- Financial performance: Improved service revenue performance across mobile and consumer fixed ahead of price rise implementation, low-margin handset and B2B fixed revenue headwinds driving a 4.3% revenue decrease excluding nexfibre construction. Adjusted EBITDA decreased 1.6% excluding nexfibre construction as Virgin Media O2 invests in future growth drivers
- Trading update: Low customer activity quarter driving stable fixed-line customer base and net reduction in mobile contract base
- Network evolution: Increased network investment as deployment of 5G and fibre continued at pace. FTTP homes serviceable footprint increased by 194,000 in Q1, as Virgin Media O2 build accelerates by 80% year-over-year
London, UK – Lutz Schüler, CEO of Virgin Media O2, said: “While there is much to do in the remainder of the year, we are gathering momentum in accelerating fibre build and marketing the nexfibre footprint, launching new services to enhance and improve customer experience, and progressing wider IT efficiency programmes as we continue our digital transformation.
“Ahead of price rise implementation, we delivered improved service revenue growth across both mobile and consumer fixed. Our teams also continue to innovate as shown by the targeted launch of 5G Standalone and a new 2Gbps broadband service on the nexfibre network in Q1, highlighting the future evolution of our networks as demand rises and new technologies emerge.
“Our performance in Q1 sets the foundations for our full year guidance as we make key investments to support future growth.”
Service revenues supported by offering enhancements
The fixed-line customer base ended the quarter at 5.8 million, with a small net reduction of 2,000 in Q1 primarily driven by lower gross additions, as a slowdown in customer activity in the fixed market offset growth in nexfibre areas. Virgin Media’s premium ARPU per fixed-line customer relationship was broadly stable for the second consecutive quarter at £46.25, ahead of price rises being implemented in Q2. The broadband customer base grew by 5,300 in Q1, while growth in broadband speeds continued, as average download speeds increased 17% year-over-year to 368Mbps. In line with its continued broadband innovation, Virgin Media O2 became the first major UK provider to publicly launch a residential 2Gbps service in February, with the new services initially available across the nexfibre network.
The contract mobile base reduced by 74,500, ending Q1 at 16.0 million. This was driven by a reduction in handset sales and disconnections related to the decommissioning of a legacy billing system, while Q1 O2 monthly contract churn remained stable at 1.2%. Total mobile connections grew to 45.1 million, as growth in IoT and wholesale were partially offset by a reduction in contract and prepaid connections.
Ramping up fibre build pace to upgrade the UK’s digital infrastructure
Virgin Media O2 continued the evolution of its fixed and mobile networks. The total serviceable fixed network footprint increased by 194,000 FTTP homes in Q1, continuing high-quality build to the nexfibre network and representing an increase in build pace of 80% year-over-year. Following the end of the quarter, the milestone of one million nexfibre premises built was achieved in April, highlighting the ramp 1 up of the Virgin Media O2 fibre build capability. The pace of fibre upgrade activity across the existing Virgin Media O2 footprint also increased year-over-year, as planning for the fixed NetCo announced last quarter continued. In mobile, investment in 5G coverage and capacity also continued in Q1, as next generation 5G Standalone was switched on in 14 cities across the country.
Reducing e-waste while supporting communities
In March, the company announced that O2 Recycle had expanded its scope to cover games consoles, in addition to mobiles, tablets and other devices. Unwanted tech can be sent to O2 Recycle, where the device can be repaired, refurbished and resold, or recycled – with zero parts going to landfill. Additionally, Virgin Media O2 and environmental charity, Hubbub, are providing hundreds of recycled tablets and smartphones to help people in need, powered by free O2 mobile data.
2024 guidance reiterated, as the company expects:
- Stable to declining revenue and a low to mid-single-digit decline in Adjusted EBITDA, both excluding the impact of nexfibre construction • P&E additions of £2.0 to £2.2 billion, with opex and capex CTC of less than £150 million
- Cash distributions to shareholders of around £850 million supported by proceeds of the minority sale of CTIL in Q3 2023 and around £500 million of Adjusted Free Cash Flow. Targeting being in line with the 4x to 5x leverage range in the medium term
Targeted investments in future growth drivers
Revenue: Q1 total Revenue decreased 0.5% year-over-year to £2,588.8 million, as revenue excluding the impact of nexfibre construction decreased 4.3%. The primary driver was low-margin handset revenue which decreased 24.6%, offsetting another quarter of growth in mobile service revenue, as total mobile revenue decreased 4.7% to £1,362.7 million. Consumer fixed revenue increased 0.1% year-over-year to £822.9 million, supported by a stabilisation of consumer fixed ARPU. B2B fixed revenue decreased 18.7% to £108.7 million driven by pricing headwinds and a reduced level of revenue related to long-term leases of a portion of the fixed network. Other revenue increased 35.5% to £294.5 million driven by increased nexfibre construction revenue, partially offset by reduced ICT revenue.
Adjusted EBITDA: Q1 Adjusted EBITDA decreased 1.4% year-over-year to £935.4 million, or a 1.6% decrease excluding nexfibre construction, prior to £9.7 million of opex CTC. This was driven by B2B fixed headwinds and investment in IT and digital efficiency programmes partially offset by growth in mobile service revenue. In addition, after a related-party contract change was agreed in the quarter, approximately £11.6 million of CPE hardware and essential software costs were capitalised, improving Adjusted EBITDA with a corresponding increase in P&E additions, with no impact on Free Cash Flow. Q1 2024 Adjusted EBITDA margin decreased to 36.1% compared to 36.5% in Q1 2023, driven by an increased level of lower margin nexfibre construction revenue. Adjusted EBITDA including CTC decreased 0.2% to £925.7 million, with a reduced level of opex CTC.
Adjusted EBITDA less Capex: Q1 Adjusted EBITDA less Capex decreased 30.0% year-over-year to £307.3 million, before opex and capex CTC of £29.1 million. This was driven by increased P&E additions as investment in both the fixed and mobile network increased, increased ROU asset additions with a significant new property lease in the quarter, and the aforementioned decrease in Adjusted EBITDA.
Adjusted Free Cash Flow: There was Adjusted FCF outflow of £738.7 million for the quarter ended 31 March 2024, with a seasonal outflow in Q1. 2
Refinancing activity supports capital structure
At 31 March 2024, the company’s fully-swapped third-party debt borrowing cost was 5.0% and the average tenor of third-party debt (excluding vendor financing) was 5.5 years.
The company further strengthened its capital position with financing activity completed in the quarter. This started in January, through a €20.0 million draw down under Term Loan Z, with the proceeds to be used for refinancing. In February, the 2026 tranche of the Revolving Credit Facility was reduced by £54.2 million. In March, certain lenders under Term Loan X, due 2027, entered into a new commitment labelled Term Loan X1 due 2029. The principle amount of Term Loan X1 is £750.0 million, including £33.7 million additional borrowing to be used for refinancing.
Following the end of Q1 further refinancing has taken place continuing the proactive and opportunistic approach. In April 2024, Virgin Media O2 issued €600.0 million and $750.0 million principal amounts of Senior Secured Notes. These were issued at par, mature on 15 April 2032, and bear an interest of 5.625% and 7.75%, respectively. The proceeds from these 2032 Senior Secured Notes are to purchase and cancel or repay existing 2027 maturing debt. As per policy, the interest and foreign currency risk of such refinancing activity is mitigated through a derivative portfolio.
At 31 March 2024, and subject to the completion of the corresponding compliance reporting requirements, the ratios of Net Senior Debt and Net Total Debt to Annualised Adjusted EBITDA (last two quarters annualised) were 3.62x and 3.92x, 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 Adjusted EBITDA would have been 5.13x at 31 March 2024.
At 31 March 2024, the company had maximum undrawn commitments of £1,378.0 million equivalent. When compliance reporting requirements have been completed and assuming no change from 31 March 2024 borrowing levels, it is anticipated that the full borrowing capacity will continue to be available, based on the maximum the company can incur and upstream which is subject to a 4x net senior debt test.
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