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Edited Transcript of LBTYA earnings conference call or presentation 7-May-19 1:00pm GMT

Q1 2019 Liberty Global PLC Earnings Call

LONDON May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Liberty Global PLC earnings conference call or presentation Tuesday, May 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles H. R. Bracken

Liberty Global Plc - Executive VP & CFO

* Lutz Schüler

Liberty Global Plc - CEO of Virgin Media

* Manuel Kohnstamm

Liberty Global Plc - Senior VP & Chief Corporate Affairs Officer

* Michael Thomas Fries

Liberty Global Plc - Vice Chairman, President & CEO

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Conference Call Participants

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* Benjamin Daniel Swinburne

Morgan Stanley, Research Division - MD

* Christian Fangmann

HSBC, Research Division - Analyst of Telecoms

* James Edmund Ratzer

New Street Research LLP - Europe Team Head & Analyst

* Jeffrey Duncan Wlodarczak

Pivotal Research Group LLC - Principal & Senior Analyst of Entertainment, Interactive Subscription

* Matthew Joseph Harrigan

The Buckingham Research Group Incorporated - Analyst

* Michael Bishop

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Nick Lyall

Societe Generale Cross Asset Research - Equity Analyst

* Robert James Grindle

Deutsche Bank AG, Research Division - Research Analyst

* Ulrich Rathe

Jefferies LLC, Research Division - Senior European Telecommunications Analyst

* Vijay A. Jayant

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Media, Entertainment, Cable, Satellite & Telecommunication

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's First Quarter 2019 Results 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 expressed 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. (Operator Instructions)

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 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 condition on which any such statement is based.

I would now like to turn the call over to Mr. Mike Fries.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [2]

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All right. Thanks, operator, and welcome, everyone. We're glad you joined us this morning or this afternoon wherever you may be. The plan is to jump right into prepared remarks so there's plenty of time for questions, and I'm joined by most of my senior executive team who'll all try to get involved in the Q&A so you can hear from them as well. Now as usual, we are speaking off of slides. So hopefully, you've got those in front of you or you can grab them later. There's some good information in there.

And then what I'll do, I'll kick it off on Slide 4 with the key highlights from the first quarter. I think it goes without saying that this is an incredibly exciting and strategic inflection point for this company. As you all know, we're on the verge of completing a series of transactions that will leave us with a more concentrated operating platform in Western Europe that serves an aggregate of 33 million RGUs and generates $4.8 billion of consolidated operating cash flow at the opco level and another $2 billion through our 50-50 JV in Holland and over $15 billion of cash and liquidity realized through asset sales at prices that are nearly twice our current implied trading multiple. John and I were talking the other day and we can't remember a time actually when our business was so well positioned to create value for shareholders.

Not surprisingly then, the first few bullets on this slide address the status of those transactions beginning with the Vodafone deal. And for anyone watching it closely, which I'm guessing a few of you are, you'd know that consistent and material progress has been made with the European Commission. And as a result, we remain confident of a summer closing. I'm happy to take questions on any of that.

The sale of UPC Switzerland is also winding its way through the regulatory process. The transaction was officially notified to the Swiss Competition Authority on the 1st of May, which starts the process of review. And the timing here looks more like Q4 to us and, of course, we'll be updating you as we move along the way.

And as almost a footnote, we also completed the sale of our DTH business in Central and Eastern Europe for EUR 180 million. Now the right-hand side, you'll see some headline operating results for the first quarter shown on a reported basis and on a guidance basis, with the key difference being that the guidance figures exclude Switzerland.

So I'll just focus on the second set of numbers in the white box that correspond to our guidance. During the quarter, we added 68,000 new RGUs, about twice the prior year growth and up significantly from 16,000 in the fourth quarter. Revenue growth was largely flat year-over-year and OCF grew about 1%, which is consistent with our guidance for the full year of flat to down OCF growth and reflects headwinds in the U.K. that we foreshadowed a couple months ago.

Three other key takeaways from our Q1 operating results are highlighted here. First, Virgin Media had a strong RGU quarter with higher net adds sequentially and year-over-year. UPC Switzerland is starting to show emerging greenshoots from the core elements of our turnaround plan, and I'll speak about that. And as expected, we saw a significant reduction in CapEx spend of almost 30% in the quarter, which drove operating free cash flow up 2.5x from the year-over-year period. That is, of course, one of the big story lines this year, and I'll dig into all 3 of these headlines in the next few slides as will Charlie in his remarks.

Now Slide 5 shows a bit more detail on net add growth by quarter and by product. If you just focus on the orange section of the bars, you'll see that broadband growth has been steady and about 35,000 to 40,000 each quarter for this continuing set of operations and was up meaningfully in Q1 this year to 57,000. Two key drivers here: First, we continue to push our speed leadership with 500 megabits rolled out nationwide at the end of last month in the U.K. and gigabit launches across our markets; and second, we're committed to a better WiFi experience for all with our Connect boxes now installed in 2/3 of our base and the launch of Intelligent WiFi and our cutting-edge Connect app.

Video launches were roughly evenly split between Virgin and Belgium in the quarter. Churn on the SFR footprint impacted Telenet's Q1 result but with subscriber migration now complete and improved operational performance is expected from Q2 onwards, and Virgin continues to target high-value TV customers as we seek to monetize our investments in content and functionality, and this approach has led to some softness in the Q1 intake but should ultimately yield ARPU and churn benefits.

You would have also seen that we announced a multiyear partnership with Amazon Prime Video in the U.K. starting this summer 2019. So we'll put the Prime Video app on our Ultra HD V6 set-top box. And similar to earlier agreements with -- like Netflix, this enhances our strategy of combining the very best OTT apps and offerings with our own world-class content and TV functionality to create a seamlessly integrated experience. That's where it's heading.

EOS and Horizon 4 are doing exactly what we hoped. Together, they're a 1-2 punch, a faster 4K box and the best UI in Europe. And everywhere we rolled out one or both, NPS is up and consumers are loving it.

And then lastly, we're well positioned on fixed-mobile convergence. Belgium and Holland are, of course, fully converged today and reaping the benefits of a lower churn and higher NPS, while the U.K. and Switzerland, which I'll talk about in a second, are MVNO-based and just really getting started. All in, total postpaid mobile add including Switzerland were over 70,000 in the quarter.

Now the next couple of slides beginning on Page 6 provide a bit more detail on our largest operation, Virgin Media. And you can see on the left-hand side customer net adds or new homes connected were up sequentially and year-over-year at 25,000. It helped deliver nearly 60,000 RGU net adds. It's important to point out that growth was a result of improved performance in Lightning and non-Lightning areas and supported by market-leading broadband bundles that really helped drive a 10 basis point improvement in 12-month rolling churn. Now I'll talk more about the plans in place to drive continued growth in the consumer business in a second.

You'd also see that Q1 ARPU is modestly lower year-over-year after 4 quarters of positive growth. And there are a few factors at play here, most of which were not part of our ongoing subscription revenue. First of all, Virgin had lower install revenue in Q1 '19 versus '18 as we ramped down the number of CPE upgrades and saw a related reduction in activation fees. As in prior quarters, we saw lower telephony usage but we also experienced lower pay-per-view revenue largely due to fewer boxing events in the quarter. And then, finally, the team did increase the depth of promotional discounts on certain bundles in response to market dynamics, particularly in January and February. It's important to note that if pay-per-view revenue had been the same as last year, ARPU growth would have been positive.

It's also important to note that we continue to target an improvement in ARPU throughout the balance of the year on the back of new consumer bundles which launched at the end of April and a series of product innovations that Lutz and his team have been working on that I'll highlight on the next slide.

On the right-hand side of this slide, though, we provide an update on Project Lightning, which continues to drive financial, operating and strategic value for Virgin. Everyone's talking about building out the U.K.'s next great network and we're the only ones actually doing it today with 500 megabits available nationally on our footprint, 1-gig cities rolling out and 400,000 to 500,000 new homes added to our network every year. Today, we've built and released 1.7 million new homes across the U.K. and Ireland, more than the entire market combined, and we've added 370,000 new customers and 900,000 RGUs on those networks. ARPUs and penetration rates are in line with expectation. The cost per premise continues to decline as we get smarter, and the revenue and OCF on a project level were up 50% year-over-year. With unlevered IRRs in the mid-20s, we are as committed as ever to this build-out and as you might expect, are exploring creative ways to expand or partner or finance expansion beyond our current plans.

I'm sure you've all seen the announcement that Lutz Schüler will be assuming the CEO role at Virgin Media starting June 11. I am extremely thankful to Tom Mockridge, who over the last 6 years really transformed Virgin Media into a dynamic market share leader in broadband and video, delivering a 5% annual growth in OCF through his tenure and positioning the company for continued leadership in video with V6 launch and Horizon 4 around the corner; in broadband with 500 megabit speeds everywhere, 1-gig cities popping up; and in convergence with the best MVNO deal we have in Europe. Now having said that, I'm thrilled that Lutz is there to take the reins. He has been a star performer in Germany and since September of last year, has set the stage for a revamp of our consumer business at Virgin.

This Slide 7 highlights a few of those strategies, most of which are incubating, but some of which have already rolled out, like Virgin's new FMC bundles which launched April 29 and have already delivered encouraging results with mobile attachment rates. For example, our new V.VIP bundle offers it all: 500 megabit broadband speeds at 7x faster than the competition, a mobile SIM with unlimited data, full-house TV with Sky premiums, 2 V6 set-top boxes and inclusive any time landline calls all for around GBP 100 per month on a 12-month contract. Customers can also add a mobile SIM with a broad choice of data bundles to all our standard packages which comes with additional speed boost.

Our research shows that people want convergence. They're craving the increased simplicity that FMC brings with a single bill and access to information about their fixed to mobile services, along with a dedicated service team and of course the speed boost. Now it's still early days. Above-the-line activity will start in mid-June, but this product should also drive improved churn and underpin ARPU growth as it has in other markets.

Lutz and his team have also been working hard to keep improving customer experience and engagement with products like Personal Picks, which offers customers attractively priced video bolt-ons that they can add on to their entry-level player TV service. As I mentioned, we've also launched Intelligent WiFi to improve the in-home experience to our broadband customers using the Connect2 app. Additional upgrades to the product portfolio include the Amazon Prime Video product I just mentioned and Horizon 4. All of those things should drive NPS up as it has in other cities and markets. Now the goal of all these improvements is to just optimize the lifetime value of customers by reducing churn, maximizing cross-sell and upsell and supporting ARPU growth.

Then lastly, on the sales side, Lutz and the team have been rationalizing high-cost sales channels by closing stores and pivoting to more online sales, which now make up around 35% of total sales. And they're investing, as you would expect, in a seamless digital experience across touch points for potential and existing customers. That includes sales, payments, help, service, all things that will drive NPS up and reduce costs.

So finally switching gears to Switzerland. The next couple of slides provide an update on the really good work Severina and her team have been doing on the ground there. Even though we don't include Switzerland in our guidance, we know that both Liberty and Sunrise shareholders would benefit from some additional transparency here, and the punchline is that the turnaround plan is working. As the charts on the left indicate, RGU losses were marginally better than Q4 but don't yet show the benefit of a strong sales month in March and new products and bundles.

ARPU on the other hand has returned to growth. It was up 3.6% in Q1, driven in part by an improved entertainment bundle and tier mix. And the new MVNO with Swisscom has delivered on the promise of unlimited product offers and led to 13,000 net postpay mobile adds in the quarter.

Financially, at the bottom of the slide on the left, you can see steady improvement in the revenue and operating cash flow losses. But I think it's important to remind everyone, this is a transition year and we are investing both OpEx and CapEx into this program and the initiatives are really highlighted on the right-hand side. All of these things are working. The 1-gig rollout is ahead of plan and will launch this year along with major benefits of the digitization plan. But 2 of these initiatives are already showing significant result and are summarized on the next slide, Slide 9.

Switzerland is the first market where we've launched both the EOS box and the new Horizon 4 user interface together and the results are fantastic. We now have 130,000 boxes rolled out at the end of April. That alone is a great sign of success, and we're looking to be in roughly half of video homes by the end of the year. But much more importantly, consumers love it as evidenced by a 30-point improvement in product NPS, record sales in March up 30% and a reduction in truck rolls and trouble calls. Similarly, the team is seeing great results in fixed-mobile convergence with over 160,000 mobile subs now on the Swisscom network, which we switched over to at the beginning of the year.

We have record Q1 sales of 19,000 on the back of our unlimited offers. We have record product NPS and a 15% cross-sell rate on the fixed base. And we've started to see the same churn benefits as Holland and Belgium. So I'm extremely happy with Severina and the team and the work they're doing on this plan, and we're all excited to get this deal across the line.

With that, I'll turn it over to you, Charlie.

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Charles H. R. Bracken, Liberty Global Plc - Executive VP & CFO [3]

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Thanks, Mike. I am now on the slide entitled revenue and OCF growth. Now if you look at the figures for the continued operations, we had a revenue decline of minus 0.6% and an OCF decline of minus 0.5%. Excluding Switzerland, that's the basis of our 2019 guidance, revenue was broadly flat and OCF grew by around 1%.

Mike has talked about what's been driving the numbers in the U.K. and Ireland and Switzerland. So I'm going to briefly address the other segments. And in the top right, you can see that Belgium recorded 2.2% of OCF growth, with a slight decline in revenue. Now as you probably heard on the results call last week, the loss of the MEDIALAAN contract and certain regulatory headwinds will have a more pronounced impact in Q2, and that's factored into our full year expectations.

CEE delivered revenue and OCF growth of 2%, which was driven by top line growth from B2B and new build but only in Poland. And for our Central and other segment, revenues were $61 million. Now to remind you, these are largely to do with the TSAs that we have with the Dutch joint venture and our former business in Austria. And the net OCF costs were minus $86 million versus minus $107 million in Q1 of 2018. This year-on-year reduction represents our continued initiatives to resize central costs in line with the smaller group scope.

Now to reemphasize that the central cost reduction that we laid out in the full results call is going to continue, namely that the $260 million of OpEx for corporate functions will be reduced by approximately 20% by 2020, and the approximately $900 million of central T&I, or technology and innovation, OpEx and CapEx will decline over time in part due to the decline in services under the multiyear TSA agreements.

We'll turn now to the slide titled cash, leverage and liquidity. Q1 reported free cash flow for our continued operations was negative $625 million, which was an improvement year-on-year versus the negative $999 million of Q1 2018. We've also laid out the various adjustments to bridge from our reported free cash flow of $625 million to the pro forma free cash flow number of $622 million, which is the basis of our guidance that excludes Switzerland.

Now I'm going to cover the underlying drivers of that number shortly so I'll come back to that then. Our Q1 leverage was 5.4x gross and 5.3x net debt to quarterly EBITDA, and this is in line with our budgeted expectations and we expect the full year even without the proceeds from any planned disposals to be within our 4x to 5x range. Liquidity remains strong at $3.4 billion, including around $900 million cash, and we still plan to spend around $500 million in the first half of the year on stock purchases.

Turning to the next slide which breaks down our Q1 property and equipment additions and operating free cash flow. Excluding Switzerland, we saw a year-on-year reduction of 31% in property and equipment additions, resulting in a spend of $640 million or 25% of sales. Including Switzerland, the figure is $699 million represented 24% of sales and showed a decline of 29%. And that was in the quarter where connected over 100,000 new premises in the U.K. and Ireland. Now we remain on track to deliver a 20% reduction in CapEx for the full year.

Of the significant upgrade of our set-top boxes data in the U.K. in 2018, we saw a significant reduction in CPE spend in the U.K. Following the peak investments in products and enablers, including our MVNO and VO -- voice over IP platforms, we also saw a reduction in spend in that category of 39%. Belgium's on track to achieve the more normalized CapEx to sales ratio of around 20% following the completion of its fixed and mobile network upgrades in 2018. Now having said all of this, we continue to invest in Switzerland. And as Mike noted, this increased spend is focused on the rollout of EOS boxes in the market, the 1-gig upgrade and also the investment in digitization.

If you look to the top right of the slide, you will see the impact that our declining CapEx has had on operating free cash flow, which grew by 74% including Switzerland and more than double that number if you exclude Switzerland.

Turning to the next slide, which details Q1 pro forma free cash flow for our continuing operations excluding Switzerland. We presented the numbers in the format that we used for our year-end results, which isolates working capital flows. And as you can see, pro forma operating free cash flow was $442 million, which included a $75 million investment in Project Lightning. Q1 and Q3 are where we make virtually all our semiannual interest payments, which meant a cash interest spend of $561 million for the quarter. Our Q1 tax payment of $181 million was virtually all accounted for by Belgium's annual payment.

Now working capital flows in Q1 are typically negative as we unwind our high Q4 payables resulting from the seasonally high CapEx in that quarter. And that contributed to a negative working capital flow of $322 million, resulting in a total negative outflow for the quarter of $622 million.

Q1 free cash flow is in line with our expectations, and we continue to expect the full year free cash flow for the continuing operations excluding Switzerland to be in line with our guidance of $550 million to $600 million. Now remember also that this number includes our estimated $400 million to $500 million negative free cash flow from Project Lightning.

So moving to the final slide. In conclusion, the transactions with Vodafone and Sunrise remain on track. We think that Virgin Media had a pretty strong Q1 subscriber result, particularly considering the negative sentiments surrounding Brexit. And despite the flat ARPU result, we believe that our product innovation and speed leadership will continue to underpin pricing power. Switzerland is beginning to show green shoots with its turnaround plan which remains firmly on track and we're confirming all of our 2019 guidance targets.

So with that, operator, can we open up to questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Robert Grindle with Deutsche Bank.

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Robert James Grindle, Deutsche Bank AG, Research Division - Research Analyst [2]

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It's Robert from Deutsche Bank. Mike, can I take you back to your comment? You referred in your speech to innovative and creative ways to expand I think it was the network. Please, could you expand on that? Are you thinking of using BT's ducts and poles perhaps to reduce the costs? I note your cost per build is lower this quarter than prior. Is that a new thing? And to address press commentary, are you thinking of wholesaling to other suppliers?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [3]

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Yes. Thanks, Robert. Look, I think the reference there was really just to point out that why wouldn't we be looking at creative and innovative ways to continue expanding the network. The results so far, for Lightening, in our minds have been exactly what we wanted them to be, successful, productive, operationally, strategically, and we think the capital that we're allocating to that project is really good capital. But as you know, the market is moving quickly. There are lots of start-ups, I guess I would call them, hoping to build fiber in various places and of course, speaking of reach, deciding that at some point they will also get more serious about fiber.

So it's smart for us to be creative and flexible and opportunistic. I have nothing specific to say about that other than to assure you we're doing what we should be doing, which is looking at all options to be sure that the Virgin network and the Virgin product is available as widely as possible. If we were to do something, I don't see it hitting our balance sheet as such, or our cash flows. I think there are ways to possibly look at network expansion and -- in more creative fashions. So that was really the only point there. What was the second question, Robert?

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Robert James Grindle, Deutsche Bank AG, Research Division - Research Analyst [4]

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It was about that you might be considering wholesaling your network in the U.K.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [5]

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Yes. No comment there. I mean yes, I have no comment on that.

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Operator [6]

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We'll move now to Ben Swinburne with Morgan Stanley.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [7]

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Maybe just to dig into the Virgin ARPU trends a little bit more. Mike, you gave us some good detail. As you look out from here, what are the drivers of ARPU improving? Did the discount headwinds you talked about will go away? I know you mentioned pay per view. And could you maybe talk about how the mix of subs in the Lightning versus the BAU markets impacts ARPU if at all?

I don't know if those are a short-term depression on ARPU because they're coming in on discounts. Just any more color there because that's obviously a huge lever for you guys. And then just on sort of use of proceeds and capital structure, rates have come in a lot. I'm just curious if you guys see kind of post close in some of these major asset sales an opportunity to maybe reprice some of your debt facilities downward. I don't know if Charlie has any thoughts on that once you look out beyond particularly the Vodafone sale.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [8]

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Yes. Thanks, Ben. I'll let Lutz work up an answer on the ARPU question. On the use of proceeds, I mean, there won't be a satisfactory answer to this question that will make everybody happy. We're still 3 months away from the Vodafone deal closing, and of course, we're like 6 months probably for Switzerland. So -- and there are no large or even small transactions in the pipeline. I wish I could be more specific about capital structure. We are looking at, as you would imagine, all of the various buttons on the fruit machine to be sure that we're optimizing capital structure, whether that's on the balance sheet or through buybacks and probably not prudent for us to be any more specific about that as we sit here today. Lutz, do you want to address the ARPU question?

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [9]

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Yes, yes, yes. I mean on ARPU, right, we distinguish between subscription ARPU and nonsubscription ARPU, and the underlying subscription ARPU is still growing at 0.9%, right? I mean it used to grow 1% to 6%. The previous quarters, it is a bit lighter. This is because of 2 things. We had less installation revenue because we had a huge box swap with V6 boxes a year ago, and the other thing is we had some higher promotion activities. Q1, according to our knowledge -- Q1 2019 in terms of gross adds compared to a year ago is 11% down, so 11% less profit. So therefore, there was a bit higher promotion activity. However, this is the biggest part -- by far the biggest part of ARPU and it is growing and it will continue to grow.

While the nonsubscription ARPU, where you see the huge shrinkage around 15% down to GBP 2.50 now, and this was driven by 2 things: less pay per views. This is more a saving thing because there was simply no big boxing event. And the other thing is a declining voice usage. I think the good news on the nonsubscription revenue is that it came down during last 6 years from GBP 8 to GBP 2.50, but we have been able to increase the subscription revenue at the same time frame of around GBP 11. So therefore, there is not so much to go down anymore, right? So therefore, only from that comparison, you see the ARPU growing in the future.

But also, and this is what Mike mentioned, we -- when I joined U.K. 8 months ago, we created a new growth strategy for consumer and now we have launched the first items. And the biggest one is, for me, fixed-mobile convergence, right? And you see that from other markets. So customers will have really cross-platform us, they have higher ARPU and lower churn. I mean V.VIP for EUR 99, you get the best of the best from us. And the attachment rate of mobile-only after the first week of launching is incredibly high. So very encouraging here.

Personal Picks, I mean, that is simply we want -- we are focusing more on higher-value TV subscribers. And therefore, we have Snackable content now, and that will also lead to higher ARPU. We have -- we are going to launch targeted advertising together with Sky in a couple of weeks from now, and this also will help us to generate revenue.

And we have launched Intelligent WiFi end of March, which leads to better in-home coverage on WiFi, higher customer satisfaction. So a lot of innovation has kicked in now the last month, and that will help us to increase ARPU and also which gives us pricing power for the future.

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Operator [10]

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Next, we have Goldman Sachs, Michael Bishop.

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Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

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Just following up on the U.K. I'd just like to change the direction a little bit to the regulation and the recent update from Ofcom because it feels like clearly there's a lot of pressure in the market in terms of discounting from the volume discounts that have been passed through by Openreach to the resellers. But if you read the latest Ofcom documents, it talks quite specifically about reinjecting margin into the infrastructure layer potentially with some more detail later in this year.

So I'll be really interested in your thoughts on that, please. And then just maybe as a very quick follow-up, you mentioned that you'd seen encouraging results, albeit from a soft launch on FMC. Could you give us a little bit more color about sort of the strategy on FMC and how big you think the initial market would be for people really looking to move to those converged products?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [12]

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Sure. Lutz, you can address the FMC question more specifically. I think on the Ofcom point, you're right. One of the market pressures that Virgin Media experienced in Q1, although difficult to say how large an impact it was in the overall scheme of things, was probably related to the discounting that might be resulting from volume discounts from BT Openreach. Again, those are generally on lower-end customers, a market that we're typically not attacking or even marketing to. But I think in the end, that has a minor impact in the first quarter, and we'll see if that continues in the second and third quarter. I think the one main point here, Michael, is that the market is heading towards superfast broadband.

And volume discounts on 36 meg or low-end speeds are temporary moments because it's our opinion and certainly there's plenty of capital and activity in this space that U.K. will be a super fast market. We're already 500 meg across our footprint going to 1 gig and that's the space where we play. So while that might create some flux in the market quarter-to-quarter, I think over the long term, we don't believe it's going to have a large impact and that everybody is leaning into faster networks and hoping, as you point out, for a greater margin, which means more price stability over the long haul. Lutz, do you want to talk about FMC in more detail?

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [13]

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Yes. Yes. I think first of all, when you talk about FMC, proper FMC hasn't been launched in the U.K. so far. So you see only mobile app bolt-ons. I mean we are leading with that, right? 20% of our customers -- our cable customers use mobile on top, but it is more in bolt-on. So if you look at other markets such as Netherlands, Belgium, Germany, you have really proper FMC product. So we have now launched a proper FMC product, right? You have higher speeds. You have unlimited data. You have a higher service level as a customer and you get a mobile phone at the best price. So really, a bundle, one proposition. And I mean we have launched that as a soft launch because we want to make sure that all processes are working, right? I mean within 6 months from the idea to launch, we have been very fast. And now the important is the [mobile] attach rate to it. And I don't want to disclose so much here because we don't want to wake competition up, but I think it's very encouraging. And at the end, right, when you talk numbers, I think in other markets, you see a mobile penetration in a cable base of 40% or even more. And why shouldn't that be also the case in the U.K.?

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Operator [14]

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We'll move now to Vijay Jayant with Evercore.

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Vijay A. Jayant, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Media, Entertainment, Cable, Satellite & Telecommunication [15]

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Can you sort of talk about your broad views on vertical integration? Obviously, the company is already all in on the converged network, but is there an opportunity there on sort of convergence with content? Just very philosophically. Second, you guys called out in your press release about mobile handset sales moderating. Can you just give us some perspective on what's the underlying profitability impact of a decline in those sales? Is this a competitive impact? Or is this more customers bringing their own devices in the market?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [16]

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Sure. On the handset question, maybe Lutz can provide some color but it's not a profitability issue. There's very little margin on the handset sale itself, so it's really creating more volatility in the revenue than it does in OCF for us.

On the vertical integration question, I think we've done it the right way to date, Vijay. If you take Holland, for example, or even Belgium and more recently Switzerland, being focused on content that's really moving the needle for consumers. So that's sports, local sports generally, whether it's Ziggo Sport or MySports in Switzerland or Telenet's sports package. These are things that we know consumers want, will pay for and we can isolate and acquire those rights at relatively inexpensive prices without changing materially the dynamics or the economics of the business model. And that strategy, where you can sort of find critical content, not necessarily all the content, and provide a bit more exclusivity and power to your package, usually works for us and you're not necessarily gambling.

In the case of Ireland, we've taken a slightly different approach, where we acquired 2 very small broadcast networks, and that has worked very well for us. We rebranded them Virgin. We've been able to cross-promote and cross-sell and we've done it really cost effectively and economically. So I think we believe in some instances vertical integration in European markets make sense. We're not -- I think there's a limit to where that makes sense. And at this point, at Virgin, we don't see any immediate need or reason to go beyond what we've done. Remember, Virgin has all the content. It has all the Sky content, it has all the key movie content, has all the sports content. We've launched Netflix now. We'll have Amazon on the box, voice control. I mean it doesn't really -- there's very little you can't get, if anything, on Virgin. And so you have to ask yourself, what would the real advantage of further vertical integration be in that market? At this point, we don't see it. Lutz, do you want to address the handset question any further?

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [17]

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Yes. Yes. On the mobile question, I think 50 months ago, the team has launched a mobile offering -- mobile handset offering called Freestyle. So it's an installment for 36 months, and that has helped to sell a lot into the mobile customer base and now each proportion of the mobile customer base has performed already. And therefore, the future sales are not so strong anymore.

Having said that, if you compare also here the U.K. market with other markets, 85% of the U.K. market is sitting on a subsidized model. So you pay your mobile contract together with your mobile phone and you get a subsidized phone, but then you pay for the phone even longer than your minimum contract length. Other markets, for instance like Germany, you have 50% on its SIM-free model, and I think this is a huge opportunity for us. So therefore, we will be offering in the future the complete range of mobile devices, including [sat nav]. And we will offer that for -- with installment for 6 months and we use that to simply drive traffic into our store. So therefore, I think it is great lever, not so much a margin lever, more on traffic.

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Operator [18]

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We'll move now to Ulrich Rathe with Jefferies.

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Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [19]

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I just was wondering in particular on the U.K. ARPU, the management discounting. I'm interested if you have a bit more color in terms of where that discounting is going into the existing base in order to sort of manage churn, whether what you're seeing here is sort of the discounting on the front book on the new intake. This is my first question, please.

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [20]

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Yes. I can take that.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [21]

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Go ahead, Lutz.

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [22]

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We have some less discounting in the customer base compared to the previous quarters, and we have done more promotions for the new sales compared with previous quarters.

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Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [23]

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Got it. That's very helpful indeed. And if I could follow up with another question for you, Mike, please. Vodafone sort of announced a remedy package to the European Commission. Obviously, you're not directly involved in this process, but I was wondering whether the package that Vodafone has now designed and then offered would affect the purchase price in any way, shape or form. So in other words, whether anything is -- an agreement contingent upon the remedies or whether this is all sort of happening at the side of the -- [the crowd] around you are insulated from it.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [24]

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Yes. So I mean for those who may not have seen this morning, Vodafone announced a long-term cable wholesale agreement with Telefonica in Germany. That covers 100% of the footprint of Unitymedia and Vodafone, about 24 million homes. The terms are confidential, but they will provide availability of up to 300 megabit speeds to Telefonica. And they also announced today that they're going to upgrade the entire footprint to 1 gig by 2022. And then lastly, they put in the press release that they believe the deal will be approved in July. Obviously, we're supportive in all sorts of ways of this particular remedy. It's clear and comprehensive, it addresses definitively any concerns that may have existed around broadband competition, and this is a huge win for German consumers. I'm not just saying that. They have Vodafone squarely focused on upgrading the entire footprint, providing access to a third party who can also take advantage of that, seems like a really positive win-win. And we don't believe it has any impact on our transaction other than speeding up closing and providing far more certainty than we had yesterday of that closing.

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Operator [25]

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And our next question comes from Jeff Wlodarczak with Pivotal Research.

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Jeffrey Duncan Wlodarczak, Pivotal Research Group LLC - Principal & Senior Analyst of Entertainment, Interactive Subscription [26]

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I have one for Lutz and one for Mike. I guess for Lutz, you've been CEO of Virgin Media since September of '18. You're about to be elevated to COO -- excuse me, CEO. What do you see as the biggest opportunity and the biggest challenge for Virgin? And then for Mike, a bigger picture question on the U.K. and a follow-up on data. From a data penetration perspective in the U.K., you're about 6 years behind your U.S. cable peers. How much of that would you say is related to the fact that DSL historically has been a much more robust product in the U.K. versus sort of the competitive environment? And now that you've taken your speeds to 500 megabits or 8x your peers, you have a cost-efficient path to 10 gig. And assuming consumer data continues to go up, is it fair to say medium or long term, you expect to close the gap at with data household penetration with your U.S. peers?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [27]

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Sure. Well, Lutz, do you want to start?

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [28]

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Yes. Thanks for the question, Jeff. Yes, I think the big opportunities we are having here is, first of all, the brand. I think Virgin Media is such a strong band, and I mean I was part of the team who came up with the brand O2. I have to say I did a lot of work on the brand Unitymedia, but we never had such an opportunity in Germany what we are going to have with Virgin Media as a brand. I think we can do huge growth with that brand.

And then to use that brand, we came up with 4 levers, and I think Mike has mentioned them. So one is fixed-mobile convergence. One is digitalization, huge opportunity both for growth and cost saving. One is sales, simply to have a very efficient go-to-market model, sell more to Lightning customers. And then the most important one is base management. I mean we have close to 50% market share so it's all about share of wallet and to manage the customer base in a way that we have more satisfied customers, you can upsell more and you do everything online and lower churn is a big value for us. So therefore, I think clearly in the consumer machine, because the consumer machine is the biggest machine of Virgin Media, that's huge for us.

In terms of challenge, well, I think it's a big company, right? And it was also founded out of a couple of smaller independent cable companies, right? And if you want to shift gears and grow more, then you need to manage the complexity. So therefore, I would say, the challenge is a bit to get the balance right between growth but also the remaining complexity of maybe proper integration of systems, sites, everything Tom has started but which is not finished yet.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [29]

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Yes. On the data question, Jeff, I mean, the key point is on footprint, we're generally 40% to 50% market share. So the balance is split between 3 or 4 different resellers. You don't have that in the U.S. marketplace. It's really a 2-horse race. And so Sky is an effective marketing machine. BT, of course, has a nationwide reach of DSL, is an effective marketing machine with sports and all sorts of things that they're selling. So the fact that we on footprint outperform them, 2 to 1, when it comes to penetration of broadband says it all. And that has a lot to do with the fact that our products are 5x, 8x faster than theirs and will likely -- are likely to be faster than theirs for a very long time because it will take -- fiber in the market today is 3% or 4% of the homes. And we're going to 1 gig as quickly as we can, as you say, ultimately to 10 gig.

So I don't want to say the race is over, but Virgin is running a different race than the rest of the U.K. broadband providers but it is a bundled market. And we know that people aren't going to generally buy broadband if they don't have a video product and solution as well and we make lots of margin on our video products still. Despite what's happening, let's say, in the U.S., video for us is still a profitable product and with a high rate of return, and that has to be part of our bundle. And so it's competitive in broadband. And I think ultimately, you'll see speeds continue to accelerate in this marketplace as they have in the U.S., maybe faster than they have in the U.S. And our goal is to be leading the way and not just with fast broadband but, as Lutz said, with fixed-mobile convergence bundles, with video products that are best in class with the new box, the V6 box, plus the new Horizon UI coming very shortly here. And remember, that's got -- basically, that's won in this market, and there won't be anybody who can touch Virgin once all those pieces of the puzzle come together. The fastest broadband networks, a fixed mobile product, by far the most sophisticated video platform with pretty much all of the content that can be available, integrating OTT apps.

And so the magic here, as Lutz identified, is to make sure the machine is running properly and there is complexity in a big company like Virgin, and I feel he's got the right talent and certainly the right focus to get that sorted out and keep the marketing engine humming as fast as possible and be -- keep innovating. There's no substitute for being first or being best in all of these particular products and services. And I'm -- we're excited about Virgin. It's -- as I said many times, as we sit and look at it today, strategically complete. We have a great MVNO deal. We've got long-term relationships with our core content providers like Sky which will get renegotiated. We have the fastest network, and we're building 400,000 to 500,000 new homes every year. We have creative opportunities to accelerate that off balance sheet if we choose. I think it's -- Virgin is in a really good spot.

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Operator [30]

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Our next question comes from Nick Lyall with SocGen.

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Nick Lyall, Societe Generale Cross Asset Research - Equity Analyst [31]

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This is Nick at Soc Generale. A couple of questions, please. You mentioned the -- on the VodafoneZiggo release that the final tallies for cable access -- wholesale cable access, sorry, have been in the market since the end of March. Could you give an update at all on any talks or responses you may have had from other operators and from the Dutch regulator, please?

And then secondly, you also mentioned the VodafoneZiggo remedies today with the cable wholesale again. Just in general, do you see increased pressure for cable wholesale from -- organically from regulators? And do you think this is going to be a future part of any remedies that anybody would need to offer in the fixed-mobile deal in Europe now do you think?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [32]

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Yes. Good question. I'll let Manuel or Charlie -- or maybe Manuel cook up an answer on securing what we can say about the Dutch element, about what we can say in the Dutch market specifically about that cable wholesale offer. I'll just speak more generally now that I think cable wholesale is, obviously, if you look today versus 5 years ago, a much more prominent part of our business and of the market environment more generally, but I think it's very situational. I think it has 3 or 4 factors that gets built into the decision. It's very much a political decision to begin with.

So that -- we will be -- it will be determined by what -- could you put us on mute until you're ready Manuel? It will be determined by what local politics are in that particular marketplace and how cable is perceived. It'll be a competitive decision just how dynamic is the market for broadband and other products. And it may be a transactional element, as you point out. In the case of Belgium or Holland, if you remember the VodafoneZiggo deal, cable access was not required in that transaction. It was only subsequently introduced on a political basis, which we continue to argue with and fighting the courts. And certainly, the commission itself doesn't necessarily see that as necessary but has been unwilling to stop it for other reasons.

And then the German transaction, this was a voluntary commercial arrangement between 2 operators. It is a cable wholesale access deal, but it's not available to all parties. It's a transaction between 2 very specific parties. And in that instance I would say it's very different than Belgium, which is regulated wholesale access. So I think it's going to be market by market, situation by situation determined by politics and the transaction itself. And in some instances, for example, in Germany, it was a voluntary decision by 2 commercial parties that they believe will benefit each other and we don't see a big problem with that as a general matter. In terms of the Dutch market specifically, Manuel, why don't you offer what we can say about that?

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Manuel Kohnstamm, Liberty Global Plc - Senior VP & Chief Corporate Affairs Officer [33]

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Yes. Not very much, but the Dutch regulator has created conditions for negotiations between VodafoneZiggo and interested parties. What we can say is there have been expressions -- a number of expressions of interest but no actual discussions are going on as we speak. It's worth to mention that it's different from the regulated system in Belgium, where in Holland, the regulator asks the parties first to negotiate and only later intervenes. The other thing to mention is that the Dutch case -- the Dutch regulatory situation is still pending a litigation in -- before the Dutch courts, where we expect decisions in the second half of this year.

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Operator [34]

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Christian Fangmann with HSBC has our next question.

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Christian Fangmann, HSBC, Research Division - Analyst of Telecoms [35]

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It's Christian. I have a couple questions back on the U.K. We already talked about the ARPU in great detail, but just looking at Q2 and the following quarters, is Q1 really the exception? I mean we discussed the reasoning, but do you see already a better traction for Q2, I mean, for example, the VoD sales and stuff like that really impacting Q1? And then also, regarding the TV losses, I think Q1 was definitely lighter than what we've seen over the quarters in 2018. Is there a new strategy when it comes to TV? So not really pushing the entry tier TV product anymore? I mean a bit of color on that one would be also be interesting to hear.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [36]

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Sure. I think you got it right on the TV side. It was definitely a focus on higher end, higher return, the more profitable TV packages. But do you want to address the March and April results more generally, Lutz?

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [37]

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Yes. I mean Christian, as you know, on colleagues, we are not allowed to make any forward-looking statement. But right -- I mean, we shared a bit the levers for ARPU growth with you guys, right? And first of all, the underlying subscription revenue is still growing, yes? I think that's important. And then, right, we have 3 levers to play now before we talk about any price increase, right? One is FMC, one is Personal Picks and one is Intelligent WiFi, right? And of course, we don't do that because we want to avoid further shrinkage. We want to increase it.

And I think on the video side, Christian, yes, I mean we are focusing a bit more on operating free cash flow and we are looking therefore to have the right balance between volume and value in video customers. And so therefore, we were -- after more VIP customers in Q1, more full house customers. And also, therefore we have now launched Personal Picks because here you can bundle an GBP 8 to GBP 10 Snackable content for a dedicated target group with the V6 box and triple play. So therefore it is a balanced walk towards more value in the video thread.

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Operator [38]

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We'll move now to James Ratzer with New Street Research.

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James Edmund Ratzer, New Street Research LLP - Europe Team Head & Analyst [39]

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I have 2 questions, please. First one is just regarding the topic of going back to cash return, please, as it's probably one of the biggest decisions you'll have to make over the next few months. I mean when you look across the investment landscape, I mean, you've been selling your cable businesses at 10x to 12x OCF. I mean Telenet itself trades near 8x. Do you see anything more attractive to do with the capital than to buy back your own stock versus the ramp valuation is nearer 4x to 5x OCF? And then just a second follow-up is, I mean, is it still your intention post deal to be keeping leverage at the upper end of your current 4 to 5x range?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [40]

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I think on the leverage question, I'll let Charlie chime in. We're comfortable where we are today. You can always trim, but you'd have to measure or evaluate that decision to use capital against what you just described, which was a return either on your own stock or on other opportunities. Listen, at this point, we don't have any transactions in the pipeline, large or small, that would be any immediate use of proceeds upon closing the transaction this summer. So we're waiting and holding our cards to determine what the right way to address all of those issues you've defined there, capital structure and opportunities, and we'll do it in a patient, appropriate way as we have in the past. So that's all I could say. I mean clearly, as we pointed out on our last call and as you can see today, the stock is highly undervalued given it's -- assuming the closing of the deals, which are only more certain than they were 24 hours ago, and the performance of our underlying business over the long haul, which we still believe is materially better than people are giving it credit for. So we see what you're describing. I'll just leave it at that.

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James Edmund Ratzer, New Street Research LLP - Europe Team Head & Analyst [41]

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I mean a quick follow-up in one of the other potential use of capital that's been talked about is maybe a combination of Telenet with VodafoneZiggo. I mean could you talk us through what operational synergies you might see in such a cross-border tie-up if that's possible?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [42]

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Yes. I prefer not to address that. The VodafoneZiggo partnership is a strong one. We're very happy with that relationship with Vodafone and Holland. There will be a natural point in the coming months or years for both parties to determine what the right outcome is. For the partnership and the joint venture, it's premature to determine that today, and I don't want to create any speculation around it. And providing synergies or things of that nature would only fuel that speculation.

Telenet, on the other hand, is a business we're happy to be a 60% shareholder in, as you say, highly valued in the marketplace and we're pleased with John's performance. And there are organic opportunities to grow Telenet as well as in-market opportunities to grow Telenet. So I think both businesses today are doing just fine on their own and that it's premature to discuss anything if at all.

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Operator [43]

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And we'll take the final question from Matthew Harrigan with Buckingham Research Group.

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Matthew Joseph Harrigan, The Buckingham Research Group Incorporated - Analyst [44]

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I think everyone agrees you've got more speed here than any of your peers on broadband. But at the same time, as you look on the global take rates for a full gig, I mean, they're pretty much in the low single-digit percentages in a lot of geographies. And some of the apps, I'm not sure everybody is going to want a light field Tyrannosaurus rex in their living room at some point. Does that give you some pause that you could ultimately have like 200 or 300 meg sort of cheap and cheerful competitors, like in 5G much further out, got the fixed wireless access right now? And I know Europe is behind, but is that something you think ultimately affects your pricing power even if you have a much better product? And then the second question is I know Vodafone has continued enthusiasm obviously for the German transaction. But what happened? I know it's a discontinued operation. But what happened with the German numbers in Q1 because the revenue in the OCF looked extremely light?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [45]

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Yes. I think on Germany, Matt, the budget -- we're feeling good about performance here more generally. We don't have any concerns around the business or quarter-by-quarter variances. But I think all things considered, they're hitting the targets that we set for them and that the buyer expects us to be hitting. So no material variability that we're pointing out.

On the 5G point, listen, 5G will roll out. It won't be fixed wireless in Europe. It will probably begin as fixed wireless in the U.S. with questionable capability and execution, we understand and believe. But as a mobile product, we're all going to have a 5G phone at some point down the road. But remember this, the average customer -- our average customer is downloading 150 to 250 gigabytes a month. That's 20x more than they are doing on their mobile phone, yet ARPUs are not that far off, right? So the value of a fixed-line broadband access is phenomenal in comparison to what you're paying for a mobile fixed line -- mobile product. And as that 200 gigs goes to 700, 800, 900 gigabytes, mobile will also grow but will never reach the kind of levels that we believe people will require in the home for video, for other products and services. So both data streams will grow. Consumption will grow in both ecosystems and network configurations, but the fixed product is so cost-efficient for consumers and for the delivery of data. It's got nowhere to go but up.

So I think it's going to be -- just as we cohabitate very well with 4G today and LTE, 1 gig and 10 gig will cohabitate extremely well with 5G. And when people are in their homes or in their businesses, they're going to rely on 1 gig or 10 gig or whatever they think they need because it's the most cost-efficient and certainly most productive and useful. And when they're out of their homes, they'll rely on their mobile phones. So I think the ecosystem will evolve much more harmoniously and look a lot like it does today, with just everybody consuming a lot more. And that's a good place to be for us and for mobile operators in the long run. So we see nothing but positive, to be honest with you, but thanks for the question, Matt.

Anyway, that's -- we're excited -- thanks for joining us. I mean the punchline here is that the Vodafone deal, absolutely on track for a summer close. That should be a positive. The Swiss market is doing exactly what we wanted it to do and providing some nice, we think, performance for the Sunrise transaction. And Virgin Media and our remaining operation we think are stable and have great prospects going forward.

So look forward to talking to you about Q2, and thanks for joining us this morning. Speak to you soon. Take care.

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Operator [46]

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Ladies and gentlemen, this concludes Liberty Global's First Quarter 2019 Results 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 today's presentation materials.