Virgin Media O2 returns to revenue growth
July 28, 2022
Virgin Media O2, the mass media telco, has reported its Q2 earnings.
Lutz Schüler, CEO of Virgin Media O2, said: “It’s one year on since Virgin Media O2 was born and, while we’ve got much more to do, we came out of the gate running and achieved a huge amount in our first year as a joint business. Our mission has been to upgrade the UK and be the biggest challenger in the market, and we’ve continued to do just that.”
“In Q2, we’ve grown our fixed and mobile customer base once again, as fast and reliable connectivity remains a top priority for consumers and businesses. We’ve seen an improved revenue performance alongside our best quarterly profitability growth since we merged, putting us in solid shape to meet our full year guidance. The launch of our Virgin Media O2 sustainability strategy was also a major highlight in the quarter, and we will back up our bold commitments on carbon, circular economy and communities with real action.”
“As we navigate a tougher economic environment and provide our customers with great value and targeted support, we have clarity and focus on three growth waves that will drive sustained commercial momentum. Firstly, our integration is firmly on track, our synergies are being realised and we’re innovating at pace with convergence at our core; secondly, we’re moving forward our digitalisation plans to improve our existing operations and build future foundations; and thirdly we’re investing heavily to expand and upgrade our fibre and 5G networks to bring top-class connectivity to more of the country.”
“While I’m proud of what we’ve achieved in just one year, nobody in the business is complacent, and we remain focused to deliver even more.”
Subscriber growth driven by demand for connectivity
The fixed customer base returned to positive growth with 8,000 net additions in Q2, taking the total base to 5.8 million. This performance was driven by continued growth in Project Lightning and strong trading following the Q1 price rise. Continued demand for fast, high-quality connectivity drove Q2 broadband net adds of 16,000, and average speed across the company’s broadband base increased 27 per cent YoY to 247 Mbps, which is almost 5x higher than the national average.
The contract mobile base increased by 13,000 in Q2, whilst total mobile connections increased by 805,000 due to strong growth in IoT, wholesale and contract connections. O2’s monthly contract churn remains stable at sector-low levels of just 0.8 per cent.
Virgin Media O2 Business continues to enhance its product offering across all areas – from small business to the public sector. The launch of a new “Get More” proposition enables new and existing medium business customers combining Virgin Media Business broadband with an O2 Business mobile product to put 10 per cent of the cost of their plan towards new tech such as smartphones, tablets and desktops.
The company also launched 1Gbps speeds for small businesses and continued to build momentum in the public sector. This included switching on the UK’s first 5G-connected hospital with the South London and Maudsley NHS Foundation Trust. The private 5G network will provide dedicated connectivity for mission-critical digital health use cases for both clinicians and patients and is part of a wider ambition to rollout services across the NHS estate over the next three to five years.
Accelerating investment in the UK’s digital infrastructure
Project Lightning network expansion build increased to 114,000 in Q2, up from 101,000 premises added in Q1 2022 and 89,000 premises added in Q2 2021. The cumulative Lightning footprint is now 2.9 million and the company is on-track to add over 500,000 Lightning premises in 2022 – further bolstering Virgin Media O2’s gigabit leadership in the UK with speeds of 1.1Gbps offered across its entire footprint of 15.9 million premises.
The FTTP upgrade of the existing network is starting to ramp up following completion of trials in Q1. The goal is to roll out full fibre across the fixed network at a cost of £100 per home with completion in 2028.
Furthermore, 5G services are now available in more than 600 towns and cities and rollout remains on-track to hit 50 per cent population coverage of 5G services by 2023. Boosting 4G also remains a key focus for investment and 4G capacity was upgraded in 154,000 postcodes during Q2.
The launch of our new ESG strategy alongside targeted support amid the rising cost of living In the current economic climate with a rising cost of living, the importance and prioritisation of connectivity services remains steadfast. The company has already taken proactive steps in providing targeted support while continuing to innovate, invest and push ahead with bold customer-centric decisions like not reintroducing European roaming charges, differentiating itself from all other major UK mobile operators. Targeted measures aimed at those hardest hit in the current climate include being the first provider to introduce a dedicated broadband social tariff called Essential Broadband, and pioneering the UK’s first ever National DataBank providing free mobile connectivity to those in need. The company is also committed to providing tailored support to customers with additional needs.
In May, Virgin Media O2 launched its first sustainability strategy as a joint business, the Better Connections Plan, outlining its bold commitments to cut carbon, champion the circular economy – such as recycling devices and donating unwanted smartphones and tablets – and support communities as it upgrades the UK.
The business has an ambitious commitment to achieve net zero carbon across its operations, products and supply chain by the end of 2040, 10 years ahead of the Paris Agreement and the UK’s target of reaching net zero by 2050. It is also one of the first ‘pathfinder’ companies working towards the Carbon Trust’s new Route to Net Zero Standard, and joined The Climate Pledge to align its environmental commitments with the Science Based Targets initiatives (STBi) new Net Zero Standard. The Better Connections Plan intends to enable 10 million circular economy actions for customers to take by 2025, which will help tackle e-waste. In addition, the plan will help eradicate data poverty through free and affordable connectivity, as well as improving digital skills and confidence.
Return to revenue growth and improved profitability driven by price rises and synergies
Revenue: Q2 transaction adjusted revenue of £2,554.5 million increased 0.2 per cent YoY supported by the benefit of the fixed and mobile price rises. Mobile revenue was up 2.2 per cent YoY to £1,427.4 million, with improvements in both handset and service and other. Fixed revenue decreased by 3 per cent YoY to £1,005.8 million primarily driven by B2B where there was a high level of installation revenue within Wholesale in Q2 2021. Other revenue increased 4.9 per cent to £121.3 million.
Adjusted EBITDA: Q2 transaction adjusted EBITDA increased 4 per cent YoY to £972 million, excluding £14.8 million of opex CTC – representing the best full quarter growth rate since Virgin Media O2 was formed. This was supported by the flow through of price rises, as well as cost efficiencies and the realisation of synergies, but partially offset by increased energy costs. The transaction adjusted EBITDA margin improved to 38.1 per cent in Q2 2022 compared to 36.7 per cent in Q2 2021.
Adjusted EBITDA less Capex1,2: Transaction adjusted EBITDA less capex increased 153.4 per cent YoY to £458.4 million in Q2, before opex and capex CTC of £86.3 million. The increase was primarily attributable to an elevated level of ROU asset additions in Q2 2021, arising from a non-recurring £289.9 million impact following the implementation of a new agreement with Cornerstone Telecommunications Infrastructure Limited.
Free Cash Flow: Adjusted free cash flow was £490.7 million in Q2. Virgin Media O2 made a cash distribution of £250 million to its shareholders during Q2.
2022 guidance reaffirmed: The company expects to deliver mid-single-digit growth in pro forma transaction adjusted EBITDA (before CTC), supported by improved top-line growth and the delivery of synergies which will ramp through the year. Expect opex and capex CTC of over £300 million and P&E additions of around £2.1 billion as the company accelerates network investments. The cash distribution to shareholders is anticipated to be £1.6 billion including cash from recapitalisations to maintain leverage at the upper-end of the 4-5x range.
Strong capital structure to support business growth
At 30 June 2022, Virgin Media O2’s fully-swapped third-party debt borrowing cost was 4.6 per cent and the
average tenor of third-party debt (excluding vendor financing) was 7 years.
In Q2 Virgin Media O2 launched the Better Connections Plan, this was committed in, and supportive of the VMED O2 Green Bond Framework issued in June 2021. So far 72 per cent of the Green Bonds comprising the $1,400 million 4.75 per cent Senior Secured Notes due 2031 and £675 million 4.5 per cent Senior Secured Notes due 2031 have been allocated. Projects with energy efficiency benefits make up the large majority of the eligible spend.
At 30 June 2022, 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 3.15x and 3.46x, 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 4.56x at 30 June 2022.
At 30 June 2022, the company had maximum undrawn commitments of £1,378 million equivalent. When compliance reporting requirements have been completed and assuming no change from 30 June 2022 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 debt test.