Liberty Global PLC

NASDAQ:LBTYA

Earnings Call Transcript 2018-Q3

[Operator]

Welcome to Liberty Global's Third Quarter 2018 Investors 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] As a reminder, this call is being recorded on this date, November 8, 2018.

Page 2 of the slides details the company's safe harbor statement regarding forward-looking statements. Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the company's expectations with respect to its outlook and future growth prospects and other information and statements that are not historical fact. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risks include those detailed in Liberty Global's filings with the Securities and Exchange Commission, including its most recently filed forms 10-Q and 10-K as amended. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based.

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

[Michael Fries, executive]

Okay. Thanks, operator, and welcome, everybody. I appreciate you joining the call today. We've got a lot of good news to walk you through, and Charlie and I will try to do that as quickly as possible so we can get right to your questions. And during the Q&A, I'll make sure I get the management team, who's on the call here today, involve as needed. And for this part of it, you should hopefully have the slides in front of you. You'll hear us refer to those along the way. You can download them now or later. I think it will certainly provide quite a bit of context for our prepared remarks.

I'm going to jump right in with the major highlights of the quarter on Slide 4. In this environment, we think we're doing the right things strategically and operationally to create long-term value for shareholders, and most of those are summarized right here. Starting with one of the most obvious, and that of course is the Vodafone transaction, which is on track for a summer close. As you would have seen, the deal was formally filed with the EU last month, which got the clock started and the process is well underway.

You would have also seen that, today, the German Federal Cartel Office asked for a partial referral back of the case. To be honest with you, this was totally expected and not a surprise at all. I'll simply say that this transaction is exactly the sort of deal the European Commission was created to handle. It's multinational, it involves 2 large multinational organizations. I'll also say that the European Commission has reviewed every large cable-to-cable and cable mobile transaction over the last 5 years. Of course, we've been involved in 4 of those. I'm happy to take any questions on this point at the end.

Looking back, I think it's pretty clear that our timing was good on this one for lots of reasons, not the least of which is the premium price, which should net us approximately $12 billion of cash. The second major driver for us is operational growth. You can see the key numbers summarized on the right-hand side of the slide for both continuing operations and discontinued operations. Of course, those are the assets that are part of the Vodafone trade. So the full company, combining both, added 128,000 net new RGUs and both sets of operations reported over 5% operating cash flow growth in the quarter.

Underpinning these results is Virgin Media, our largest operation. Now Virgin delivered its fourth straight quarter of 4% or higher revenue growth and another strong operating cash flow result of 5.3% growth, both of which were fueled by a record quarter for subscriber adds and monthly cable ARPU up around 2% year-over-year.

Turning to our continuing operations on the continent. Many of you would have seen that Telenet reported last week. I think it's fair to say that Belgium remains intensely competitive, to use John Porter's words, with continued pressure at the top line and the subscriber growth level. But as we've seen, with every fixed mobile merger we've been part of, the synergies are substantial and in this case, it helped Telenet deliver over 8% rebased operating cash flow growth in the quarter and just under 7% year-to-date.

And then lastly, we are laser-focused on turning around Switzerland and feel good about the progress so far, which is being led by our new CEO, Severina Pascu, who's on the call today, and supported in part by our first launch of next-generation Horizon 4 video platform. I'll give you a bit more detail on all 3 of these operations, plus the Dutch JV, in just a moment.

And then like everybody else in this market, we are buyers of our own stock, not surprisingly, and we repurchased about $400 million in the quarter. And as Charlie will address in more detail, we're confirming full year guidance targets for both the full company and the continuing operations today.

Moving to Slide 5, you'll see some detail on subscriber growth in the quarter. As you know, we provide plenty of information by country in the press release, so I'll just hit a few key points on this slide. Usually just referring to full company results, I'm starting with the quarterly trends on the top left. Now you'll see that the 128,000 net adds for the group is more or less consistent with the second quarter and nearly double the first quarter. In comparison to 2017, the results have been impacted negatively by 2 markets, principally Switzerland and Belgium, which lost a total of 240,000 RGUs year-to-date versus just 60,000 in the same period last year. Let me break it down by products. The full company added 70,000 broadband RGUs in the quarter, which is consistent with the first 2 quarters, despite headwinds in Switzerland. I'll repeat what I've said in the past, data is our single most important product. It drives our bundles, it delivers our highest margins and is our greatest source of competitive advantage. So with 1-gig upgrades and WiFi Connect boxes in almost 60% of the base and then app platform that transforms the broadband user experience, you should expect to see us invest in and press this advantage going forward.

On video, our performance was steady with 37,000 net RGU losses in the quarter and that's about 0.2% of our base, so clearly, we're retaining more of our video customers than our U.S. peers on average. We've talked a lot about that in the past. Nearly all of our video losses were in 2 countries, Belgium and Switzerland. And our strategy in these markets going forward is grounded in the rollout of Horizon 4, which just hit the Swiss market and will roll out in the Dutch JV in Belgium next.

Horizon 4, for those who haven't been told about it already, features our 4K Ultra HD box, that's the one we've already rolled out in the U.K., plus an improved user interface of voice-enabled remote and an upgraded version of our Go app. We know these features matter to consumers and we're seeing the results already, for example, in the U.K. where the V6 box rollout, as we call it there, has played a role in 9 straight quarters of video games in that market.

That's a great segue to Slide 6, which drills down on Virgin Media's results. There's a lot of good news on this slide, we think. Operationally, this was a quarter -- a record quarter for Q3 net adds in the U.K. and Ireland, with 105,000 new RGUs and growth coming from both the Lightning areas and the legacy footprint. Several factors supported Virgin's performance, including: a continued focus on low churn triple-play customer acquisitions, that was a big impact; the rollout of V6 boxes to half the base, as I just mentioned; and Hub 3 WiFi routers to nearly 70% of the broadband homes. Superior broadband speeds, of course, which saw Virgin grab, in our estimation, 99% of all new broadband net adds on the footprint.

It was also Virgin's best ARPU growth in 5 quarters at just under 2%, reflecting improved base management and a more disciplined approach to acquisitions and retention discounts. Now we did announce our 4.5% price rise in August to be rolled out in October. Now which means that the fourth quarter volumes may be down a bit, but ARPU should be very strong. And so far, customer response to the price rise has been in line with expectations and more or less similar to last year.

Virgin made steady progress on Project Lightning in the quarter with 109,000 new homes built and released to marketing which, as you'll see on the slide, is relatively consistent with the prior 2 quarters. I'll tell you, we like this pace. It allows us to focus on the most cost-effective and efficient opportunities, while still expanding our footprint at a significant rate. We've now built more giga-ready homes in the U.K. than anybody at over 1.4 million, and we already have a full build plan in place for 2019.

I think, most importantly, all the KPIs continue to support attractive returns. We're building in the GBP 650 to GBP 700 cost per premise range. We've connected over 300,000 customers representing almost 750,000 RGUs, and ARPUs are in line with expectations. As the chart in the bottom right shows, we're hitting 30% to 35% penetration after 3 years, and we're getting better every quarter at selecting high-return build projects. So the bottom line is Lightning continues to contribute significant operating cash flow to Virgin and is generating solid returns on capital.

I'll close with some quick updates on our 3 largest Continental European operations in Belgium, Switzerland and our Dutch JV, of course, all of which have some important things in common. On one hand, now these are highly competitive markets that are fully converged on fixed and mobile, and where we've experienced some tougher subscriber and top line results. But on the other hand, they're all high-margin operations with good free cash flow conversion and lots of strategic optionality over the medium to the long term.

I like our position in all 3 of these markets. We have a great management team in each case, world-class networks and all of the tools we need to make good strategic and operational decisions. I'll start with Telenet, which is a cash flow machine. Yes, subscriber losses were higher than normal in the quarter and due to competition, price rise related churn and some subscriber migrations on the acquired SFR footprint. And these headwinds contributed to a soft revenue performance that was down 1.5%, but operating cash flow was up 8.4% in the quarter and driven by synergies and cost efficiencies. And Telenet's full year guidance for operating cash flow was just raised to a range of 8% to 8.5%. Adjusted free cash flow is now expected to be closer to EUR 420 million for the year. And Telenet just paid, as you know, a special dividend of EUR 600 million, which we got our proportionate share.

In the middle of the page, Switzerland is in full turnaround mode, as I mentioned. Now we've got a new CEO in place and we just launched Horizon 4 with all the features that customers love. We've made a deal with Sky that meaningfully improves the MySports package. We're focused on 1-gigabit broadband speeds and we'll shortly be moving over to the Swisscom mobile network on much better terms that allow us to provide an unlimited offer. There's already some green shoots, but let me be clear, these initiatives will take time to work financially. So while revenue and operating cash flow performance next year will be slightly better than this year, it will still be negative. In the meantime, Switzerland maintains the highest operating free cash flow margin in the group, which supports our investment in a turnaround plan and our strategic options in that market.

And then finally, on the right, the VodafoneZiggo JV in Holland feels like it's turning the corner. The fixed business continues to provide steady financial and subscriber results with 13,000 broadband adds in the quarter, the Horizon 4 launch planned for the first half of 2019 and 1-gig trials underway with a nationwide rollout planned for 2020. Convergence is working here, too, with 1 million households and nearly half the eligible mobile subs fully converged and exhibiting better NPS and better churn characteristics. Also, synergies are on track. And I'll tell you, the operating team was, with a few weeks ago, is bullish about the next few years. And then, lastly, sticking with the theme here, the JV has strong free cash flow margins and will return at least EUR 700 million to us in Vodafone this year.

So I'll conclude with a couple of remarks before turning it over to Charlie. Like many of you perhaps, we are puzzled, certainly not pleased, with our stock price today. By our estimate, we're trading somewhere in the mid-single digits if you assume completion of the Vodafone transaction. But 4 things get us excited. Number one, Virgin has been, for the last 5 years and continues to be, a growth engine for this company. It's a great market, we have great new leadership on the management team and no pressure. Let me repeat that, no pressure to do anything strategically in the U.K. Each of Belgium, Holland and Switzerland are highly profitable. And while they present some operational challenges, they also present some unique strategic options for us.

In all cases, we're preparing to monetize the considerable CapEx investments we've made over the last 3 years, so that capital intensity and free cash flow for the group look promising going forward. And then, finally, completion of the Vodafone deal will unleash a tremendous amount of opportunity to shrink our equity and create value for shareholders.

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

[Charles Bracken, executive]

Thanks, Mike, and hello, everyone. I will start with an overview of our Q3 2018 financial results on Slide 9. Similar to the previous quarter, we presented certain consolidated results on the continuing operations and a full company basis. Our continuing operations generated rebased revenue growth of 1.9% to $3 billion. We delivered rebased OCF growth of 5.2% for our continuing operations and 5.3% for the full company. Q3 property and equipment additions were $891 million for our continuing operations and $1.1 billion for the full company, representing 30% and 29% of revenue, respectively.

Moving to the bottom left of the slide, we present adjusted free cash flow for both the continuing operations and full company. Our free cash flow profile remains heavily weighted towards Q4, and as such, we are reconfirming our 2018 full company guidance of $1.6 billion based on the February guidance FX rates. In Q3, we delivered adjusted free cash flow of $165 million in reported basis and $245 million in a pro forma basis, after giving effect to the lower interest payments and higher transitional service revenue that we estimate would have occurred if our discontinued operations had been sold on Jan. 1, 2018.

It's also worth noting that adjusted free cash flow for continuing operations includes negative cash flows from our central corporate division, which continues to provide services to the entire group, including our discontinued operations. From a full company perspective, the basis of our 2018 guidance, we delivered adjusted free cash flow of $395 million in Q3, and the positive contribution to adjusted free cash flow from our discontinued operations was mainly driven by Germany.

Moving to leverage, our ratio of consolidated adjusted gross debt to OCF for the full company stood at 5.1x, while our net debt ratio stood at 4.9x, both on the basis of last quarter annualized OCF. At September 30, the average tenor of our debt exceeded 7 years with over 70% of our debt not due until 2024 or beyond, and our blended fully swapped borrowing cost is currently 4.3%.

And then finally on this slide, we repurchased nearly $400 million of our stock in Q3. This takes our year-to-date repurchases to $1.7 billion, and we already have over $800 million authorized of buybacks over the coming 3 quarters, even prior to the Vodafone proceeds that we expect to receive next year.

Turning to Slide 10, we present rebased revenue OCF for our continuing operations. Virgin Media delivered rebased revenue and OCF growth of 4.1% and 5.3%, respectively. Revenue growth was underpinned by solid results in Virgin's residential cable business through the combination of ARPU growth and an increase to year-over-year contribution from Project Lightning.

Mobile handset sales also contributed, albeit this is a low margin revenue stream. Virgin's OCF performance also benefited from reduced marketing spend as we focused on more efficient sales channels. Telenet's revenue declined by 1.5% on a rebased basis in Q3, as the July price rise was offset by ongoing competitive headwinds as well as lower mobile handset sales. These adverse top line trends were more than offset by the continued realization of fixed mobile synergies, which drove rebased OCF growth of 8.4% for Q3.

Switzerland remains a challenging market. And though we were able to hold cable ARPU flat, we continued to lose customers in Q3, primarily those with a video subscription. As a result, our revenue and OCF declined 6% and 9%, respectively. I would also mention that Q3 marks the first anniversary of the MySports launch. And it's therefore the first quarter in which our revenue and OCF growth is not meaningfully impacted by MySports distribution revenue and content costs.

Our CEE segment posted an increase of 1% in revenue in Q3, primarily driven by growth in our Polish B2B business. The 0.5% OCF growth in Q3 in CEE was principally due to the revenue trend offset by an increase in interconnect costs.

In the Central and other segment, net expenses were reduced by approximately 14% on a reported basis. This is in due part to the conversion of a portion of our annual incentive compensation from cash to shares pursuant to the compensation plan that was introduced in Jan 2018.

On Slide 11, we detailed property and equipment additions for our continuing operations under our 5 main categories of new build & upgrade, CPE, product & enablers, capacity and baseline. We spent $2.7 billion for the 9 months to date, and we are reconfirming our full year guidance of around $4 billion at guidance FX rates. As you can see from this slide, we are running on a significantly low ratio of CapEx per sales in the prior year, and we are targeting a further reduction in capital intensity in 2019.

We previously highlighted that a number of material investments, such as the V6 upgrade in the U.K. and our network investments in Belgium, have been substantially completed. The year-on-year decrease is also partly due to the lower volume of Lightning premises and a change to the build mix, which led to a lower cost per premise.

Our property and equipment additions increased sequentially from Q2 as a percentage of revenue. This was due in part to the extension of our 2G mobile spectrum licensing to Belgium, which was capitalized as part of our baseline spend. That also highlighted that our property and equipment additions for continuing operations include Central CapEx, which continues to support the full company, including our discontinued operations.

So moving to the conclusion slide to summarize. Virgin Media maintained its commercial momentum with a record Q3 RGU additions and accelerating ARPU growth. At Telenet, we're realizing significant fixed mobile convergence synergies that are insulating the business from top line challenges. Switzerland remains a challenging market, but we are investing in a turnaround plan and we would expect Horizon 4 to make a significant difference in the attractiveness of our product bundles heading into 2019. Although our results in Switzerland this year are below our expectations, today, we are at a position to confirm both sets of full year guidance.

And with that, operator, I would like to turn it over for questions.

[Operator]

[Operator Instructions] We'll take our first question from Michael Bishop of Goldman Sachs.

[Michael Bishop, analyst]

Just 2 quick questions for me. Firstly, on the good ARPU performance. You mentioned that you expect that to accelerate into the fourth quarter, supported by the price increase. So I'd just like to get your thoughts on how much of the price increase you think you can potentially land and whether you're seeing any early impact from the resellers passing through BT's volume discounts as Sky and TalkTalk signed agreements towards the back end of the third quarter. And then just picking up on CapEx in the U.K. As you mentioned, you've settled into a pretty steady run rate on Project Lightning, just over 100k. So if I was to extrapolate that to the end of 2024 per the original Project Lightning time frame, that would get you to 2 million, 2.5 million homes passed. Do you expect to potentially just continue there given you're hedging all of your return metrics and that's how we should think about the overall budget?

[Michael Fries, executive]

Thanks, Michael. Yes, I think we'll -- I'll take the Lightning question first, and then both Tom and Lutz are on the line, you can start to think through what we want to say about the price rise. On the Lightning Project, I'll repeat what I said in the prepared remarks. So far, we are seeing positive returns, the kind of performance and outcomes from the capital investment that we expect. This pace allows us to be thoughtful about where we build, how quickly we build. And I think from here, it gets better in terms of our ability to target more efficient build areas and hopefully, higher return build areas. In the event that we continue to see this sort of performance, we're going to continue building. As I mentioned, we've already built more than all the other altnets including BT combined. And I believe while there might be 7 or 8 million homes targeted for construction by 4, 5 other players, there's a lot of overlap in those homes and it's going to take them differing periods of time to get there. So we're leading the way here, in our view, and I think that it's so strategically important to the company, not just operationally and financially, to continue to push the footprint out. Remember, BT is rebuilding, not extending footprint. We're actually extending footprint, reaching new virgin territory, no pun intended. So I think it's reasonable to assume we continue at this pace. And we can still modulate CapEx, as Charlie intimated, even building at this pace because there's a number of other things both CPE and capacity and enablers that we can and should be and will be tempering going forward. So the reduction in CapEx intensity isn't dependent on slowing down Lightning. In fact, we think Lightning is at a good clip and we expect to continue building out at this pace and -- so you could extrapolate as you've done. Tom or Lutz, you want to hit the ARPU point and a few 4 price rise impacts?

[Thomas Mockridge, executive]

Yes. Thanks, Mike. Tom here. I think as you outlined quite comprehensively in the introductory remarks, yes, we do believe the price rise in this exact comp period is landing well. And frankly, it is landing quite a bit better than we did last year and significantly better than the problem we had 2 years ago. And that reflects a lot of focus, some change to people with the new systems, and a lot of discipline around pricing, discounting, retention. And as we've mentioned before, letting go some of the low price opportunities in the marketplace. So in combination, we are seeing a positive effect there. I think we will continue with that discipline. I don't know if we want to give full guidance about a particular ARPU number. I see Charlie shaking his head. But we do think we are in fundamentally good shape there. To the earlier question about are we seeing others in the market apply the benefit of these announcements by open reach around bulk sales of this service, the short answer is, no, we don't see that. If anything, we've seen some of the low-priced operators maybe come up a little bit in recent weeks.

[Operator]

And we'll take our next question from Polo Tang with UBS.

[Polo Tang, analyst]

Just got some 2 quick questions. I really just want to follow up in terms of the competitive environment in terms of U.K. broadband. Specifically, BT talked about heightened competition in the U.K. broadband market. So I heard your comments just now, so are you basically saying that actually there's not really been much change in terms of the competitive dynamics? So if you can maybe just expand on that? That's the first question. And the second question is really just about the Central and other costs for the group because you add OpEx and CapEx together, there's something like about $800 million to $900 million per annum of cost in terms of Central and other. So can you remind us what's in this bucket of cost and what's the scope you have to actually reduce this going forward, considering that you're obviously divesting of a number of assets?

[Michael Fries, executive]

Charlie, you want to hit the Central and other cost point first?

[Charles Bracken, executive]

Sure. Yes, you're right, it takes $900 million. I would categorize it in 2 broad buckets. One is what we call T&I, technology and innovation, which is around $700 million of the $900 million. And that's broadly activities that we have pulled out of the opcos because we can -- believe we can drive scale efficiencies across our groups. So that would include things like product development, particularly around set-top box and video products; connect, which is around the Internet products; what we call network operations, which is things like our European backbone; and also certain -- historically, certain IT-type platforms. I think as you rightly point out, as we de-scale the business, the question is how does that adjust. But the important consideration is, under what we call these TSAs, for at least the next 3, 4, 5 years depending on the asset, we continue to provide services to a number of people, whether it be Vodafone under the Scorpio assets or the assets sitting around Germany, Deutsche Telekom in Austria and indeed, in Holland, we continue to support the joint venture. And indeed, there are some support to LiLAC. So I would argue that the baseload of that is reasonably consistent here. There is some minor reduction and we'll flex our cost structure. And just to put that in perspective, our internal labor component of those $700 million is sub-100 million. So what we're really talking about is flexing external spend, and you can assume that we will optimize that. As I'm sure you all realize, we will continue to get paid under these transfer services agreement pretty material monies to reimburse us for that spend. So from a Liberty Global ongoing shareholder point of view, the net cost will go down considerably although the gross cost will be there. The balance was around $200 million as our corporate functions, which is your traditional sort of finance, HR, CEO and a degree of management best practice, we're continuing to evaluate what the right size of that is for the ongoing businesses. Clearly, there'll be some flex downs, for example, from an accounting point of view. In my area, you're clearly going to need less people to process accounts, and that's largely done through a shared service operation. So we'll be making some announcements on that over time, but we would characterize that $200 million as probably not bad. And as we've been benchmarking in other corporates, that looks already a reasonable number there. Obviously, we would always trying to do quite a bit better. I don't know if you want to add on that, Mike or Polo?

[Michael Fries, executive]

Yes. I mean, as you sort of intimated, Polo, as we get to the point of concluding the transactions with Vodafone and taking into consideration the recent transaction with Deutsche Telekom, our business next year will be smaller in scope and scale. So we're in the midst right now of a process that will ensure, going forward, we're as agile as possible, we're as nimble as possible, and that we are rescaling the central part of the business to reflect that. And that should be a tailwind to some extent to our corporate cost, but we're not prepared to provide any detail on it at this moment. But remember, we've been able to keep our OpEx flat for 3 straight years despite growing both the footprint and the RGUs and revenue of the business. So I think we're pretty good and pretty disciplined and diligent on the OpEx side, and you should see that along with the CapEx becoming much tighter going forward. Tom or Lutz, do you want to address the broadband point?

[Thomas Mockridge, executive]

On the broadband -- it's Tom, again. On the broadband point, I would say that it's always worth remembering that we are unquestionably the highest quality operator in the market with the best speed, the best router. I mean, Golly Survey showed this. The consumer showed this, the NPS scores. And so we are, to some extent, operating with a higher ARPU in a better statement. And so maybe BT's comments reflect the fact that they might feel some competitive pressure for their products down that other end of the market. And, of course, inevitably as we expand Lightning, BT's role as both a supplier and a reseller means pretty much every customer we take in Lightning is, by definition, coming off BT either directly or indirectly. So possibly that explains their position there. We can't walk away from the fact, of course, as the penetration of broadband continues, that the opportunity for new customers to enter the segment that, that as an absolute level, is reducing. But we're absolutely taking our share. We believe we took off-net 100% of the increase to the market -- net entries to the market in Q3. So we see a combination of that -- quality of the offer and good judgment on pricing is putting us in that position.

[Operator]

We will take our next question from Vijay Jayant with Evercore.

[Vijay Jayant, analyst]

Two for me, please. You're talking about a reduction in capital intensity going into 2019 to sort of the mid-'20s. Can you sort of take us beyond that? In the U.S., we see capital intensity in cable in the teens. Obviously, the economics are a little different in Europe. But as you see your rollout of these advanced boxes and the moderation of the new build, what is that number? How fast can we get there? Is it the high teens? That would be really helpful. Because it seems that we are sort of pivoting to a free cash flow growth story, and that's the key component of it. And second, obviously, the Dutch regulators ordered VodafoneZiggo to offer wholesale access to its network. I just want to understand what do you think the impacts are? What are the learnings from Belgium to have an impact in the markets?

[Michael Fries, executive]

Sure. On the capital intensity point, obviously, we have foreshadowed, as we just did this morning, that we believe we peaked and that going forward that capital intensity should decline. I'm going to not provide any specific numbers to you, Vijay. I'm sure you'd like them. Except to say that directionally, we think it's achievable without -- I mean meaningful impact -- without any impact on our ability to grow the business. And that has to do largely with the fact that over the last 3 years, as you would've noticed, we have raised our CapEx intensity considerably and spent meaningfully more in products, enablers and capacity in particular along with new build. And going forward, as we trim in those areas that we probably overinvested in, we think we can get the business to a much more traditional CapEx level. And next year, you will see that. I'm not going to give you specific guidance. We'll do that, of course, in February when we report our numbers for the full year, but I think you're spot on, on the free cash flow point and we believe operating free cash and free cash flow will increasingly be the metric that we believe we should be judged by and will be judged by. If you look at those growth rates going forward, they will be meaningfully higher than they have been in the past, and that should be a good new story for investors who want to know fundamentally that the underlying operating businesses are sound and profitable and are growing. And that is, I think, the right way to focus on the core business going forward, and we'll start providing more information around that beginning with CapEx, of course, and some guidance around that next year, so you can start to model it and make greater sense of it. In terms of the Dutch situation, it's a bit different than the Belgian situation as it relates to what exactly is required, the pricing and cost mechanisms implemented, what services we're obligated to provide wholesale access to. I will say, we are challenging that position on multiple levels in the European courts as well as locally in Holland. We believe that it's obviously unwarranted and unnecessary and we'll continue to push that case as long as we can. Sometime in the first quarter, we'll be obligated to provide the Dutch government with a cost model as we did in Belgium. And we'll see how it all unfolds. The lessons from Belgium are that if we can add customers from our competitors, in many instances, we're getting some benefits, obviously, the wholesale revenue benefits of that. So if you can add a couple of customers from your competitors, you really -- it certainly outweighs or equals the negative loss from the customers they may be taking from you. So if Orange can take customers from Proximus, that's a benefit to us. It would be similar, I imagine, in this particular market. We're not sure who wants access to these products in Holland, unclear, but neither Deutsche Telekom or Tele2 has even expressed an interest in these services, unlike Belgium, where Proximus and Orange are quite vocal about wanting access. So I think it's really too early to tell what the impact will be, whether it'll actually be implemented and what the impact on our business will be. I'll simply conclude by saying that the VodafoneZiggo venture has pretty robust plans going forward based on an improving fixed environment, an improving mobile, particularly mobile ARPU environment, and the ability to be the national converged player they are and the synergies kicking along with it. So it'll be one of the many things we layer into that long-range view of the business, and we'll probably have a lot more to say about it in the new year when the details are fleshed out. Today, it's all very theoretical.

[Operator]

We'll take our next question from Ben Swinburne with Morgan Stanley.

[Benjamin Swinburne, analyst]

Mike, just going back to your comments about Switzerland. Looking to get a sort of improving or lower declines in '19. If you've got a -- decompose that a little bit and help us understand how much of that is being driven in your mind by product initiatives, I know you're pushing your advanced set-top in that marketplace, versus the competitive dynamic hopefully getting less aggressive. Just any color to help us flesh that out. And then just taking up on the conversation you just had with Vijay. One of the big sort of hard parts on our end to forecast free cash flow for Liberty is around vendor financing cash movements. And year-to-date, continuing ops, I think, are free cash flow negative because of a lot of that -- those paid -- those repayments on vendor financing. And so I don't know if you can give us any color on how that might look in '19 on a net basis? Is that a free cash flow benefit or drag to continuing ops because it's pretty tough from our end to sort of get our arms around that piece?

[Michael Fries, executive]

Yes. Fair point on the free cash flow. Charlie, I'll let you work up an answer to that. On Switzerland, look, there are many things that are impacting or are have been impacting the business over the last 12, 18 months, right? We needed to get a better TV product into the marketplace. Our TV product, which was a legacy platform, was viewed by consumers as being inferior to Swisscom in particular, and even Sunrise. We also were being impacted by very aggressive pricing and discounts from our competitors, both in terms of the length of those discounts and sort of bounty prices, bounty offers. And we have fiber-to-the-home builds in many of our markets. We probably overindexed in those fiber builds, and that was impacting us, of course. And then lastly, we didn't have access to unlimited mobile. And in a converged market, when you don't have access to unlimited mobile, you're disadvantaged. If you look at what we're doing now and into the '19 period, number one, we've launched EOS and Horizon 4. I would argue, and Severina can add to this, the early indication is this is a killer product and viewed potentially even superior to all the competitors' products with the voice-enabled remote, the speed at which you can channel change, the access to content. So we feel really good about that rollout. We're already twice as fast on broadband as most of our competitors, but the 1-gig plan, I think, will be fuel and tailwinds to that. We recently launched some pretty successful back-to-school campaigns. We've seen increases in sales, and the kind of things you'd want to see from that. And then lastly, we're going to switch over to Swisscom platform in January from the Salt platform, which will give us access to an unlimited product. If you put all those things together with other internal changes we're making, it feels like the turnaround plan has legs. And we've been in this position before. It's not the first market we've had to turn around, the markets that move and are competitive in varying degrees from time to time. So as I mentioned, it's going to be a period that's required to bed down these initiatives, together with some digital initiatives. There's going to be a little bit of capital we have to put into place, but we're confident we can get the business back to growth and it'll take at least next year, for sure, to get all of these things working. Perhaps we'll be quicker about it, but I think we're trying to be conservative in terms of how we forecast the environment. It's -- Salt hasn't has a huge impact on any of us, so it's not an Italy situation where it's absolutely irrational. It's really, I think, blocking and tackling around the core products, and that is -- those sorts of things we'll give you greater detail on as we get into it and some more metrics you can measure the success of those initiatives by. But at this point, we're really just in the first inning, second inning of getting those things rolled out. Charlie, do you want to address vendor financing?

[Charles Bracken, executive]

Do understand, it has a complexity. I think it's a complexity that's good to shareholders because I do believe the free cash flow benefit, and I've rehearsed it many times, is of value to it. We try and disclose out very clearly what of our free cash flow comes from vendor financing and what doesn't which, I think, hopefully, puts us at best of class, certainly compared to some of the other practitioners of vendor financing. But in terms of where we go in 2019, I think you can assume that it will be -- there'll be limited growth in our vendor financing on our continuing operations. We clearly, in relation to the discontinued operations, the "debt" associated with that will pass across to, in this case, Vodafone. And then presumably they will refinance it or not as they see fit. But I think as you model the free cash flow growth of the business, I wouldn't expect material increases on the vendor financing that we currently have on the continuing assets. I think as Mike pointed out, perhaps an easier way to think about valuation maybe just to look at the EBITDA managed CapEx metrics, which I think as we signaled, we see quite a bit of growth coming go-forward as we reach the peak of the investment cycle.

[Operator]

And we'll take our next question from Daniel Morris with Barclays.

[Daniel Morris, analyst]

Another follow-up, Charlie, on the free cash flow. This time on 2018 rather than '19. Obviously, most of the free cash flow is going to come in Q4, and I just wondered if you could provide any color on the key drivers there? We've obviously got net vendor inflows, I suspect. Mike's already mentioned the associate dividends. We've got the intermediary part as well as discontinued cash flow, so any color you can provide or anything I've missed there will be helpful.

[Charles Bracken, executive]

I think the key will be the vendor financing. As you know, our vendor financing is very cyclical so I think you'll see the majority of the flow being reversed so that the outflows under the financing in the first half of the year and I think going forward, you'll see less volatility, particularly as we move to a smaller group. So you'll see that smoothing out, but that's more of for '19. Traditionally, Q4 is a very good free cash flow quarter for us for a number of reasons, not least, for example, in Switzerland, there's a massive prepayment by many of the analog customers that we still retain for a year in advance, and I think a similar thing applies in some of the other Continental European markets. So I think the fact that we'll see a major inflow in Q4 shouldn't be out of the ordinary as compared to historical years, and I think you hopefully will be able to, when you benchmark it, see that's a very credible evolution. So I'm pretty optimistic -- I'm very confident we'll hit the free cash flow target we've given you.

[Daniel Morris, analyst]

That's helpful. If I can just ask a very quick follow-up. Earlier, you mentioned that you were looking to bring down your average rollout cost of fiber in the U.K. And at BT recently, you held a fiber day. They're looking at the low end of their GBP 350 to GBP 400 rollout cost, you're obviously GBP 650 to GBP 700. Can you talk about what you're seeing that is bringing the cost down for you guys? And where that might go to? And I just wonder whether the passive access in the U.K. has any benefit for you guys at this stage?

[Michael Fries, executive]

I could add a couple of things to that and I'll let Tom or Lutz chime in a bit. Remember, in BT's case, it's an upgrade. It's not a new build. And there's a material difference between upgrade and new build. In new build, you're extending network to parts of a community where no network exists today. You're trenching, you've got all the civil works. It's just an entirely different build process. In an upgrade, you're pulling fiber, you're using existing infrastructure. There's a number of things that make that cost different. And we've endeavored to vet that more closely and understand exactly what they mean by it. But we're the only ones who have done this, folks. I mean, we've built 1.4 million homes collectively; the rest of the industry has built fewer homes than that. So we feel pretty good about what we've learned and where to focus capital and what it really takes to get it done. Going forward, we're smarter and smarter as we walk out territories, as we plan for build. We're much smarter about MDUs versus new build territories and being sure that we can design a build program year in and year out that optimizes capital. I think for us, every quarter, we're farther ahead of the competition in terms of doing that and I think we're also smarter about it. Last thing I'd say on that is, we -- you should see us -- expect us to be creative in this area. By that I mean, we know our new build program is generating meaningful returns. I'm guessing, and Charlie talked about this sometimes as well. I'm guessing if we took the Lightning Project off balance sheet, packaged it up for a private equity shop, it would get a massive valuation because we can tell you that the cumulative CapEx we've invested with the run-rate EBITDA we're generating, this is a highly profitable project in its own right, even if it weren't attached to us. So there's a reason why all these altnets are raising capital, people are excited about it. But I will tell you, we're the ones delivering, actually delivering returns today. And we will be creative and thoughtful about how best to optimize CapEx, but also to maybe partner in certain instances, find ways to ensure that we're ahead of the pack, but also optimizing the spend and the returns we get on that network build. So you should expect us to be agile and clever in that respect going forward, which should only be accretive to what we're doing. And what was the second question, I'm sorry?

[Daniel Morris, analyst]

You did actually cover it. It was just whether your local team wanted to add anything to that.

[Michael Fries, executive]

Yes, go ahead. Tom, or Enrique or Lutz. Welcome to add anything you choose.

[Thomas Mockridge, executive]

If I might just add the point that it's certainly not an apples by apples measure in terms of these reported build numbers. I mean you found a common definition here, certainly the financial team under Charlie here is very robust in the manner of the numbers we report. So we -- it's a pretty low cost they're reporting. I think you might have seen the Financial Times for the latest BT results announcement did dig out that the fact that -- of the homes built that BT reported, only roughly 1/3 of those were serviceable and that they still have a backlog of work to do on a number of the homes that they have reported as built. And then that's a matter for BT, not for us. But I think this makes the point that there's not a common definitional standard here, so I'd be a little wary of taking some of these numbers at face value. But certainly, we are fully loaded for the transparent cost basis.

[Operator]

We'll take our next question from Jeff Wlodarczak with Pivotal Research Group.

[Jeffrey Wlodarczak, analyst]

Mike, I just wanted to follow up on the last answer you gave in regards to the fact that you do sort of operate 2 separate cable companies. The new build, mostly in the U.K., utilizes a lot of capital but with higher growth, and your traditional cable nets. Have you all thought about breaking those out separately with the CapEx, EBITDA just to sort of highlight? Because I think it's difficult for people to sort of think of it as a company on a blended basis. And then Mike, how do you think things will change with Comcast controlling Sky, specifically in the U.K, but also across Europe, and it seems like one of the things they may be interested in doing is expanding to new countries, leveraging the wholesale access environment.

[Michael Fries, executive]

Yes. On the second point, Jeff, you all saw the remarks that Brian Roberts made in London a couple days ago. I think his basic message was they come in peace and it's hands off, which I think is the right approach because Jeremy and team have done a nice job of building the business. And I think it's smart for Comcast to take some time to understand what the implications are to the business and how to take advantage of what they've acquired. So I think it's going to be business as usual for the most part in the U.K. market, and you should expect Sky and Virgin to continue to be good, solid partners. The nice thing from my point of view is that I have a new avenue of communication and dialogue in Philadelphia. And I think if we have strategic initiatives, some of which you just now referred to, we will take those up at both levels. And I suspect we'll have some interesting conversations going forward. We do have some programming contracts coming up in a year, and then -- this summer and the following summer, so we'll have an interesting opportunity to engage with Sky and talk about the future and what we might be able to do, possibly together. In terms of the new build numbers, I think we have to be careful there. We do look at it internally. I can assure you that the Lightning Project is evaluated very scientifically in terms of how we break out revenues and customers and cash flows, and we'll continue to do that. It's a valid point, and let us consider in time how best to do that. I sort of implied we think it's very profitable and -- the NPV of this project is massive just because we see it, we know it. But it's a great point, Jeff, and we'll take that into consideration.

[Operator]

And we will take our next question from James Ratzer with New Street Research.

[James Ratzer, analyst]

I have 2 questions, please, following up, Mike, on comments you made during your opening remarks. Firstly, on cash return, please. I think you kind of mention post the Vodafone deal closing for it this could unleash an opportunity to shrink the equity. I mean, does that mean compared to some of your previous comments, you are starting to veer more towards considering a more material return of capital through buyback mid-next year? And then secondly, a question just on M&A. I think you also mentioned you felt no pressure to do anything strategic in the U.K. While I'd agree there might not be any pressure to do anything, it's just a question as would it be value accretive to consider doing something in particular using or owning a U.K. mobile operator?

[Michael Fries, executive]

Sure. I think on the issue of the Vodafone transaction and use of proceeds, certainly at these price levels, it would be an obvious decision to create -- it would unleash opportunity to reduce the equity, and that you should expect us to take very seriously and factor into our strategic decision-making. So I think that was maybe an obvious statement. But it doesn't mean we won't look at other value creation opportunities in 7, 8 months when we're at that point. But I think it's fair to say that, given where we are today and given the implied fundamental value we see in our stock, clearly, we would look at that. I mean, when we do the sum of the parts, folks, when we look at the implied multiples based on the close, these are screaming buys. So to be honest and consistent with how we philosophically looked at our business for 2 decades, it would be crazy not to be thinking about that and thinking about that aggressively. And if the rest of the market doesn't get it, that's okay, because we'll buy cheaper and they will, over time. And so I think that's correct, and I meant what I said, no question about it. In terms of the U.K., I also meant what I said, we are strategically complete in that market. I'm excited about what Tom and Lutz are working on. Lutz, in particular, has a program that he, in 8 weeks, put together to try to accelerate his growth in the consumer business. We see tremendous untapped opportunity in base management and fixed mobile convergence. The B2B business is steady. It is -- it looks more like a U.S. cable asset than anything we've ever owned in terms of its growth profile, in terms of its competitive profile, in terms of its future operating free cash and free cash flow profile. You can benchmark it, go ahead and measure it to Charter or anything you want. And so that is going to be going forward, the foundation of our storyline and should be, and there's no pressure to mess that up with a transaction. It doesn't need a transaction today. If a transaction presents itself, it's our job to look at it, of course. But I think it's important for you to understand we aren't working on anything, that the Virgin business as it sits today is strategically complete and that when I sit down with Tom and Lutz and we talk about the next 3 years, there's no M&A in those next 3 years. And there doesn't need to be. Of course, if something presents itself and it's massively accretive, we'll look at that. That's the nice thing about having capital and being opportunistic. And -- but sitting here today, not necessary, nothing in the works and that's a really good feeling for us and should be for you.

[James Ratzer, analyst]

Mike, just a quick follow-up and given your confidence, you were saying earlier, about the Q4, then free cash flow. I'm just intrigued then that you didn't choose to accelerate the buyback this quarter alone just using some of the proceeds from the Austrian transaction at this early stage?

[Michael Fries, executive]

Yes, fair question. I think we look at the buybacks, I think, pretty methodically and diligently. We have schedules that we stick to and sort of a matrix of activity that we stick to. Sometimes we're restricted, sometimes we're not restricted. So it's a bit of a -- you can't always be doing what you'd want to do, that's point one. Point two is the proceeds from Austria, we want to have in our back pocket as well. As we turn the corner into 2019 before any of our year-end results are announced, before we usually -- it's when we usually reiterate or increase our buybacks. We wanted to make sure we have that in our back pocket. But we'll see how we use it in the rest of the year and in the first quarter. I think you should -- whether it's $400 million or $500 million, these are big numbers that we're investing in relation to our free cash and our overall market cap, so it's all good.

[Operator]

We'll take our next question from Ulrich Rathe with Jefferies.

[Ulrich Rathe, analyst]

So 2 questions. The first one is on the RGU adds in the U.K. They were very strong, as you say, again for the second quarter. But I do notice that more than half of the RGU adds in the third quarter were actually from telephony. So I'm just wondering why that is? What sort of activities are behind that, given they're quite a lot higher than the broadband net add or for the TV net add separately? So I mean, things like are they standalone net add or do they add to sort of broadband-only subscribers, or what is really behind this? And the second question is, if I may, on the VodafoneZiggo cash return. Last quarter, the guidance was the high end of EUR 600 million to EUR 800 million range, saying above EUR 700 million. That is not necessarily incompatible, but I'm just wondering could you just sort of clarify why you changed that? Is there something going on that sort of lets you nudge down the expected upstreaming at VodafoneZiggo? Or is this simply a different way of writing the same thing?

[Michael Fries, executive]

Sure. On the voice RGUs in the U.K., really 2 things happening. One, there's a much heavier emphasis on triple-play subscribers, both in the Lightning footprint and in the base. Part of that's enabled by Voice over IP or are accelerated and really now completed Voice over IP projects so that we have greater access to VoIP services in a greater part of the footprint. That's really what's happening there and that's a good new story. In terms of VodafoneZiggo EUR 700 million, Charlie, you want to address that?

[Charles Bracken, executive]

There's nothing sinister going on, we obviously just tightened the range. I think the answers were landing around EUR 700 million, within the guidance. I really wouldn't read anything kind of sinister into that. They just -- I think they got more precision around the number.

[Operator]

And we'll take our next question from Matthew Harrigan with Buckingham Research.

[Matthew Harrigan, analyst]

Two questions. One, Netflix is really just kind of a benign benefit for your broadband business today, but when you look at the advent of some of these national champion OTT services, something like ProSieben and Discovery with Eurosport and [ Salsa ] in France. Do you think that's something that is going to be a different animal than Netflix in terms of the influence on your business? Or are they just basically another app or feature on Horizon 4? And then secondly, on the -- you've got a very dislocated stock price, you've got a massive amount of money coming in, in relation to your market cap and you've been very agile in the past in things like Dutch auctions and I think some of these loan entities and you've even done some forward purchases. Is there anything you could do right now on the derivative side on the conditional forward purchases or something? I know with the amount of capital you have coming in, it's very difficult to deploy, but with your stock at this level or a little higher, I appreciate this layers somewhat into the UPC Austria question, but it just seems like a shame that you can't do more at this level.

[Michael Fries, executive]

On the OTT point, listen, I think we, like everybody, are evaluating both the quantity and quality of OTT press releases and services that are out there in each of the markets. In Netflix, YouTube, they sort of stand apart in terms of over the top video platforms. They have great prominence in our networks and great prominence on our boxes and they will continue to. We continue to talk to Amazon also as a potential app in our environment. You should expect that, that's a normal conversation for us to have. In other apps that look to have traction, we'll also consider whether they make sense or not. It's a difficult business model for national OTT services, whether they be in Germany or in any marketplace. But we have the luxury of picking winners. I'll go back to what I said many times, which is we believe that being an aggregator of both linear on-demand and over-the-top content for consumers with devices that are slick, easy-to-use, fast, powerful and work across multiple platforms, TVs, mobile devices, iPad, that's a great place for us. And with a very -- with a video base that's growing in the U.K., for example, not shrinking, with increased investment in our video platform in terms of V6 boxes rolling out and ultimately the Horizon 4 UI rolling out in the U.K., we are in a great position to not just retain customers but be the go-to platform for their video consumption both in the home and out of the home. So I think the European market is -- it's highly fragmented, it's highly complex, it's much more complicated than the U.S. to build scale and grow scale in the OTT space, and that suits us. That gives us a great opportunity to be the aggregator of those services and we'll continue to do it. In terms of what we may or may not do going forward on buybacks, I'm not going to mention anything here. You correctly point out, there's lots of tools, there's lots of opportunities to look at it. Suffice it to say, you should expect, since we're some of the more sophisticated players in that space, that we're looking at all things. And when we have something interesting to talk about, we'll let you know. But we remain committed to that strategy in principle, and in the fourth quarter, we'll update you on what we've been doing. I'll close it out here and just make a couple of quick points. One is, on the Vodafone deal, we believe it's on track. This whole FCO move was totally expected. This is -- there's nothing surprising about it. It's normal and ordinary. And we and Vodafone, of course, have a very strong view about it as we believe the commission does as well. And the commission isn't generally excited when it gets interfered with, so to speak. But I wouldn't view that as any particular milestone here that was unexpected, quite the opposite. That was always in the cards. And we've been prepared for it and it would have been more surprising if they hadn't done it, let me put it that way. And Virgin, look, we're pleased with the progress in the quarter. We're excited about Lutz and the energy he is bringing to the consumer business. It is the foundation of our cash flow and growth story going forward and you should be paying attention to it, and it sounds like you are. On the continent, we've got profitable free cash flow assets and fortunately for us, some really interesting opportunities in all 3 markets to create value for shareholders. I can't be more specific than that, but in conversations, we can get into it and you should be able to think about that. And then lastly, look, we're focused on value creation and we're disappointed like you, days like today we announce great results, stock wobbles, what can I tell you? Except that we're focused on creating value in the long term. That's what I'm focused on, that's what John Malone is focused on, that's what our board's focused on and we welcome shareholders who want to part of that journey. So have a great day. Thanks for joining us. Take care.

[Operator]

Ladies and gentlemen, this concludes Liberty Global's Third Quarter 2018 Investor Call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global's website where you can find a copy of today's presentation materials.