Liberty Global Ltd. Q2 FY2021 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's Second Quarter 2021 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. 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 statement is based. I would like now to turn the call over to Mr. Mike Fries.

Thanks, operator, and hello, everyone. As always, we appreciate you joining us today for the Q2 results call. Now we've got a lot of ground to cover, so I’ll begin with some operating results and a deep dive into a couple of topics that I’m sure will be of interest to you all. And after Charlie covers the financials, we’ll get right to your questions. I’ll kick it off on Slide 4 with 5 key headlines that should capture the broader narrative of the quarter and our value creation opportunity. First of all, our goal of creating FMC champions in our core markets is working. We made a very conscious and deliberate shift in our strategy 4 to 5 years ago, which saw us exit subscale markets at premium multiples and concentrate our resources into really 4 key countries where we’ve become fixed-mobile champions. I’m going to illustrate this more fully on the next slide. But despite reducing our geographic reach by 40%, we increased aggregate revenue by 40% and now serve a larger base of 85 million fixed and mobile subs. And those FMC champions are driving scale and growth, supported by unrealized synergies of $12.6 billion from our last 2 deals in the U.K. and Switzerland, that's on an NPV basis. And by the way, given our ownership, over $8 billion of that will accrue to our shareholders. Second, the demand for fast and reliable connectivity in Europe continues to anchor strong commercial momentum across our footprint. I’ll speak to the numbers in a second, but we reported good revenue and subscriber growth with a standout quarter from Virgin Media O2. Third, we’ve talked quite a bit over the last year or so about our network strategy options. Yesterday, we made a big move in the U.K. announcing our plans to upgrade to fiber across our footprint. I’ll speak to that in a moment. But the main takeaway is that we have great options in every market, and one size will not fit all here. To answer the question preemptively, cable and DOCSIS will continue to play a big role even in markets where we intend to upgrade to fiber. And given our speed leadership today and heavy investment in fiber-rich HFC, we can approach this moment in an offensive posture, with a clear focus on free cash flow and accretive returns on capital. Fourth, it's becoming increasingly hard to ignore our ventures portfolio, which has been valued by third parties at $3 billion or about $5 per share. That's around 20% of our current stock price and I’m guessing very little is being recognized today. We’re going to continue to provide greater and greater transparency of our tech, content and infrastructure investments that each strategically aligns with the core operations, and they also benefit from our unique track record within telecom and treasury and M&A. We also announced that we are in nonbinding negotiations with Iliad's Polish subsidiary to sell UPC Poland for $1.9 billion, that's about 9.3x EBITDA. We don't normally announce these things, but Iliad was required to do so for other reasons. And I can tell you, these sorts of asset sales at these sorts of multiples should also help bridge the value gap in our stock. And then speaking of our stock, we're making a big commitment today to put our money where our mouth is. Rather than decide periodically how much and at what price we’re going to purchase shares, we’re announcing today our commitment to buy back 10% of our market cap annually for 3 years, which means we’re adding $400 million to our current $1 billion program for the remainder of 2021. Now I just referenced the transformation of our platform over the last 4 to 5 years, and we’ve been trying to find a way to better illustrate the transition to an FMC champion. And Slide 5 does that, I believe. If you had asked me 10 years ago whether I thought we could build a better, stronger business by exiting half our markets and concentrating all of our resources into a handful of fully converged fixed-mobile operations, I probably would have said, I don’t know. I’m not sure. But when broadband competition intensified, cable consolidations slowed, and the demand for broadband capacity and mobility skyrocketed, we rapidly pivoted and we're a much stronger and more valuable company today for it. That involved 4 key steps: First, of course, we exited 5 subscale markets, like Germany and Austria, at premium multiples to mobile-only players like Deutsche Telekom and Vodafone. Aggregate proceeds were $25 billion. And these guys needed a fixed network solution in their markets. On one hand, this validated the underlying private market value of our cable operations, something we continue to demonstrate even today with the potential sale of Poland. But on the other hand, it allowed us to focus resources on those markets where we had a pathway to fixed-mobile convergence by acquiring or merging with mobile operators, specifically in Holland, Belgium, Switzerland, and of course, the U.K. So even though we shrunk our geographic footprint by 40% with the concentration in 4 countries, we have 25 million more fixed and mobile subs than before, 85 million in total, and 40% more revenue, $24 billion in total on an aggregate basis with a very balanced blend of shifts in mobile revenues. Now the benefits of that fixed-mobile transformation are showing up in our results. It was a solid quarter for our businesses, really across the board as you can see on Slide 6. We delivered positive revenue growth across all 4 key markets. Charlie is going to walk through the details, but VodafoneZiggo grew 3%, Telenet and Virgin Media grew 4%, the latter represented just the 2 months prior to the merger. By the way, for a good look at pro forma financials of Virgin Media O2 for the second quarter and restated for prior periods, take a look at their fixed income release. We can’t provide that data in our GAAP presentation this quarter, but we’ll do that going forward. You’ll see that Virgin Media O2 combined revenue was up slightly in the quarter and EBITDA was up 6%, on the back of cost control and commission savings in the mobile business. It was also a good quarter for broadband and postpaid mobile net adds, which totaled around 250,000 in the quarter across the group on an aggregate basis. And here on the top left, we do show full quarter results for Virgin Media O2, which added 22,000 fixed customer additions, our fifth straight quarter of customer growth, by the way. And that was supported by 36,000 broadband net adds, up 8% from Q2 last year, and 65,000 postpaid mobile adds. You can see on the bottom left, we continue to benefit from convergence with total fixed-mobile convergence ratios up to over 40% in all operations. Virgin Media O2 now sits above 40% with the addition of the O2 mobile subs to the subscriber of Virgin. And Switzerland is at 56%, which is clearly a medium-term target for every market. The right-hand side of the chart provides some operating highlights for each of the big 4 opcos, I’m not going to go through all of this in detail. But Virgin Media O2 is off to a great start as of June 1, with record fixed sales in the month and strong mobile adds. The team is working on some exciting commercial offers and is focused on driving the benefits of an expanding 5G presence and the availability of 1 gig broadband across 100% of the footprint by year-end. To summarize, UPC continues to benefit from strong sales momentum in the early rollout of FMC offers with 6,000 broadband adds and 41,000 postpaid mobile adds in the quarter. The integration in Switzerland is right on track. In fact, the team just raised the synergy target by CHF 50 million, which after cost to capture brings the NPV of synergies to $3.7 billion, up from $3.1 billion. VodafoneZiggo delivered its ninth consecutive quarter of revenue growth, with fixed ARPU increases and mobile postpaid adds offsetting the loss of broadband subs. And with 5G rolling out 1 gig services rolling out there, the company is well positioned to deliver its 2021 EBITDA and free cash flow guidance. And finally, Telenet continues to be our most innovative operator, launching yet another converged fixed-mobile offer called ONE, which helped the company deliver positive subscriber growth in video, broadband, and mobile for the quarter. So each of our 4 top key opcos are performing well. Now let me switch gears to a subject on Slide 7. I know you’re all interested in it. I’m sure by now, you’ve seen the announcement and read the press and analyst remarks about our decision to upgrade Virgin Media O2’s fixed network to fiber over the next 7 years or so. We already have fiber-to-the-premise to about 7% of our homes through the Lightning build. So we’re talking about 14.3 million homes to be upgraded at the cost of about GBP 100 per premise. There’s lots of discussion around why are we doing this. What does this mean for cable and DOCSIS? Is this cost really that low? Let me start by reminding everyone that Virgin is today the undisputed speed leader on 15.5 million homes across the U.K. Average customer speed hit nearly 200 megabits per second with the balance of the market around 40 megabits or so. So speed matters in the U.K. Of course, that’s why BT is building fiber. But today, they only pass about 10% to 15% on our footprint, we believe. And we’ll be offering 1 gig services to our entire footprint in 5 short months from now. So using an Olympic analogy, we all have our eye on advancing to the 10-meter diving platform, if you will, over the next 7 years with 10-gigabit speeds. But today, we’re already standing on the 3-meter platform. And the rest of the market, in our view, just have their toes in the water at the edge of the pool. It doesn’t matter how fast BT gets to 1 gig, we will always have an advantage. It’s almost not a fair fight. And all of that is attributable to cable and DOCSIS, which will be part of our network solution in the U.K. for a long time to come. We’re not decommissioning our cable network, quite the contrary. We are simply expanding its capacity by pushing the fiber that’s already there in the ground even closer to the customer. In fact, that’s why we can upgrade for a fraction of BT’s cost. We already have fiber deep into the network in mostly urban markets, and we have access to our own underground ducting that will require far less digging, and that’s the most expensive part. And for these same reasons, upgrading the fiber is only marginally more expensive than DOCSIS 4, which is not the case in every market, but we made this decision pretty easy in the U.K. Like everyone else, we will incur costs to connect the drop to the home, and that will be a variable cost based upon demand over time. It’s also important to point out that these are gross CapEx costs. So they don’t take into account the expected revenue uplift that could occur here. You can see some of those economic benefits outlined on the right side of this chart. Both DOCSIS 4 and fiber-to-the-premise will make our B2C and B2B services more competitive, that's clear. But given the marketing halo around fiber that seems to be building up in the U.K. and the benefits of symmetrical services to the enterprise market would argue that fiber probably has a slight advantage and will derive more value. Similarly, while cable can do wholesale, just look at Telenet, the likelihood of deriving value from the GBP 1 billion wholesale market in the U.K., if we chose to do it, which is quite mature and busy, is enhanced by an off-fiber solution. Since we only cover half the country, it’s safe to assume that wholesalers will want to keep their technology platforms simple and seamless across providers, and a fiber solution does that, of course. Now beyond those economic benefits, fiber-to-the-premise in the U.K. also provides greater confidence as we think through network expansion options beyond the steady Lightning build today. And we continue to evaluate that opportunity to add an additional 7 million homes, sort of a supercharged Lightning, if you will. And we’re in good discussions with financial and strategic partners about what that might look like. So stay tuned. Now in light of this U.K. announcement, I think it’s important to stress that there’s no direct read across to cable or other markets from this decision because the truth is we have multiple paths to 10 gig in every market, and we’re evaluating the right path on a case-by-case basis. Slide 8 outlines our strategy through three approaches. The first is to access another company's fiber network, which allows us to avoid the capital expenditures related to upgrades and provides some level of market fairness beyond simply pursuing the same route. Sunrise has successfully implemented this in Switzerland with the Swisscom wholesale agreement. However, there are drawbacks, including the loss of ownership economics in our key product, broadband, and exposure to changes in wholesale rates among other factors. Clearly, DOCSIS 4 will represent a groundbreaking technological advancement when it becomes available, supported by a strong global ecosystem of cable operators, especially in the U.S. Historical transitions from DOCSIS 2 to 3 and then to 3.1 show that the costs are generally lower than fiber solutions as they build on the previous platform, allowing for quicker rollouts. That said, DOCSIS requires a significant one-time investment in both active and passive network components each time we upgrade to increase spectrum capacity and speed. Therefore, we are uncertain when this technology will be ready for commercial use, but we are part of a select group of operators aiming to speed up that timeline. While DOCSIS 4 will enable us to reach 10 gig, there’s no current plan for what it will take to reach, for example, 50 gig, which presents future considerations. Our recent announcement indicates that building fiber-to-the-premise is a viable and beneficial option in certain markets. We have highlighted the clear pathway to 50-gig speeds, advantages of symmetrical services particularly in the B2B market, and a significant opportunity for wholesale revenue in some areas. The trade-off involves higher costs that vary considerably by market. The choice of which direction to take depends on several key factors. We are likely to utilize all three options across our coverage area to varying extents based on market conditions. First is the competitive landscape—what other operators are doing, are they building fiber, and how rapidly? Next, as previously mentioned, is the relative capital expenditures connected to each option. The economic advantages resulting from one method versus another are interesting, especially regarding the positive effect on B2C and B2B competitiveness, the size and allure of the wholesale market as a provider or consumer, and the strategic and financial partnerships that could emerge to support our strategy. Progress is well underway in all markets. You might have heard about Telenet's discussions with Fluvius to gradually upgrade Flanders to fiber. Ireland resembles the U.K. closely. Switzerland is expected to adopt a hybrid approach, while Holland is still in the early stages of determining the best plan, though a fiber-deep DOCSIS 4 strategy could be the most sensible there. Ultimately, as we've done in the U.K., we will concentrate heavily on enhancing our medium-term and long-term capacity to compete, grow, and produce free cash flow, guiding our decisions in every market. Now in my remarks on Slide 9, with a quick recap of how we intend to create value for shareholders from this point forward. And it comes down to 3 core pillars, if you will. First and foremost, we’re going to focus on maximizing the value of our fixed-mobile operations. These are the crown jewels of our business. We’ve worked hard to build scale as the #1 and #2 player in each country, so we can shape markets, radically innovate and make the important strategic decisions that are going to underpin growth for years to come. How will we do that? Well, as you’ve already seen in Holland and Belgium, it helps when you have a near-term catalyst of synergies to kick-start growth and support cash flow longer term. We also know that in an increasingly competitive market, convergence is working, it drives cross-sell and upsell, it reduces churn and makes customers happier. Nobody debates it anymore. The key is to stay rational on pricing and put the real effort into seamless digital experiences that keep customers coming back for more. The end game in every market is to generate distributable cash to the parent, from free cash flow, dividends, recaps, whatever source. That’s the metric that matters to us and that’s the metric that will fuel our model. Now as we provide more visibility to our infrastructure and network strategies, you’re going to see that these are largely offensive, as I’ve just gone through. In many cases, like the U.K., they come with significant strategic opportunities around new revenue streams, network financing, and strategic partnerships. Hopefully, also a re-rating of our business. And then lastly, we’ll always look for ways to create demonstrable and transparent value either through asset sales, like the potential sale of Poland, and possible public listings in markets where there is serious pent-up demand for local telecom champions. The second major pillar is becoming too big and too important to ignore, and that’s of course our growing ventures portfolio. With a focused investment strategy around tech, content, and infrastructure in markets and services that are adjacent to our core operations, we continue to create value, whether that’s benefiting from some smart early venture capital deals such as Plume or Skillz or watching some larger positions like ITV, Univision, or Formula E and appreciate. We’re also excited about our move into infrastructure where we have a real right to play given our track record in telecoms, financing, and M&A. All in all, the portfolio is valued at $3 billion, which I mentioned, about $5 per share, and is starting to realize cash return. It has already returned $400 million to the parent. By the way, we’ve begun the process of monetizing hidden assets in our opcos like towers in Holland, Belgium, and the U.K. That could add about $2 per share net of adjustments in the opcos. And that’s not accounted for either in the ventures group, it’s not in that portfolio, or in our stock. So watch this space. And then the third pillar is our levered equity model, which is unique in the European landscape and distinguishes us from mainstream telcos in Europe. At the core of this strategy is the prudent use of leverage, in our case, 4 to 5x on a fixed-rate currency-hedged and siloed basis, and that creates the opportunity for recaps and greater equity appreciation. You all know and understand that strategy. But we combine that with a strong stock buyback plan that just got stronger today with our commitment to repurchase 10% of our market cap annually for 3 years. And again, that means we’re adding $400 million to this year’s $1 billion program, only 3/4 of which we’ve spent so far, and we’ll seek to purchase 10% of the shares in ‘22 and ‘23. So that was a mouthful for me, I know. And let me turn it over to Charlie, and then we’ll get straight to your questions. I look forward to addressing all of those shortly. Charlie, over to you.

Thanks, Mike. I'm starting by highlighting our strong performance in Q2, where we achieved revenue growth across all markets and consolidated revenue growth of 3.4%. Now whilst there’s an element of COVID recovery in areas like sports and broadcasting, there has been very limited recovery in areas like roaming, and we’re seeing positive underlying growth across all our businesses. The U.K. grew 4.4%, which includes a roughly 2% benefit from premium sports with continued strong convergence volumes and B2B performance driving growth. Telenet also realized strong underlying growth in Q2, but only a 4% growth rate does benefit from a EUR 30 million year-over-year improvement in broadcast revenues. And as we guided earlier, Switzerland has returned to revenue growth, fueled by continued strong mobile volumes, B2B performance and a consumer business that continues to stabilize through positive broadband sub momentum. Whilst VodafoneZiggo continues on the trend of strong financial growth, posting a 3% year-on-year increase versus the prior year, which marks a milestone of 9 consecutive quarters of positive growth. Q2 saw growth across all segments, including mobile on both the consumer and B2B sides of the business as COVID drags abated. On the next slide, we provide details of our adjusted EBITDA, where costs to capture synergies continued to weigh on results in the U.K. and Switzerland. Relatively, they performed in line with the prior year despite $8 million of premerger costs to capture. And it's worth noting that the recovery in premium sports revenues is offset by increased programming spend year-on-year given the credits that we received in Q2 of 2020. The Swiss performance continues to improve and a 3.1% decline is explained by $9 million of cost to capture and high growth in related investments in marketing and B2B. Synergy benefits are limited in the quarter despite the recent MVNO migration back to our own network as those savings will become apparent in half 2. Telenet's growth rate was suppressed due to the acceleration of programming rights in the prior year period as live sporting events were paused in the second quarter of 2020, the benefit of which was seen in the Q1 results. But taken together, Telenet achieved nearly 2% first half year EBITDA growth. And in the Netherlands, a 2% EBITDA decline is expected given the estimated EUR 21 million impacts of COVID-related temporary broadcast suspension, a nonrecurring settlement in Q2 of 2020. VodafoneZiggo remains on track for full-year guidance. Focusing now on OFCF. We presented a year-to-date view of our performance, illustrating the significant OFCF generation of our core businesses. Despite a headwind of $58 million of cost to capture, the consolidated group delivered 2.1% growth in the first half. U.K. OFCF grew 2.3% in the first 5 months of the year, and we reached a milestone of 2.5 million Lightning homes. We continue to build efficiently and our cost per premise continued to trend lower, delivering a cost per home of GBP 576 in the quarter. The Swiss team remained focused on the integration and incurred significant costs in the first half to achieve longer-term synergy realization. The $41 million of half 1 costs to capture helped lay the groundwork for future network migrations, IT integration, and the alignment to the product road maps, including B2B. Although OFCF growth in Switzerland would otherwise have been positive. In Belgium, OFCF declined around 1%, whilst in the Netherlands, OFCF grew 1.6% in the first half as we continue to invest in the network and remain on track to have upgraded 80% of our footprint to 1-gig speed by the end of the year. Focusing on our core Liberty Global performance metric of free cash flow, we delivered $717 million of free cash flow in half 1. Our strong first-half performance indicates we are on track for our full-year guidance of $1.35 billion, which represents 26% year-on-year growth, with growth accelerating on a per-share basis as we continue to aggressively retire our stock. As of July, we retired nearly 80 million shares since the year-end 2019. And the next slide illustrates our year-to-date buyback performance. As you can see, as of July, we repurchased $765 million of Liberty Global stock as we approach our initial $1 billion authorization. As Mike announced, we’re committed to repurchasing 10% of our market cap a year over the next 3 years, which serves to increase the 2021 buyback to around $1.4 billion, supported by our significant free cash flow and our corporate liquidity, which includes a cash balance of $4.1 billion as of quarter end. Our ventures portfolio is currently valued at $3 billion, which reflects the full color around one like ITV, which we completed in early Q2, and the continued monetization of our Skillz stake where we’ve realized over $80 million to date. During the quarter, we also announced the creation of our AtlasEdge joint venture with Digital Colony, utilizing our owned real estates to provide cloud providers, streaming services and enterprises with high-performance edge-of-network facilities, through which they can distribute low-latency applications and services such as 5G, gaming, IoT and edge compute. We expect that transaction to close in Q3 of 2021. To conclude, we are executing our FMC strategy across all markets, with positive revenue growth across our markets, synergies validated in the U.K. and upgraded in Switzerland. In the U.K., we’re excited to announce a cost-effective upgrade to full fiber by 2028, and we’re increasing our buyback program for 2021, whilst committing to repurchasing 10% of our market cap annually over the next 3 years. Finally, we are converting all guidance targets, noting Virgin Media O2 management were not part of the merger clean team, and as such, are in the process of validating the combined business plan. And with that, operator, we’ll take questions.

We will now take our first question from David Wright with Bank of America.

I want to start with a different perspective. The performance of your stock has been disappointing over the past few years, which is evident in your recent buybacks. It's clear you and John are frustrated with the valuations of Telenet equity. You've completed several deals without relying on equity, but now you need to justify this significant capital expenditure in the U.K. to a market that is concentrating on short-term cash flows, despite your confidence in long-term value creation. This frustration seems to echo what Iliad’s owner, Xavier Niel, expressed this morning when he indicated he doesn't prioritize short-term cash flows because he recognizes longer-term value potential. He's taken action to buy back shares. Do you ever find yourselves discussing why you even engage with equity capital markets? Would it not make more sense to buy back shares, increase leverage, and invest where you see the best opportunities for value creation? I'm interested in your thoughts on this.

Yes, that was an unexpected question to begin with. Thank you, David, for bringing it up. I understand your point, and it's common for entrepreneurs, CEOs, or company Chairmen who feel they're outperforming the market to contemplate such matters. On the flip side, it's essential to note that we are, in some way, buying out the public. When we invest $1.4 billion in stock this year and plan to acquire another 10% of the market cap—not per share—if the stock price increases, we will still spend whatever it takes to purchase 10% of the shares. Some analysts suggest that this is just $1.4 billion annually, assuming the stock remains static. It's about the number of shares; if the stock price doubles, we still buy that 10%. So, we are essentially doing what you're suggesting but in a more cautious and perhaps cost-effective manner. Looking back, we have repurchased over half the company at various prices, generally lower than the current listing price. For shareholders who support our vision, this offers a way to accompany us in our gradual transition to being privately held. Even if there is just one share left and we own it, it reflects a successful outcome. We are providing shareholders with an opportunity to exit if they're dissatisfied. Given our knowledge of the business, we feel confident in using our capital and free cash flow to buy those shares. That's all I have to say for now.

We’ll take our next question from Robert Grindle with Deutsche Bank.

I was half expecting some guidance around the dividend from Virgin O2 as a clue to where group free cash flow might be going. But you’ve taken the different approach by committing to your buyback, which you’ve just been talking about. Can you give us some background for thinking behind this? Is it because you’re not sure yet about the funding for fiber? Supercharged Project Lightning? Whether to go alone or with someone else? Or is there some other rationale behind this approach?

I think it's quite clear, Robert. We have invested a considerable amount of time creating what we believe to be a strong group of fixed-mobile businesses that exhibit excellent cash flow potential and solid strategic and competitive positions. We also have a comprehensive understanding of what the next 5 to 10 years in network and technology evolution will mean for those businesses. Our confidence in their value is growing. Therefore, we believe this is an opportune moment to solidify our commitment to both the stock and the business, as we have a clearer picture of our future. I would characterize this as an offensive strategy rather than a defensive one, aimed at capitalizing on what we perceive as an undervalued stock. We are demonstrating this confidence to investors through a definitive buyback strategy rather than an annual one that gives updates every 12 months. Additionally, I think it's beneficial for investors to see our willingness to utilize not just free cash flow but also our cash reserves. If our stock rises in value, as we fully anticipate, we will still proceed with buying back 10% of the shares, even if that means using cash in addition to free cash flow. This decision reflects our confidence and alleviates concerns for those investors who believe we should expedite cash deployment. Overall, I see this as a positive move, one that I hope most investors will appreciate.

Our next question comes from Akhil Dattani with JPMorgan.

Could you please provide an update regarding the Virgin Media management team in relation to the merger process? As you've mentioned, they haven't been able to share their plans with us yet. When should we expect to hear from them? Will there be a standalone event for updates in the next quarter? Additionally, considering the complexities in the U.K. market that you highlighted, what do you believe are the most significant decisions and strategic considerations for the management team? One area of particular interest to us is the wholesale strategy. Can you share any insights on how you view the wholesale approach for Virgin?

Sure. I’ll start by discussing the U.K. situation, and then I’ll hand it over to Lutz to share his insights on the management team’s progress and his commitment to the joint venture. We’re confident about our direction for next year and beyond thanks to significant efforts underway. The major decisions in the U.K. should be fairly clear, and I’ve touched on some of those directly or indirectly. As we plan to invest in fiber across our remaining areas that lack it, we aim to ensure we gain benefits in our B2C and B2B businesses, prioritizing those investments. Additionally, we’re exploring opportunities to collaborate with financial and strategic partners as well as potential wholesale partners to enhance and monetize this investment. We are intentionally keeping our plans general for now as there is still much to explore and various options to weigh. We’re viewing this primarily from an economic perspective, believing there are paths to uncover economic advantages from this network investment that extend beyond merely enhancing competition in the B2B and B2C sectors. We must also carefully consider our future network expansion plans, which we’ve discussed in previous calls. This is the first step, but we are eager to quickly assess possibilities to extend the network beyond our current footprint and potentially partner in an additive manner. There are indeed significant decisions concerning the network, and we’re approaching all of them with consideration of the value they create and their effect on our cash flows and dividends, which is a priority for us and our partners at Telefónica as well. We aim to make decisions that serve the best interests of all stakeholders, especially our shareholders. Lutz, would you like to share your thoughts on the management team and how you’re aligning on broader strategic and operational goals?

Yes. We have four priorities in VM O2. The first is to integrate both companies. The second is to maintain and accelerate business momentum. The third is to fully transition the company into a digital environment. The fourth is to determine the best approach for extending our fixed network. Regarding integration, we have made significant progress, having announced the top 100 of our organization. We recently shared our plans for this year with the Board, who will make a decision soon. Once the Board decides, we will provide guidance. This aligns with the expectations of our shareholders. We are currently working on a new three-year plan set to conclude in October, after which we will seek Board approval and share the details. Additionally, we have reconfirmed that our team is capable of achieving the $540 million run rate synergies, thanks to extensive premerger work that laid a solid foundation. In terms of business momentum, our performance in Q2 reflects our strong position compared to competitors. We are approaching this integration with solid momentum in both mobile and fixed sectors. As for digital transformation, while we won’t delve into it now, we are committed to completely digitizing our business. Regarding network expansion, it is indeed a significant step forward. We aim to serve an additional 7 million homes, ensuring we balance our capital investments in 5G and 4G capacity and find the right partnership model. We have a lot of work ahead, but it’s a promising start with good momentum. Back to you, Mike.

Okay. Thanks, Lutz.

We’ll go ahead and take our next question from Nick Lyall with Societe Generale.

Could I go back to the wholesale strategy, please, Mike, because I mean, there are risks with this as well. So how are you confident you can protect the high ARPU retail subs if you were to do that? Have you thought through that yet? Obviously, you have, but could you share with us some thoughts on the U.K. business on that? And any conversations at all with Ofcom? And could I just clarify, when you're talking about wholesale, you are including the cable HFC network to wholesale as well or is it just the incremental fiber parts of the network?

Look, those are really good questions, Nick. And I’d love to walk you through the exhaustive amount of analysis that we’ve done at both the Liberty and the Virgin Media O2 and Telefónica levels around all of this, but I prefer not to. I think it’s safe to say that if we were to enter into any sort of wholesale provider arrangements or consider that as a long-term strategy, then we would have thought through the impact on ARPU, the regulatory impact and the best technology solutions to achieve that. Better to not get into too much detail today. The announcement is plenty to digest for investors, and we want to focus on explaining how we got there and how we’ll achieve that. But I think it’s safe to say we have lots of time to think through how we exploit and monetize that commitment beyond the benefits to our own business. And I would just give us a little time to finish those considerations, and you will certainly have plenty to talk about over the course of the next few quarters. Sorry to be evasive. I just think it’s a slippery slope. We could get into a lot of detail, that's probably not helpful here.

We’ll take our next question from Steve Malcolm with Redburn.

Yes. Regarding the U.K. fiber plans, could you help clarify what makes the U.K. network so unique? After all these years in the industry, I still find it intriguing. What allows you to build at such a low cost compared to other networks? I assume since it's fully adopted, you believe there's no further construction needed. Do you integrate the fibers directly into the ducts for all customers? Additionally, the Project Lightning experience has faced challenges over the past six years. What lessons have you learned from that? How confident are you in meeting the targets you set out yesterday? That would be helpful to know.

Lutz and Enrique, could you provide some additional insight on why we believe the numbers to be accurate and, as you mentioned, more cost-effective than our competitors? I'd like to comment on Project Lightning. To date, we have constructed 2.5 million homes. Your mention of slippage refers to an issue that dates back five years, which seems quite a while ago. Since that initial phase, it has operated like a well-oiled machine, and we have been very effective, consistent, and reliable in our network expansion efforts in the U.K. Our returns and penetration rates have aligned perfectly with our forecasts. Additionally, our capital costs have consistently decreased as we engage with PIA and enhance our execution on this significant construction project alongside our suppliers. I believe we are as active, successful, and reliable as anyone in the U.K. market, and our suppliers can attest to that. In my view, our credibility and capability to deliver this is solid and not questionable at all. However, Lutz or Enrique, feel free to elaborate further on the specifics regarding GBP 100 if you wish.

Sure. I’ll just make a couple of comments. First of all, the number is obviously an average over quite a few different scenarios. But in the case of this upgrade, this project, the majority of the process actually uses our existing ducts. And our existing fiber-deep DOCSIS network allows us to really focus the upgrade capital basically on a significant portion of the passive part of the network. There are construction, you’re asking your question, is it because there’s no construction costs? There are construction costs, but it’s significantly lower than when you’re building a brand-new territory like we are today doing in Lightning. And then the final point I would make is that the significant commonality between both the technology as well as the construction mechanisms between Lightning and what we’ll be doing in this upgrade. So we’re pretty confident that we understand the process and that we will hit those targets.

A follow-up, Mike. I think you said that Openreach is now passing like 10% to 15% of your network with fiber. Can you maybe just update us on what you're seeing? Where they have passed with fiber, are you seeing any particular change in the sort of customer onboarding and offboarding dynamics in those areas?

Lutz, you can address that.

Yes. So I mean, you’ve also seen, Steve, that these new wholesale prices, right, are announced and will kick in. And for 1 gig, that is then GBP 22. Today, right, the fiber prices are very, very high. And we watch it very carefully, but look at our net adds. So we don’t see an impact at all at the moment. Will that stay the same? No, because we think that, right, if prices for higher speeds will go down a bit, we would see a bit more competition here. But on the other hand side, right, we have now more than 40% of our fixed customers having also mobile with us, and that will help us also protect our customers from churn.

The other point I’d make is we are already 1 gig pretty much and will be at the end of this year, 1-gig capable across 100% of our subscriber base. Is it as if BT or any Openreach customer will be providing a superior product to us? It’s really a me-too product. And we’re going to have the advantage of being there first across the entirety of our footprint, and we’ll be marketing aggressively both fixed-mobile products as well as 1 gig products well ahead of the vast majority of these operators because we’re already there. This is what I meant when I said it’s not a fair fight because if BT is building to get to 1 gig, we’re already 1 gig. And we’re just basically further supercharging our networks for the next 10 years by ensuring that we’ll have symmetrical 10-gig when and if that market requires it. So hard to see us not being able to compete with any activity from BT or Openreach, given the fact that we’re so far ahead of them as we sit here today, the 1 gig product.

We’ll take our next question from Matthew Harrigan with Benchmark.

One perspective on fiber is that a major competitor in the U.S. is following a different network strategy. It appears your approach is somewhat more complex. To use an Olympic metaphor, I hope there are no execution issues because it seems quite intricate. An interesting point about your U.S. competitor is that although they cover 1 million homes, they haven't mentioned the operational costs associated with serving that number of homes since fiber costs are relatively low, even though their capacity utilization is under 5%. Can you discuss the cost advantages of fiber? There's a belief among some that you can achieve roughly 30% savings in consumer-facing costs and related capital expenditures. Additionally, regarding your ventures portfolio, I think the valuation you have is likely secure, especially for initiatives that could attract significant interest if marketed, such as Formula E and edge computing. Can you elaborate on the potential of Formula E and whether it serves as a complement or replacement for Formula 1?

Sure, Matt. I think Enrique would echo the comment that the fiber network could easily and should reduce operating costs over the long haul. I think it's important to point out though in the U.K., we’re not decommissioning the cable network. We’re going to continue to utilize the DOCSIS 3.1 plant that take us all the way to 2.2 gigabytes. So we’ll be at 2 gig pretty shortly here on the DOCSIS plant, and we’ll continue to utilize that plant wherever and whenever necessary, with the fiber really being an overlay as opposed to a replacement of the coax network or the HFC component of the network anyway. They’ll share tons of fiber to the cabinet, if you will. But beyond that, we’ll keep the HFC network viable. So the cost will be there. So there’ll be cost savings long-term and CapEx savings long-term. But I think you have to remember that those annual costs may not be quite as significant. On the ventures side, there are numerous assets that could easily transition to other strategic owners or public offerings. We have around 8 to 10 unicorns in our tech portfolio, which represents about $800 million of the total $3 billion. Additionally, our content portfolio includes several sizable businesses. You mentioned Formula E, but we also have a stake in ITV, which has a relatively low investment basis, along with three media companies and other assets. Each of these has unique stories and opportunities. Formula E is performing exceptionally well, entering its seventh season and rebounding strongly from COVID, with exciting advancements in the car and technology expected next year. Major manufacturers like Mercedes and Porsche are supporting it, and the product continues to improve. Moreover, we have another 18 years of exclusivity with FIA on electric car racing, which will be exciting to see how that platform develops over time. We are consistently exploring ways to assist our companies in reaching their objectives, whether through public offerings, mergers, or fundraising. Stay tuned for more updates on these assets as they progress.

Over time, are you more likely to have the mobile traffic on the HFC network as some of the American system, new technologies, some Cisco and others? Or is that going to be on the fiber network, if you don’t mind my asking?

We currently provide backhaul services to nearly all mobile operators in the U.K., including O2, primarily using fiber. I'm not sure if there's anything else you would like to add, Enrique or Lutz, but generally, these circuits are fiber.

Yes. The mobile traffic is mostly on the fiber network, and we'll continue to grow in that direction. There may be opportunistic cases in which we use a portion of the HFC network, but it’s really the F of HFC that is being leveraged here.

We’ll take our next question from Andrew Beale with Arete Research.

I just wonder if we can develop the discussion about longer-term fiber cost savings in Virgin. I mean as you blow or pull the fiber alongside the existing HFC network or coax, I guess you can choose whether you serve each existing or new customer via DOCSIS or fiber. And then longer term, you’ve got this OpEx saving when you switch the DOCSIS off. So what is your thinking at the moment? Will you put all the new customers or upgrade them on fiber? Or do you just do it for customers seeking a certain high-speed tier or symmetrical or other services? And then how many years off are you thinking it is that you actually switch off DOCSIS in an area that you’ve previously passed with fiber? I guess I’m just really asking about the pacing of variable CapEx by replacing the coax drops with fiber versus the long-term OpEx savings opportunity and what your thinking is there.

It’s a valid question, but it’s a bit too early for us to offer any guidance on the percentage of customers who will need or want a fiber connection, as well as the associated costs. We are actively working on this, and we have made some progress, but now is not the right time to disclose specifics. I believe the cable network will continue to be an important part of our service for a while and will allow us to effectively serve customers who may not need the advantages of a fiber network or its speed and capacity. We can achieve speeds of up to 2 gigabytes with our current infrastructure, which supports our overall strategy. As for more detailed information on Virgin Media O2's plans, we may provide that during a future quarterly call once it’s more fully developed. While it's too soon to share that information publicly, you are correct in thinking about what percentage of customers will need a new connection and how fast that might occur. We have our own assumptions, but it's still premature for public commentary.

We are in a fortunate position to plan our migration primarily based on customer demand. This means if customers want speeds higher than 2.2 gigabits per second, we will need to accommodate that. Currently, a Virgin Media customer is using about 200 megabits per second, and improving to 2.2 gigabits per second will take some time. Additionally, we have the flexibility to implement fiber in one area while using DOCSIS 3.1 in another, so we are not obligated to upgrade entire regions to fiber at once. Over time, we aim to balance the use of both our fiber network and DOCSIS 3.1 network effectively. It’s important to note that our main motivation is not just cost savings from decommissioning networks. While a copper network is capped at 80 megabits, with DOCSIS we can easily reach speeds of 2.2 gigabits. Thus, we want to utilize both networks to their fullest potential. The key driver for us lies in the business opportunities within the consumer market, where we currently have a growth opportunity given our market share is below 10%. With our 5G and fiber networks in place, many possibilities are available, including wholesale opportunities. Stay tuned for more updates on that.

We’ll take our next question from James Ratcliffe with Evercore ISI.

First, I know you raised the synergy expectations in Switzerland, and there are additional costs to achieve those. How does that impact the timeline for realizing the cost savings versus the energy split being positive in that market? Secondly, regarding the buyback, could you explain the rationale behind approaching it as a percentage of market cap instead of a fixed dollar amount or free cash flow plus a certain dollar figure, since this means that as the stock price increases, the amount you would be buying back increases as well?

I will address the buyback question. I want to ensure I understand what you’re saying, James. We are committing to repurchase 10% of our outstanding shares over the next 24 months, regardless of the price at the beginning of the year. The total amount spent on the buyback will vary with the share price, but we may accelerate the buyback if the price decreases. However, we will maintain this commitment even if the price increases. This means investors can factor in at least a 10% increase in the stock price based on our buyback commitment. We believe this makes our approach to buying back shares more straightforward, predictable, and beneficial. While it's difficult to determine the exact dollar impact of that 10% commitment, we are firm on this plan.

Yes. Well, on your question, does the higher synergy expectation have an impact on the time scale of the realization? No, it doesn’t. So we actually have seen that some of the assumption that we have taken on the realization of moving customers over to own infrastructure from whole buy infrastructure, we're more conservative than what we think is now realistic to achieve. And that does not really change the time frame. In fact, we have seen some synergies coming in even a bit earlier. You’ve seen in the presentation that we were alluding to the MVNO migration being executed ahead of schedule. And overall, I would say we are rather ahead of schedule than behind. So no real change to the timescale.

We’ll go ahead and take our next question from Ulrich Rathe with Jefferies.

I have a question then probably to Lutz. Does the fiber upgrade plan require in-footprint share gains in the consumer market? I understand there are opportunities beyond that. But in terms of literally the consumer market, is there an element here that you think you can up the share with the market share?

Well, I mean we are currently winning market share, right, with the speed advantage. And we have not made any planning yet what kind of market share we are planning to win over the next 10 years. And we haven't justified the plan by a win of market share in consumer, right? I said earlier on, we have just started now after committing the budget for '21 to come up with a 3-year plan and beyond, and then we are working on that. But it’s definitely an opportunity to keep our customers and also to increase our share of wallet, so ARPU per home with our customers. If we keep winning market share as we do today, give us some time to figure that out.

Thank you for staying with us today despite other calls taking place. From my perspective, we're seeing ongoing growth in our FMC champions and the synergies are beginning to materialize, which will provide a positive momentum in the medium term. We are eager to enhance transparency regarding our network strategies, starting with our announcements related to the U.K. Rest assured, we are approaching these initiatives with a proactive and value-enhancing mindset, aided by our robust fiber-rich network and strong broadband base. Please keep an eye on the ventures portfolio, as it is gaining importance and value, and we will update you on the Polish deal, which reinforces the private market value of our operations. Lastly, we are enthusiastic about our buyback commitment, which is a significant message to the market. This is something investors can count on over the next year and the following two years, as it’s a clear opportunity for us to reinvest in our own shares. Thank you for joining, and we look forward to speaking with you again soon. Enjoy your August. Goodbye.

Ladies and gentlemen, this concludes Liberty Global's Second Quarter 2021 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.