £118.7 million for the nine months ended 30 September 2021 and 2020, respectively

(b) Deferred revenue write-off of £9.7 million and £8.6 million for the three months ended 30 September 2021 and 2020 and £21.4 million and £32.5 million for the nine months ended 30 September 2021 and 2020, respectively

Third-party debt, finance lease obligations and cash and cash equivalents
The following table details the borrowing currency and pound sterling equivalent of the nominal amount outstanding of VMED O2’s consolidated third-party debt, finance lease obligations and cash and cash equivalents:

Covenant debt information
The following table details the pound sterling equivalent of the reconciliation from Virgin Media O2’s consolidated third-party debt to the total covenant amount of third-party gross and net debt and includes information regarding the projected principal-related cash flows of our cross-currency derivative instruments. The pound sterling equivalents presented below are based on exchange rates that were in effect as of 30 September 2021. These amounts are presented for illustrative purposes only and will likely differ from the actual cash payments or receipts in future periods.
CT Bureau

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