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Earnings Transcript for LBTYA - Q2 Fiscal Year 2024

Operator: Good morning, ladies and gentlemen and thank you for standing by. Welcome to Liberty Global's Second Quarter 2024 Investor Call. This call and the associated webcast are the property of Liberty Global and any redistribution, retransmission or rebroadcast of this call or webcast in any form without the express written consent of Liberty Global is strictly prohibited. [Operator Instructions] Today's formal presentation materials can be found under the Investor Relations section of Liberty Global's website at libertyglobal.com. After today's formal presentation, instructions will be given for a question-and-answer session. Page 2 of the slides details the company's Safe Harbor statement regarding forward-looking statements. Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the company's expectations with respect to its outlook and future growth prospects and other information and statements that are not historical fact. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risks include those detailed in Liberty Global's filings with the Securities and Exchange Commission, including its most recently filed Forms 10-Q and 10-K as amended. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based. I would now like to turn the call over to Mr. Mike Fries.
Michael Fries: Okay. Hello, everyone. Thanks for joining the call today. We've got a lot of ground to cover, so I'm going to jump right into prepared remarks. My senior team is also on the line as usual. So I'll be involving them in the Q&A when we get there. So I'm starting on our Q2 highlights slide. On our year-end call in February, you'll all remember that we laid out what I think is a clear strategic plan which included 3 core elements
Charles Bracken: Thanks, Mike. The next slide sets out the quarterly revenue in EBITDA for each of our 4 key markets
Operator: [Operator Instructions] The first question is from the line of Carl Murdock-Smith with Berenberg.
Carl Murdock-Smith: I just wanted to ask about Virgin Media O2 and the fiber rollout. So fiber now passes 5 million premises. But of that, how many are actually ready for sale? And how many broadband customers do you have on the fiber infrastructure, particularly in upgraded cable areas? The reason I'm asking is there were a few reports a few months ago that you faced delays in being able to launch services to fiber customers in project Mustang areas, where there was previously cable network.
Michael Fries: Well, I mean, I'll let Lutz dig into the details. I'm not sure we're disclosing that much information, Carl. But the $5 million breaks out into both, nexfibre about $1.3 million, I believe and the balance on our VMO2 upgrade or fiber up as we call it, we're connecting customers on nexfibre. I'm not sure we disclosed our penetration rate, Lutz. And Charlie jump in here, if you think we have, I'm pretty sure we have it. And then we're taking our time on converting HFC customers to fiber, just getting ourselves ready to do that more than anything. And that's as much around how we package and market products and services than where we build or where we don't build. So in terms of homes ready for service. Lutz, I don't believe we're providing that detail. That's how the fiber homes break out. But clearly, we're gearing up to take advantage of these fiber homes or we wouldn't be building them in the first place. But jump in here, do you think there's more we're going to say, Charlie, or Lutz.
Lutz Schüler: I mean, we are only selling…
Charles Bracken: Sorry. Lutz, I was just saying we haven't provided final [ph] numbers.
Michael Fries: Yes. Okay. Go ahead, Lutz.
Lutz Schüler: Yes. I was -- the only thing I can add is that at the moment, we are well positioned with our HFC work with our 60 million homes. So therefore, we have taken a conscious decision not to start selling fiber -- but as Mike has said, we will do and you see in our churn numbers that, at the moment, customers are not leaving our network because of fiber.
Operator: Next question is from the line of Maurice Patrick with Barclays.
Maurice Patrick: It's Maurice here from Barclays. Sorry for the U.K. question. But I see in the financial, you lost, I think it was 12,000 broadband customers but you had growth in nexfibre. I'm just conscious listening to the -- looking at the BT numbers yesterday, they saw $190,000 losses of customers in Openreach, they said they were seeing increased loss to competitors but also a soft pull by markets. So just curious as to given you presumably you lost about $30,000, $40,000 of our legacy footprint, are you seeing more impact from altnets? Is it a soft market? What's driving that shift? And should we see improvement in the coming quarters?
Michael Fries: Go ahead, Lutz.
Lutz Schüler: Yes. Thank you for the question, Maurice. So in the net add development outside nexfibre, we are a bit better this year in a price rise quarter compared to last year. So therefore, yes, I agree altnets are increasing their activities, right? They're built less but they try to sell more and therefore, you see aggressive promotions. But in the scheme of things, we managed to keep our base stable in the price rise quarter. And we have now managed also to increase the ARPU and the fixed service revenue first time in 3 years. And this is a result of a completely different way of working, right? We understand every household we are serving. We have -- we run 25,000 campaigns in parallel. And we come up with individual product and price combination and therefore, we are able to maximize retained revenue. Something we have achieved for several years and it starts now to really pay off since Q3 last year. On the nexfibre area, we haven't disclosed any numbers but it is fair to say that we are a bit behind in our ambition. The reason for that is that fiber is a new product. So we had to also deliver the video product. It's a bit of different sale, it's a different sale process. It's a different provisioning process but we are getting better and better. And we stick to our ambition that end of this year, we have sold so many fiber customers into the nexfibre area that turns into a growth driver for '25. But I think it is simply a ramp time. We lost a couple of months there. But month over month, we faced record months in sales and provisioning. And we want to sell and we will much -- sell much more in second half. I hope that answers your question.
Maurice Patrick: Yes. Just maybe on the phasing, sorry for a quick follow-up. But if you look at the cadence of net-adds and ARPU, it should be maybe different this year given the way the price increases put through?
Lutz Schüler: I mean, it could be but the majority of our customers are in contract. So we know exactly how many will be out of contract. So we don't expect a massive different phasing there, a little bit, it could be.
Operator: The next question from the line of Ulrich Rathe with Bernstein Societe Generale Group.
Ulrich Rathe: I wanted to ask a little bit about the Belgian memorandum of understanding. So the idea for the mutual wholesale access, could you just confirm that's at the active for the passive level? And also when you envisage sort of an agreement eventually, obviously, the terms aren't really announced and probably not finalized it. But do you essentially foresee this JV to -- JV, sorry, this carve up to offer terms to each other, to the partners on a reciprocal level that are different from the terms that are offered to other takers? A virtue of the underlying agreement? Or are the wholesale essentially going to be open to all take us at the same level?
Michael Fries: Yes, it's a really important question. And just to remind everybody that -- the contract is under -- is now being reviewed the regulators. So we're hopeful they'll see it -- the way we see it as a very constructive development for the market and for the operator. John, Do you want to address the specific issue around wholesale rate to the extent we're disclosing that at all?
John Malone: Yes. But first of all, for clarity, it is a passive -- reciprocal passive deal ultimately with Proximus, where Telenet will be building 60% and Proximus 40% in the collaboration zone which is about $2 million of the homes path in Flanders. The principle of it being open and nondiscriminatory is already a public principle articulated by the regulator. And we do have a regulatory process which will be underway here very shortly. But like I said, the principle of a nondiscriminatory regime will be in place in part of that agreement.
Operator: The next question is from the line of Polo Tang with UBS.
Polo Tang: It's on Switzerland. Can you maybe talk through what you're seeing in terms of competitive mix in the Swiss market? And can you maybe comment on a few specific factors. So for example, what's happening with promotional activity, specifically in the Swiss market. Also, is there still a drag on financials and KPIs from the retirement of the UPC brand. And then also going into Q3, Q4, should we expect your Swiss financials to see slower growth as you start to lap your 4% price rises from July 2023.
Michael Fries: I mean I'll let Andre address the competitive dynamics. And I think I mentioned in my remarks, Polo, we believe the UPC migration will be done by year-end and we'll have an increasingly smaller and smaller impact on results. And I don't believe we've provided quarterly guidance but take a look at where we are year-to-date through the midyear and where we ought to get to the full year guidance. So I think you can do that on your own. Do you want to talk about the competitive dynamics andre?
André Krause: Sure. Yes. Thanks for the question, Polo. So I would describe the competitive dynamics as promotional intensity being high but at the same time, we are seeing a bit of a worrying off effect. Meaning liquidity in the marketplace is somewhat reducing. I guess, customers are increasingly getting tired of the ongoing price promotions being the only argument being raised. On the back of that, I think our inflow was benefiting from 2 additional features that we have launched. One was the Flex upgrade program on hardware which is a very strong driver of our inflow at this moment. So that's perceived as a differentiating factor. And second to that, we have also announced that we are increasing our HFC speeds for 70% of the population in Switzerland to 2.5 gig. That's another differentiating factor. Very relevant one, we believe, because, a, of course, there's only 40% of the country today covered with fiber and all additional HFC coverage is having a unique situation, not only delivering 1 gig but now 2.5 gig which we think is also strengthening our position with customers when fiber rollout will increasingly get to areas where we have been a unique selling proposition with HFC so far. So I think that's positive. Additionally, I think worthwhile mentioning where we have seen good dynamics on our own info. You've seen 33,000 and 5,000 on mobile and broadband, respectively, on broadband; now the third quarter consecutively where we have been in the positives. That is not only on the back of strong inflow but furthermore we have reduced churn which is on the back, again, of increased retention activities, increased and improved service capabilities and our ability to differentiate through the product additions that I mentioned. So I think overall, it remains an intense market but we see some wearing of promotional activity, I would say, to consumers. And on the back of that, we just recently also have seen that the amount of discounts being granted has been slightly reduced. So I think that's a positive indication going forward and we will continue to drive that trend.
Michael Fries: And as with other markets, having this dual-brand strategy is making a world, a difference because you can compete with Salt on one hand and Swisscom on the other hand, with products that match their offers and the customers they're targeting.
Polo Tang: But just on that dual-brand state question. You only have one.
Michael Fries: Go ahead, Polo.
Polo Tang: Just on the dual-brand strategy. You don't have one in terms of the U.K. because you have a premium Virgin Media O2 brand. So that's a different setup from other markets now.
Michael Fries: No, we have giffgaff. Giffgaff is our, well, flanker brand, if you will, in the U.K. and arguably one of the stronger elements of growth. giffgaff is a really digital-first incredibly popular mobile brand which at some point, could be a broader telco brand. But that's our brand in the U.K., giffgaff. Do you want to say any more about that, Lutz? Okay.
Operator: The next question is from the line of David Wright with Bank of America.
David Wright: I guess, Mike, Lutz, just more of a question on U.K. potential consolidation. I'm just wondering whether this dynamic of the altnets maybe focusing the financial resources more on loading the network and provisioning rather than building. Does that create any potential sort of hurdles to consolidation, the fact that you might -- any of these businesses might have incumbent subscribers, maybe on discounted pricing, could that create any more regulatory challenges? And I guess there's an obvious kind of TalkTalk has, I think, even themselves have made it quite clear the there's an element of distress around that business at the moment. Do you think given the kind of going concern risk that the U.K. regulator could even consider customers from TalkTalk possibly even being acquired by the 2 biggest network operators yourselves and BT?
Michael Fries: Well, I'm not going to speak about TalkTalk. You can read about their situation. And it's premature to determine or even guess to what the regulator may or may not do and what they may or may not do. We're not assuming TalkTalk is doing anything but competing with us until they're not. So not much to add to that. On the altnets question, I mean you are seeing what you described which is a slowdown in build as financing and capital slowly dries up and I think that will continue. There will be winners and losers in that game. Some continue to raise capital. Others will consolidate and others will stop build. And so inevitably, one way to improve their prospects is to start selling more directly and perhaps more competitively, it's still very early days. It's too soon to tell whether this will have an impact on the broader market, whether it will have an impact on their futures and -- or our ability to consolidate or not in this market. But I think the trend is the same and I'll let Lutz if he wants to -- or Andrea, if you want to speak to it. The trend is the same. There are companies like -- nexfibre which is fully financed at GBP 4.5 billion that we own a piece of, that is going to be building, full stop and is going to generate -- get to 5 million to 7 million homes in home. No question about it. There's VMO2 which is going already at 16 million [ph] and 3.5 million, 4 million of which are fiber and is going to get to full fiber, full stop. So there's going to be platforms like ours with 21 million to 24 million homes and that's a certainty and BT is a certainty. And the rest, we'll see how it shakes out. I think it's -- the writing is on the wall, so to speak but that doesn't mean between here and there, it's a straight line. There will be puts and takes. We look at M&A prospects along 3 or 4 levels. First of all, what's the overbuild with us, if we can upgrade at GBP 100, what's it worth it to us to acquire an existing fiber home that somebody spent GBP 500 to build. Secondly, the quality of that network, obviously, what it would cost us to get to our sort of level of sophistication. And thirdly, is there a customer base. And maybe your main question is, does the existence of a customer base on an alternate change that dynamic materially. And I would say no. If there are customer and we would look to see how those could be integrated or required or migrated. That in and of its doesn't change the principal analysis. It's more about where they built, how much they've spent to build and how it fits with our broader strategy. I'll maybe pass Andrea, do you have anything to add to that as the Chairman of nexfibre.
Andrea Salvato: No, I think you've summed it. Yes, Mike. I think you summed it up well, Mike. I would simply say that there's also a certain amount of value expectations, I think that need to get reset in the market, before we can start to see material consolidation. So I think that's one of the other issues that people are struggling with at the moment.
David Wright: Just put the -- you just put the infrastructure multiple out there, haven't you guys in one of your early slides, I think you've given the market its price point.
Michael Fries: Well, I would say those are pure NetCos with scale and cash flow. So it's a little different. That kind of is a little different market. Yes and existing customers; but a fair point. Yes, there you go.
Operator: The next question is from the line of Joshua Mills with BNP Paribas.
Joshua Mills: It comes back a bit to the cable versus fiber debate. And my question is, how do you -- can you talk a bit about how you're testing DOCSIS 4.0. And then going back to Andre's comment earlier of the improvement in speed in the Swiss cable network, can you maybe give any stats about the kind of commercial benefits you're seeing where you do upgrade can to faster speeds and maybe just give us a sense of how much the network longer term will go to that? And maybe if I could tack on 1 small question. One of the points of the Proximus sale today is they're now going to be wholesaling from you on cable in 700,000 homes. I think in the past when you've talked about your cable versus fiber strategy. One of the points about the U.K. was a benefit of upgrade to fiber gives us that opportunity to wholesale. Now you're doing that just on the cable network, so you don't need to make that investment. Do you think this could be a template for other markets in the future as well? And how should we think about that?
Michael Fries: Yes. That's a good question. And Josh and I'm not sure we have enough time to answer it but I'll take a quick crack on it and maybe Enrique can chime in here, too. First of all, we have been wholesaling cable or a hybrid fiber coax in Belgium [ph], I don't know, 5 years or something like that. We were regulated in Belgium and obligated to open up the cable network and Flanders. And we did and Orange Belgium is a very happy customer on our cable network and has hundreds of thousands of customers and will be and has already committed exclusively to our fiber build as we do that through wire. So there are situations where either it's HFC or fiber, wholesalers are happy as long as they're getting the speeds they want the service, the quality, it works fine. We haven't done it anywhere else. We haven't been obligated to do it anywhere else. It doesn't mean we couldn't do it elsewhere. But I think when you step back and ask the question, why wouldn't we do it, in say, the U.K., principally, it's because the cost to upgrade the fiber and the cost to upgrade to DOCSIS 4 in the U.K. is about the same within spitting distance, so to speak and when you have the choice of upgrading to DOCSIS 4 or fiber in a market like the U.K. where you own your own DOCS, it's pretty clear that fiber makes more sense for the long term when you -- might need to look at DOCSIS 5, DOCSIS 6. But more importantly, when the entire wholesale market is working off of a fiber platform, beginning, of course, with Openreach and even altnets then to be competitive to be in that marketplace, you're going to need to go fiber. So there's a market check. What's needed at the commercial level, what's the rest of the sector doing in that market around access or kind of technology. So that's driving the decision in that market. In Belgium, we are happy as HFC wholesalers and we'll continue to do that for some time. But slowly and over time, we'll migrate that network to fiber as we've discussed and clarify today with that MOU. And then Switzerland, we're taking an even different approach which is let's use the best technology for the particular customer in a particular region. And so in that market, we have a complete option, a menu. We can access our 2.5-gig HFC platform. We can access the Swiss -- Swisscom's fiber platform. We can build fiber. We really have the best of all options there. Clearly, we'll migrate as many customers as we can to our own infrastructure because that benefits margins but we really have the flexibility to be competitive from a retail point of view with whatever technology makes the most sense. So there's not one size that fits all in this equation but it typically revolves around the cost to upgrade, the market realities of the competitive environment, the wholesale environment, the revenue opportunity in wholesale and whether or not regulators are requiring us to do one thing or another as they did in Belgium, for example. So I think we're taking the right approach. If you dig into each and every one of them, you'd see that they are the correct way to attack the economics, the technology, the customer opportunity, the competitive environment. And it's great to have that ability to be flexible. So I hope that's addressing your question. But if there's anything further, maybe follow-up and let's make sure we've done it.
Joshua Mills: Yes, that's very clear. And I'm guessing the -- any detail on how faster broadband speeds on the cable out in Switzerland, as the old cable network might wait for the C&V now [ph].
Michael Fries: Okay. Yes, they'll dig into that for sure. Operator?
Operator: The next question is from the line of Luigi Minerva with HSBC.
Luigi Minerva: It's about the Netherlands and your pricing strategy. If I think about your broadband price increase last year, I think you just did exactly what KPN did back in July 2023. Now this year, KPN is going for 3.8% growth. And VodafoneZiggo is going for 2.5%. And I was wondering what is the rationale behind this and how you see competitive dynamics in that market?
Michael Fries: Yes, we've got Ritchy on, who's our interim CEO. I think it's as much as anything to do with the fact that we're trying to remain competitive in a declining inflation market which doesn't call for the same sort of increases. But Ritchy, do you want to provide more color on our price increase level?
Ritchy Drost: Yes, for sure. Thanks, Mike. The 2 things. First and foremost, we do a price increase both on the back-book and front-book. It's not similar to the others in the Dutch market. But also keep in mind that the inflation in the Netherlands is falling. Last year, we had about 10% inflation. And we did an 8.5% fixed price increase. This year, the inflation is 3.8% and we're doing 2.5%. The price increase in itself is, I would say, not a reflection of the competitive position in the market but it's all about price value perception. We do see that customers who decide to leave us, use cost of subscription as a main reason for them to churn. And hence our decision to go slightly below the inflation level to make sure that the price sort of value perception stays in balance with market expectations.
Michael Fries: Last year, as you recall, KPN took a price increase on their back-book and lowered their front-book. So some of this is signaling to perhaps. We've always taken price increases on both front book and back book. So hopefully, there's a more rational market here.
Operator: The next question is from the line of James Ratzer with New Street Research.
James Ratzer: So if it is possible, just go back to talk about TalkTalk in a little bit more detail. I know you might be limited in what you can say. But are there any scenarios, you can see in which you might interest in acquiring some of the asset or the rate at which customer base is declining at the moment just makes it kind of too risky to get involved like the asset you think you see now that when it comes to closing. [Indiscernible] you had on that particularly would be really interesting.
Michael Fries: James, I want to make sure I heard the first part of it. I got the jist of the question around M&A but which entity are you referring to?
James Ratzer: TalkTalk, in particular in the U.K. because that -- [indiscernible] so just to get your thoughts on that, though it is too risky an assets to be looking at right now, given the rate customers are coming down?
Michael Fries: Yes. No, I got you -- I just didn't hear that first part, you're coming in and out a little bit. I don't think we have anything to say about TalkTalk today. I mean we watch as others do, with great interest of what's happening across the sector in the U.K. but obviously, with TalkTalk, they're competitor. And we certainly are watching what they're doing and what they're considering doing and with their B2B, with their network, with their consumer business, it's really outside of our control. And if there were opportunities, you should assume we would be looking at them but there's nothing I can say about that today.
Operator: The next question is from the line of Matthew Harrigan with the Benchmark Company.
Matthew Harrigan: I think I'm last American [indiscernible] these days. Conceptual question really at the some various other industry organizations, I think you had some consultancies, like McKenzie really commented on how you've had trillions of dollars of equity value created, Silicon Valley and other places of telecom networks and you've really obviously borne the cost without necessarily having that much impact. Is there anything that's different about the service code that would enable you to participate better in fintech, entertainment, health care, et cetera? Is that like a -- at least complementary rationale for doing this relatively complicated structure?
Michael Fries: Well, possibly, Matt. I mean, I think both entities, Netco and the ServCo are probably better positioned to compete long term and take their fair share of that ecosystem. I mean, you correctly point out that net neutrality as a whole, created haves and have nots, right? And the haves are anybody in the big tech space, selling apps and access largely for free. And we in the infrastructure, connectivity space have obviously experienced more competition, higher CapEx and higher usage and capacity requirements. So with some ability to pass that a lot of consumers but not as much as we'd like. So going forward, there's a handful of things the industry in network-as-a-service. I'm sure you're following that, new products and services in the home and how we might take advantage of that. AI which is going to give us a much stronger, some more sophisticated way to manage customers and our networks. But the Netco cervical model itself certainly should create a more agile ServCo management team and product and brand, looking at accessing the NetCo as well as perhaps other networks to try to drive services into the home and into business. And the NetCo itself will become really a connectivity provider first but also depending on who the user is, more sophisticated transport hub. So I don't think it, by definition, makes it easier to ensure that the next 10 years don't look like the last 10 years but I think it certainly bends that way. And I think in some instances, depending on how well we execute and kind of structure we put in place and the capital we have, think it could actually that but we've got things to do the board even in our integrated businesses to make sure that the next 10 years look different than the last 10 years. And I think the toolbox, as I said, the outset is pretty good to make that happen.
Operator: There are no further us time. So I would hand the call back to Mike Fries.
Michael Fries: Great. Thanks, everybody, for joining. I hope you have incredible summer wherever you are, whenever you're doing and do please put in your calendar September 9 in Zurich or September 9, wherever you'll be, be connected, of course, to our Capital Markets Day. For Sunrise, we really look forward to getting that process moving in earnest in the fall. So thanks and we'll speak to you soon again.
Operator: Ladies and gentlemen, this concludes Liberty Global's second quarter 2024 investor call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global's website. There, you can also find a copy of the presentation materials.