Liberty Global PLC

NASDAQ:LBTYA

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Liberty Global Third Quarter 2022 Investor Call. This call and the associated webcast are property of Liberty Global and redistribution, transmission, rebroadcast of all the calls or webcast in any form without the expressed written consent of Liberty Global is quickly prohibited. At this time, all participants are in a listen-only mode. Today's formal presentation materials can be found underneath 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 statements regarding the forward-looking statements. Today's presentation may include forward-looking statements within the managing of Private Securities Litigation Reform Act of 1995, including the company's expectations with respect to its outlook and further 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 recent 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 the conditions on which such statements is based.

I will now turn the call over to Mr. Fries.

[Mike Fries, CEO]

Great. Thanks, operator, and welcome, everyone. We appreciate you joining us today for our third quarter results call. We've got a lot of ground to cover, so as usual, Charlie and I will deliver some prepared remarks, and then we'll get the rest of the team engaged in the Q&A.

I'll just remind you that we'll be referring to a slide presentation, which is available on our website and has a fair bit of useful data, so hopefully you can grab that while we're speaking. And I'll kick off on Slide 3 with what we believe are the five key takeaways from the quarter.

First of all, as you all know, we continue to experience a challenging macro environment in Europe today with record inflation, higher energy costs, rising interest rates and volatile currencies. So while unemployment remains low and central banks are clearly taking action in our core market, it's pretty clear that GDP growth forecasts are coming down, and we remain cautious about the macro outlook for 2023.

Now despite these factors, our business continues to perform well, which is consistent with what we experienced in prior periods of economic dislocation. Our operating companies provide an essential service for individuals, households, schools and businesses, and we don't see anything on the horizon that will change the demand for connectivity. In fact, we only see it increasing over time.

Our Q3 results reflect this trend, with subscriber volumes and revenue largely stable to growing across the group. We'll drill down these results in a moment. And we also saw a significant improvement in EBITDA growth in the quarter in three of our four markets, as Charlie will expand upon the positive benefits from synergies, cost controls and price rises more than offset the impact of wage increases in energy costs where we're fully hedged for 2022.

And third, we're making excellent progress on our fixed to mobile network strategies across the footprint. Our fiber plans are advancing in the U.K, Ireland and Belgium, and 5G coverage is increasing in every market. More on this in just a minute.

And fourth, we remain firmly committed to our buyback plans, with $1.7 billion or about 14% of our outstanding shares repurchased this year and a minimum commitment to buy back 10% of our shares next year. Now, our confidence in this strategy is emboldened by the widening gap between public and private values, our free cash flow profile and the strength of our balance sheet. On the latter point, it's worth repeating that all of our debt is siloed, long term, fixed rate and currency hedged, and we're sitting on a large cash balance. So not surprisingly, we believe our capital structure is a huge asset in this environment.

And then finally, we're confirming all of our original guidance for 2022 at the operating company level, and importantly, our distributable cash flow guidance of $1.7 billion at Liberty Global.

Moving to Slide 4. We're presenting here our usual chart on connectivity trends in our big four markets. There's always quite a bit of data included, so I'll begin with a couple of general observations.

First of all, as you glance at the numbers, you'll see that we delivered stable performance in Broadband, that's the orange segment of the bar chart, with growth in the U.K. more than offsetting flat to slightly down net adds in Switzerland, Belgium and Holland. In line with these historical trends, Broadband sales picked up in the third quarter sequentially and year-over-year, supported by back-to-school promos, but we also saw elevated churn due to price rises, and in the case of Sunrise, the phaseout of the UPC brand. Meanwhile, it was a good quarter for Postpaid Mobile, which saw improved growth trends versus Q2, supported by the iPhone 14 launch in September and converged FMC offerings across the group.

Now looking at each market briefly, Virgin Media O2 delivered a sequentially better quarter in Broadband with 19,000 net adds despite a highly competitive backdrop and cost of living challenges. We estimate our share of gross adds was up for the quarter, bringing our national market share to a new high. And we continue to see good growth in our greenfield areas, what we have historically called Lightning, which bodes really well for our network build plans going forward.

In U.K. mobile, we had our best quarter of the year on postpaid ads with 47,000, supported by our best-in-class churn. And we now have 1 million customers taking our converged Volt product which offers double data, WiFi guarantees and average broadband speeds of over 400 megabits per second.

We're proud of the fact that every second home in the U.K. is a customer of ours, but there's a long way to go. Average service penetration is around 1.5 products per customer, so Lutz and the team have a lot to play for.

And turning to Sunrise, broadband performance was stable on a sequential basis. Swiss broadband market remains competitive with higher promotional activity, and we continue to experience some added rotational churn as we phase out the UPC brand. More positively, yallo, our digital first service, is performing really well, and André is seeing good inflow on the new Sunrise portfolio and strong speed uptake, including 1 gig services.

In Swiss mobile, we saw good performance across all the brands with 42,000 postpaid net adds, roughly in line with Swisscom, and helped by the Sunrise rebrand and our back-to-school campaign.

In Holland, VodafoneZiggo's broadband net adds remained negative at 9,000, slightly worse than Q2 as a result of intensified market competition. On the positive side, churn was stable year-on-year despite the price rise in July, and MPS has improved. [John] and the team remain focused on the broader customer experience, with 1 gig broadband now available to 93% of our footprint, smart WiFi pods and almost half the homes.

Mobile postpaid adds in Holland were strong at 67,000, better than KPN, by the way, and supported by the higher uptake of converged SIMs, the best NPS in the market and our successful runner campaign.

I don't have much to add to Telenet's results which John Porter released last week. Overall, the Belgian fixed market continues to see low growth, with Telenet bedding down the price rise from June and holding broadband subs flat in the quarter. On the other hand, mobile postpaid adds were the highest of the last four quarters, driven by our ONE(Up) bundles and [summer] web deals. And looking forward, Q4 is always a big sales for us, especially in mobile, and we have strong campaigns underway now and approaching in each market.

Slide 5 provides a breakdown on our revenue growth. This is the first time we've shown you this sort of data, but we think it helps illuminate some key top line growth trends. So before jumping into the numbers, I'll just highlight the pie charts at the bottom of the slide. The main goal here is to illustrate the diversity of our revenue growth mix, with Consumer Fixed at roughly 30% to 50%; Consumer Mobile, including handsets, at around 20% to 45% depending on the market; and B2B Fixed and Mobile, between 20% to 25% of revenue.

On the numbers above these charts, at the top, show Q3 and year-to-date revenue growth figures for each of these segments by country with a bit more granularity around Broadband and Mobile Service revenue. So rather than dive in each opco, I think it's easier just to make a few big observations here.

First, as you'll see along the top, all of the opcos have generated modest revenue growth in the third quarter and year-to-date with the exception of VMO2, which was negatively impacted reduction in handset sales principally, some lapping of B2B contracts and competition in Consumer Fixed.

The second big takeaway is that the Consumer Fixed business, that's the next line down, has been declining in all big four markets. And with both headwinds and tailwinds appearing here, on one hand, as you know well by now, we are generally losing video and voice RGUs like every mature market, albeit at a slower pace than the U.S.

By the way, video today only represents on average around 15% of our total revenue. At the same time, however, we are growing in broadband, arguably our most important product and roughly 50% of our Consumer Fixed revenue. In some cases, like our VMO2 broadband revenue is growing as fast as 6% to 7%.

The third big takeaway is that our Consumer Mobile business is strong, growing low to mid-single digits. And when you strip out Handset revenue, which is zero margin and more volatile quarter-to-quarter, the trends for Mobile Service revenue are even stronger, supported by both postpaid additions and price increases.

And then finally, you'll see that B2B is a consistent growth engine as we challenge market share from a relatively low starting point, usually 10% to 30%. B2B revenue growth is averaging mid to even high single digits except in the U.K., which had exceptional growth a year ago from some backhaul contracts.

When you stand back from the chart, there's a lot of green numbers here, with Fixed Consumer Revenue as the only outlier really. And on that front, we have clear strategies to manage our Video base from both a profitability and penetration perspective while we drive Broadband share and Broadband revenue. And of course, both Mobile and B2B are consistent sources of revenue growth.

Now in support of this growth in Broadband, Mobile and B2B, we've been heavily focused on our network strategies in each market, and we summarized the latest updates for Fixed and Mobile on Slide 6.

So starting with Fixed on the left-hand side, even though we have the largest 1 gig network in every market today, we're committed to expanding that leadership position and we're making good progress on our announced fiber plans in the U.K., Ireland and Belgium. VMO2 is on track to add 500,000 greenfield homes in the U.K. this year, and we'll carry that momentum and that build engine into our recently-announced and fully-financed fiber JV, which is targeting an additional 5 million to 7 million greenfield homes.

The second part of that strategy, of course, is a cost-efficient upgrade of our existing HFC network to 16 million fiber homes, which is on budget and on track. We're taking a similar approach in Ireland, which is targeting 200,000 homes out of 1 million upgraded to fiber by year-end, and just announced its first wholesale agreement with Vodafone. That's a big milestone.

At the same time, we've entered into a network access deal with another operator that extends our fiber footprint reach to an additional 450,000 homes on top of the million. And Telenet is making great progress on the recently-announced NetCo with Fluvius, focused on building fiber to 78% of Flanders with DOCSIS to the balance.

And then just a quick update on our mobile networks summarized on the right-hand side of the slide, we're making strong progress on 5G across our footprint with coverage ratios driven by spectrum availability and other factors. You'll see that Switzerland and Holland are nearly 100% 5G today and among the best mobile networks in the world, while the U.K. and Belgium are a bit further behind, but that's due to slower spectrum availability and market conditions. Actually, we're expecting 50% coverage of the U.K. in 2023. And as you might expect, we're focused intently on the next wave of innovation in mobile, in particular, ORAN, 5G stand-alone and mobile private networks.

And finally, I'll end my bit on Slide 7, which provides an update on capital allocation. And we talk every quarter about the intrinsic value of our company relative to our public market cap, and regardless of the methodology you use and regardless of whether you look at EBITDA, operating free cash flow or free cash flow, the value gap is substantial.

And many of you on the call today get that, I know, and nearly all of the analysts covering us have a buy reading on the stock. And while we want nothing more than to see that value recognized in the market, in the meantime, we have been aggressive buyers of our own shares. This slide illustrates our commitment in a number of ways.

First, on the bottom left, you can see that since 2017 and inclusive of this year, we've purchased $12.5 billion of stock or approximately 50% of the shares outstanding, and we're committed to acquiring another 10% of the shares next year in 2023.

Also on this slide, for the first time, we've translated our buyback activity into a yield concept to help make the relative value point. When you look at it this way, from 2017 to 2021, we returned an average annual yield of 11% to shareholders, and that number will be 14% in 2022. That's simply taking the buyback amount and dividing it by the average market cap for that period. Now, this buyback yield compares to an average dividend yield for our European peer group of around 5%. And is, we believe, a superior approach to shareholder remuneration both in quantum and structure.

As I mentioned earlier, we've done this while maintaining a rock-solid balance sheet, which is a huge asset at times like these. On the right side of the slide, we summarize those key data points, again, each of which is worth calling out. First, we are sitting on significant cash, down denominated cash principally of around $4 billion on a consolidated basis with $3 billion at the corporate level, and even more liquidity. And we've shown great discipline in the allocation of this capital, focusing on buybacks, opcos and ventures, and mostly funded through free cash flow.

And second, our debt position is very secure with no near-term refinancings or floating rate exposure, an average cost of capital of around 4% and a 7-year average life. And importantly, all of our debt is siloed, meaning there's no debt at the parent company, and it's hedged into local currency of the operating company.

And then finally, we're able to complete three key financings before the debt markets closed, raising over $9 billion in new capital on really good terms for our U.K. fiber JV, our Belgian NetCo JV and our recap of VMO2.

So just to wrap it up here before I turn it over, despite macro challenges, we are reconfirming our original guidance across the board. That's a pretty strong indicator of our ability to deliver in difficult times. Our connectivity trends are solid and support a diverse and growing mix of revenue, while synergies, price increases and cost controls are helping us deliver strong EBITDA growth. We're committed to the right balance of FMC related innovation and network investment to ensure we maintain and expand our leadership position, and our approach to capital allocation and buybacks is unwavering, supported by our free cash flow profile and a strong balance sheet.

Charlie, over to you.

[Charlie Bracken, EVP and CFO]

Thanks, Mike.

On the next page, we provided a summary of the revenue profile in our four key markets. Overall, we've managed to deliver revenue growth in three of our four markets amidst challenging market conditions. Despite some pressure in fixed, price adjustments in Benelux were supportive and mobile grew strong.

VMO2 reported a modest decline in overall revenue, with declines in consumer, B2B fixed and low-margin handsets, not fully offset by strong mobile growth. I'll give more color on this in the next slide.

In Switzerland, strong mobile momentum and growth in B2B more than offset the pressure from lower consumer fixed revenues. Lower fixed line revenues were driven by changes in ARPU mix and softer fixed volumes relating to the phasing out of the UPC brand last quarter. This impact will likely continue in Q4 as we reposition the UPC subscriber base.

And in the Netherlands, we saw a return to revenue growth, supported by a strong performance in Mobile and B2B, coupled with the July price rise benefit in Fixed. The main pressure remains in Consumer Fixed, where the market remains very competitive. The strongest revenue growth we've seen in Belgium this quarter, driven by their mid-June price rise of nearly 5%, higher roaming revenues and strong ICT delivery.

On the next slide, we provide some detailed analysis of our U.K. revenues. Overall revenue declined 0.6%, but the key drivers of that decline are lower sales and our lower margin and largely variable cost products such as handset sales and video, where like the U.S. cable operators, we continue to slowly lose subscribers. And it's important to remember, TV profitability is materially lower versus broadband. And increasingly, we're able to drive more variable content costs in this space.

We also continue to lose our fixed telephony customers as we have for many years. And Mike has highlighted earlier that the core high-margin broadband business is actually growing very strongly, but it helps explain why underlying consumer fixed revenues were down 1.6%.

Our B2B revenues from large fiber contracts are also very lumpy, which can stall ] the underlying growth rate. For example, in Q3 last year, we had significant fiber sales that weren't repeated this year. These connected circuits remain a growth business, but the phasing of these larger sales can vary quarter-to-quarter.

If you strip out these lower-margin products and those B2B fixed revenues, underlying revenue growth was actually positive at 1.4%. This performance was supported by an outstanding mobile service revenue evolution of more than 4% year-on-year, which saw further acceleration in Q3 as the April price increases continue to flow through and postpaid volumes kept growing.

Moving on to our adjusted EBITDA performance in the quarter, VMO2 delivered accelerated EBITDA growth of 8%, but this did include a $35 million legal settlement one-off. Excluding this one-off, growth will be approximately 3% lower. This performance was driven by synergy execution and price rises, with MVNO migration set to contribute more savings in Q4. $18 million of OpEx cost to capture was included in EBITDA this quarter.

Sunrise saw EBITDA decline 2.3% as tailwinds from the MVNO synergies faded combined with a weaker fixed ARPU mix. Other drivers of this decline included increased acquisition and marketing costs, which were partly offset by labor synergies. EBITDA included $6 million of cost to capture in the quarter.

As implied by our continued guidance for flat EBITDA growth in 2022, we expect a relatively tough fourth quarter, giving ongoing pressure in fixed and lower synergy tailwinds. VodafoneZiggo saw a return to EBITDA growth of 1.3%, which was driven by strong cost control and support from price rises in fixed despite headwinds from inflation, in particular, energy. And Telenet reported strong EBITDA growth of around 5%, driven by price rises and continued cost optimation offsetting energy headwinds.

Turning to our capital allocation slide, we continue to be on track relative to guidance across the four key opcos in terms of capital intensity. Excluding the cost to capture investments in the U.K., our CapEx to sales for the nine months year-to-date remained around 20% of sales and modestly below in the case of Sunrise.

We expect a pickup in capital intensity in Q4, as you've seen historically. But overall, we expect to meet our CapEx guidance for the group and our core markets. On a consolidated basis, our CapEx split remains around half on Product & Enablers and CPE, and the other half on Baseline, Capacity and New Build & Upgrade.

And lastly, turning to Ventures. The fair value of the portfolio fell slightly to $3 billion, driven primarily by declines in the ITV share price, while our Technology and Infrastructure valuations remained stable quarter-on-quarter.

Moving to free cash flow and the key drivers. Year-to-date, we delivered $979 million of full company distributable free cash flow. The third quarter, as usual, saw relatively higher interest payments offset by higher overall dividends, including $49 million from Virgin Media O2 along with $267 million coming from our share of the recapitalization and $58 million from VodafoneZiggo in the quarter. And we remain on track to deliver $1.7 billion of distributable free cash flow for the full year 2022 at the original guidance FX rates.

Turning to our guidance. Today, we are reiterating all OpCo guidance across the portfolio following a resilient performance during the quarter. We're on track to deliver our group guidance of $1.7 billion of distributable free cash flow for the year, excluding the impact of FX, and we continue to execute on our buyback commitment of $1.7 billion in 2022, having bought back 73 million shares year-to-date.

And today, we actually have 459 million shares outstanding compared to around 900 million at the end of 2016. As Mike mentioned, we'll be executing on at least another 10% share buyback in 2023, so you should consider that a floor for the next year in terms of what we might do. And to that point, our balance sheet position remains strong with $4 billion of consolidated cash at the end of the quarter, of which $3 billion is at the group corporate level.

And with that, operator, I'm handing over for Q&A. Thanks.

[Operator]

[Operator Instructions] The first question comes from the line of James Ratcliffe with Evercore ISI. Your line is now open.

[James Ratcliffe, Evercore ISI]

Hi, thanks for taking the question, a couple, if I could. First of all, just when you think about the impact of a higher rate environment, can you talk about any impact on your thoughts around capital structure, the appeal of debt retirement, target leverage, the appeal of holding a large cash balance, and also whether this affects your use of vendor financing?

And second, Mike, you mentioned TV and video and that's a declining business in terms of profitability. Can you give us a sense of what the profit margins on video look like versus, say, broadband? Thanks.

[Mike Fries, CEO]

Sure, hey James. I'll let Charlie work up an answer to higher rates, but just preface that answer by saying we're fixed rate across the group. So higher rates in terms of our existing balance sheet don't impact us directly at all, it's only refinancing should we need it, we don't, or M&A, which we're not commenting on. So, but he can work up a more specific answer to that. On TV margins, they vary by market.

They are low, but they're not as low as perhaps Charlie implied. Meaning that in broadband, we're generating 99% margin, TV could vary on a gross margin basis from 75% to 50%, depending on what we're paying for content and in what market we're paying for that content. So it's not B2B, it's not broadband and it's not voice, which is very, very high margin. Because it does have direct costs associated with content and content acquisition and spend, but it's still positive margin.

That - I think sometimes, we refer to the - to a broader definition of profitability on TV where we start to include the cost of the box. But of course, the devices themselves are becoming less expensive, more powerful, more IP-driven streaming devices. So the good news is, what I meant in my comments was that we're doing a lot of things on the technology side to drive the overall rate of return, if you will.

The rate of return on capital from this business down by making the, devices themselves very inexpensive for consumers. So we need to maintain that revenue stream even if it's small, because we do know that consumers in the U.K., for example, have told us - without a video product, they would be less interested in our broadband product, which is one of the advantages we have, of course, over every altnet in that market as we're offering an FMC converged bundle with video.

And it does matter to consumers that you can offer them some sort of video solution, whether that's an all-in box like an X1 box or Xfinity to draw a comparison, or whether that's more of an IP first, digital first box, app first box like our TV stream box in the U.K., which really drives you to streaming services. So having a solution for video is critical. Charlie on rates?

[Charlie Bracken, EVP and CFO]

So I think, I'll just echo what Mike said. I think we're very comfortable with our ratio of four to five times. We have an average life of seven years, so we don't have to do any refinancings. If in seven years' time, rates are materially higher, it will depend a lot on - and I think we've demonstrated we have the ability with the underlying businesses of Broadband and Mobile to pass through inflation.

So I would be very - I would expect us not to change our four to five times our guidance. I think in terms of vendor financing, just to reiterate, vendor financing is just a tool to optimize your working capital. We shouldn't be forcing our vendors to lend us money for 90 days if we can organize it for them in a people way. It is not material to our cash flow metrics. It just - it is a tool we use to optimize our cost of capital for our vendors and our supply chain.

In terms of the excess cash, I think the most important point is all our businesses, even with all the things that are going on in the world, are broadly speaking, positive free cash flow and/or significantly positive free cash flow. So that corporate cash number that we talk about, I mean, that is clearly free and clear for capital allocation, and Mike said, we think our stock is cheap.

And/or for if we can find acquisition opportunities that are even better than buying our stock which looks hard today, then obviously for that. But I don't think there's any – Mike you should comment, but there's no imperative to hold that size of cash at the parent.

[Mike Fries, CEO]

Certainly not from a leverage point of view, I think it's more of just being opportunistic. And we think this environment - and the reason we say that cash is an asset in times like this is you don't know what the next six to 12 months will bring for competitors, for peers, for opportunity. And so, we want to stay in a position where we could take advantage of that, if necessary. But netted against our debt, obviously, is a good thing if you're looking at net leverage, so.

[James Ratcliffe, Evercore ISI]

Great, thank you.

[Mike Fries, CEO]

Next question operator, thanks James.

[Operator]

Thank you. The next question comes from the line of Sam McHugh with BNP Exane. You may proceed.

[Sam McHugh, BNP Exane]

Thanks guys. Just to follow-up on Switzerland, question Switzerland bank. You mentioned Q4 might be a bit tough still on the rebranding, so if you could give a little more color on how far through the UPC migration you are, and therefore, how we should think about kind of cable ARPU declines in the next few quarters and also the KPIs? Is this just a Q4 thing, or do you have a bit more in early 2023?

And if I can, on the balance sheet, you mentioned the cash. Should we be thinking about interest income as a half decent offset to some of the FX hedges you've done, I think you've had about $40 million this year? You could earn a bit more on interest income [indiscernible]. Thanks very much.

[Mike Fries, CEO]

Sure. André, do you want to tackle the rebranding issue?

[André Krause, CEO, Sunrise UPC Business]

Yes, sure can do. So in fact, we have consolidated our commercial brands, UPC and Sunrise, into one commercial brand that we are using for new customer acquisition, which is now the Sunrise brand, and that has already happened at the end of May. Since then, of course, we have, if you want, less distribution surface for the acquisition of new customers. In fact, we have been able, in the last two quarters or 1.5 quarter.

We accelerate our inflow of new customers on both mobile and fixed. On mobile, we are already outperforming our previous levels, so that is working very well. On fixed, we are slightly behind previous levels, but we are expecting to ramp up on that as we go along. Now the other question, of course, to the migration is while we have now a fully-focused Sunrise portfolio, we still have a number of UPC customers on old products.

And those will be it's over the years to come, so we're not expecting that we migrate all of the customers onto the new products within one quarter. It's other journey that will probably take around two years. And the ARPU pressure that we are seeing is mainly driven by the lower, if you want, front book prices compared the base situation that we have, in particular on the UPC side.

Now giving an outlook, it's a bit premature at this moment in time because we have just started our ratio initiatives and are learning as we go along, so I think we will have a more stable outlook in the upcoming quarters. But overall, I think the situation is quite well. I think we're very happy with the fact that the new Sunrise brand is really embracing most of the growth opportunity in the market.

Mike mentioned that there is some rotational churn that we are observing, which I would say is a bit of an operational floor at the short-term, but we are working full speed on mitigating that. I think we are going in the right direction.

[Mike Fries, CEO]

Charlie, do you want to address the cash?

[Charlie Bracken, EVP and CFO]

Yes, yes. So you're quite right. We're going to get some cash income, happy days. Actually, all our cash is - corporately, it's broadly speaking, in dollars. So you should be looking at the corporate cash yield. And obviously, we've been getting very little at the beginning of the year, and now we get towards the end of the year, it's much higher.

So you can do the math as well as I do. But we have these SMAs we are getting pretty good yield pickup, so there will be a reasonably material number next year from net interest income. And it will depend on the rate of the buyback, how that plays out in terms of how much we get.

[Sam McHugh, BNP Exane]

Super, thank you both.

[Mike Fries, CEO]

Operator, yes.

[Operator]

Thank you. The next question comes from the line of Nick Lyall with Societe Generale. You may proceed.

[Nick Lyall, Societe Generale]

Thanks very much. Hi guys, just a quick question on VodafoneZiggo, please. It looked like the - I think from what you said, like the churn was static, with maybe the gross adds weak this quarter again despite some pretty aggressive promotions. So could you just discuss how competition is hitting? Is there a big difference between gross adds on the broadband product in fiber areas and non-fiber - obviously, the competition is fiber and non-fiber areas?

Do you see quite a big distinction, in other words, it's just fiber hitting you hard? And second one, if possible, just on the VMO2 chart, you talked about passing through inflation. Do you think you can pass to inflation in the same way in 2023? You've seen a few operators starting to break mainly MVNOs. Do you think - is that something you're thinking about for 2023 as well or thinking about the cost in it? Thank you.

[Mike Fries, CEO]

Listen, I'll just hit the VMO2 question quickly to say that we're not going to discuss today what we may or may not think of doing around price increases, just premature. You do point out understandably that while we don't know what inflation will be at that time and certainly other operators have T&Cs where they can't take CPI or RPI Plus, we're just not in a position today to talk about it and we're still working through that.

On VodafoneZiggo, we've got Ritchy on, who I'm sure can address this more comprehensively. But we've been competing with fiber in the Dutch market for some time. This is not a new experience for us. KPN's been building fiber for over a decade. And so we have pretty good experience, pretty good track record on what happens, how quickly and how we win back and level out competition in fiber areas.

But go ahead, Ritchy, if you want to provide any further color there?

[Ritchy Drost]

I think it's fair to say, Mike, that once fiber becomes available nearly in an area, you see a small uptick in the churn mostly in the first six to 12 months because it attracts new customers, simply because there's choice. But at the same time as the commercial offers on the fiber side expiring, you also see a lot of customers coming back for various reasons, but the most dominant one is that video platform in VodafoneZiggo are extremely rich. And at the same time, it's all about the experience, which you give with the fiber connection versus HFC connection, and our strong WiFi proposition is attracting a lot of customers.

So we do see a small uptick, then after six to 12 months, you also see customers coming back on the back of expiring contracts. I think it's a promising thing.

[Nick Lyall, Societe Generale]

So pretty similar after the 12 months, you've been pretty similar between the two types to competition out there?

[Ritchy Drost]

There's always -- if there's more choice available, customers consciously make a choice on who to pick in terms of the operator. I think the main point I'm making is that clearly, let's say, comes back after the promotional period is that the customers are actually going for quality, which we offer. We are the best network in the Netherlands from a fixed perspective. Independently measured, so it's not personal opinion.

And secondly, it's all about the experience. And then fiber versus HFC doesn't change the WiFi experience. And I do believe we have a stellar WiFi experience with the puck box, with the smart WiFi apps and all the sales service around it.

[Nick Lyall, Societe Generale]

That's great. Thanks very much.

[Operator]

Thank you. The next question comes from the line of Georgios Ierodiaconou with Citi. You may proceed.

[Georgios Ierodiaconou, Citi]

Yes. Good afternoon. Good morning and thank you for taking my questions. Maybe the first one is a follow-up on Switzerland. And André, you mentioned the integration process. Your main competitor last week highlighted that in the areas where Salt is offering fiber, there seems to be a bit more pressure, let's say, on the KPIs. I just wanted to perhaps get an understanding of how you're thinking about the integration given that over the next few months, Swisscom definitely sold more and is likely will have a much bigger fiber footprint on which to market our products, and whether that puts any pressure perhaps to accelerate the migration process? Any thoughts on that will be great.

And then my second question is on pricing environment in the Netherlands. And I guess across Europe, there's going to be a lot more inflationary pressures next year than this year. Just curious to hear from you whether you believe you will be able to accelerate revenue a lot more? Obviously, there's been a lot of promotions recently, whether you believe those will not be as common in 2023? Any color on that. Greatly appreciate it. Thank you.

[Mike Fries, CEO]

André, do you want to address Swisscom comments around Salt , and I think the issue around -- I wasn't quite sure I understood the question around fiber access? Swisscom still hasn't been building aggressively given uncertainty around their fiber rollout plans, but go ahead and address that, André?

[André Krause, CEO, Sunrise UPC Business]

Yes. Swisscom has in the meanwhile probably built around 400,000 lines, which are currently not marketable as they are built in point-to-multipoint. And with the decision that they took now to rebuild them into point-to-point and with that to comply with the request from [BECO], they can bring them to market as soon as they have done the rebuild. Now I don't think that this is an immediate thing to happen. It requires quite some technical investment and change in the already 400,000 built homes, so will not be immediate.

When it's happening, yes, it's true, then we will have more competition in that footprint. But the difference between us and Swisscom is also that in that footprint to the vast majority, we are already today offering 1 gig services on our HFC footprint. Such, the impact on us is quite less than what the impact on Swisscom is. Nevertheless, of course, there's also some pricing pressure that comes to the equation. But we also, with our second brand, yallo, which is also selling this expanded footprint, the HFC solution. We have also a good second price to compete well.

So yes, we would expect that there is some competition increase to happen as soon as the rebuild has happened. However, I don't think that the impact is as [marked] as it is with Swisscom, given that we have access to the HFC network already today.

[Mike Fries, CEO]

And Ritchy, we're not saying much about pricing for next year either in Holland, but if you want to add any color on?

[Ritchy Drost]

Not really an answer because we're not going to comment on it, although the fact that the terms and conditions cater for CPI-related price increases. But that's not immediately saying we will increase prices. At the same time, it also doesn't mean we're not going to do that. It's just a topic we're not commenting on.

[Operator]

The next question comes from the line of Carl Murdock-Smith with Berenberg. You may proceed.

[Carl Murdock-Smith, Berenberg]

Hi, thanks very much. Mike, you're clearly frustrated at the share price, given what you said on the slide. With that in mind, I wanted to ask about the buyback, and why you haven't sought Board approval to pull forward the 2023 buyback given where the share price currently is? And meaning, we will kind of have two months now before next just buyback kicks off. So I just want a bit more color around that, this decision-making.

[Mike Fries, CEO]

Sure. Well, I mean, we haven't announced anything today, and we haven't necessarily indicated that we won't do anything today. So I think we're just, first and foremost, reinforcing the commitment we've made for 2023. We've talked about the $1.7 billion, which, of course, started the year at $1.4 billion. So you should assume that when we say 10% minimum, it is generally a minimum. If market conditions are such that we would seek to increase that buyback, we would likely do it.

And in terms of the next, what is it, 60 days, well, we're leaving our options open. We haven't said anything publicly, but we'll see what the market provides, I guess, is the way I would answer that. We think the commitment we made in '22 of $1.4 billion, raising that to $1.7 billion was great for shareholders.

And we look forward to buying more stock in the future. And certainly, based upon the commitment we made around 10%, you should assume that as a minimum. When we start those purchases, how rapidly we make those purchases is generally something we don't discuss, and that's more of a retroactive, retrospective update. So that's what I'd say.

[Carl Murdock-Smith, Berenberg]

Okay. That's great. One follow-up, if that's okay, just on the wholesale deal mentioned in Ireland. Obviously, that is a big step forward, announcing a wholesale deal there. I was wondering if you could provide any update on your confidence in terms of signing wholesale deal in the U.K. at some point?

[Mike Fries, CEO]

Well, as Lutz has said many times, we're in conversation with everybody. We're just getting started in our fiber activities in the U.K. We started upgrading the 16 million homes. We haven't announced any numbers, but I'm pleased, we're all pleased with the progress we're making on that upgrade. And we're just getting organized, seeking final regulatory approval for the fiber JV with Infravia, but that will hit the ground running.

So we've got quite a bit of activity in front of us to get those upgrades and those networks to a point where they can offer wholesale, and those conversations continue with all parties. So I mean, nothing to announce this quarter, but you should assume we're in conversation with everybody.

And the last point I'll make is that the upgrade of the 16 million homes when we announced it was never dependent on a wholesale deal. I'll just say that we approved the capital, which is about GBP 100 a home, on the basis of its relative cost of DOCSIS for as well as it, we think the benefit to the B2C and B2B business over the long term.

In that context, a wholesale deal would be gravy. But obviously, the new JV to build out 5 million to 7 million would seek wholesale deals, and we have nothing to announce this quarter.

[Carl Murdock-Smith, Berenberg]

That's great. Thanks very much.

[Operator]

Thank you. The next question comes from the line of Luis Lecaroz with Credit Suisse. You may proceed.

[Luis Sanchez-Lecaroz, Credit Suisse]

Hi, thank you for taking my questions. I have two, please. The first one is on energy and wages into 2023. Several of your peers that have reported already indicating significant headwinds from energy price increases and wages renegotiations into 2023. Can you give us some color on how you are seeing these two elements impacting each of Liberty's regions into 2023?

The second one is on the U.K., specifically on the consumer fixed business. Your fixed line ARPU is deteriorating sequentially this quarter despite a 6.5% price increase that was announced early this year. When you look at the KPIs, you have rolled out 330,000 new lining premises so far this year, yet the Fixed and Broadband net adds year-to-date look a little bit weak compared to last year. I would be interested in understanding what are the competitive dynamics that you are seeing this quarter, and particularly if you are facing increased pressure from fiber over business in your existing footprint? Thank you.

[Mike Fries, CEO]

Okay. Thanks. Charlie, do you want -- I'm not sure what we're saying publicly about energy and wages. Other than that, we're -- we think we're 70% hedged on energy going into 2023, but I don't believe we've provided much color around or quantified the impact of that on our business. We're also largely completed with our wage negotiations. But go ahead, Charlie. Let me now -- let these guys know what we're seeing…

[Charlie Bracken, EVP and CFO]

I think we're going -- on the energy, you're right, Mike. We have locked in a lot of hedging for next year, which may or may not being a good thing because as you want -- energy prices have dropped. So I think some of the markets will benefit in that because we are planning to, broadly speaking, get fully hedged on the fixed price, at least on the energy cost 23% by the end of the year. So we'll give you an update on that in Q4. Obviously, encouraging that prices are going down, and it obviously makes the return on capital from some of the renewables investments a bit more attractive.

But you should assume that we have certainly been hit versus our original assumptions by the Ukraine war in terms of energy this year, and some of that will certainly spill over into next year. And then I think -- Mike, I don't think we've said an awful lot about the exact numbers, both on energy and indeed on wages. There's still lots of moving parts. We'll give you an update on that in February, I guess, for '23.

[Mike Fries, CEO]

Lutz, do you want to address the U.K. question?

[Lutz Schüler, CEO, Virgin Media]

Yes, sure. So I mean, in terms of fixed customer net adds, right, 12,000 broadband net adds, 19,000 this quarter, so the market is smaller. We explained this to ourselves because during the pandemic, there was a bigger growth in the market, and now, there is smaller growth coming to the market. Our relative market share, so the share of gross ads in the smaller market, has increased. Therefore, we are able to continue to release positive growth here.

And also on the acquisition pricing, because the market is smaller, it is a promotional market. So that means also that the acquisition prices compared to a year ago are something like GBP 1.5 lower than a year ago, yes? So there's more competition, market is smaller, but I think we get more than our fair share out of it.

In terms of ARPU, your observation is right. As we have put through a 6.5% price increase. I think what you could also see out of Mike's and Charlie's presentation is that customers are looking for ways to optimize their monthly spend, yes. And I mean, the monthly spend on average with us is broadly GBP 50, so it is up on the attention of the customer. And so where they predominantly optimize is in mid-tier video, Pay TV video, right?

So not premium Pay TV, such as Premier League or Formula One, more the mid-tier stuff, and also fixed voice. And therefore, we have pressure here while we are growing pretty strongly in underlying fixed broadband. But as Charlie said, the margins here are lower, and we are sitting also partially on variable content cost for exactly these mid-tier video. So therefore, the underlying EBITDA growth is also supported out of a better gross margin here. I hope that helps.

[Luis Sanchez-Lecaroz, Credit Suisse]

It does. Thank you.

[Operator]

Thank you. The next question comes from the line of Jerry Dellis with Jefferies. You may proceed.

[Jerry Dellis, Jefferies]

Yes. Good morning. Good afternoon. Thank you for taking my question. I've got two questions, please. In relation to the spin-down effect that you're seeing within the U.K. TV business, is there a sort of a commercial strategy that can help to arrest these headwinds as we go into next year? Or is it predominantly now a matter of cost management? And if it is a matter of cost management, then what would be the immediate actions that you think you would be able to take on a fairly short time scale?

And the second question, if I may, is I remembered that in the past, you used to give us some data on adoption rates of your broadband services in the Lightning areas. And I just wondered if it was possible to give an update on that, please? Thank you.

[Mike Fries, CEO]

Yes. go ahead. Go ahead.

[Lutz Schüler, CEO, Virgin Media]

Yes, sorry. I mean, on the first one, and maybe I should have mentioned that before, right? Of course, we have strategy to really get back to growth, and this is convergence. So right, I mean, I think it's a good success that only after -- one year after we launched Volt, every one of our fixed broadband customers have now fixed the move with us in our superior bundle. But there are still lot of fixed customers who don't have mobile with us, and mobile customers who don't have fixed with us.

So therefore, the year '23 for us is the year of convergence, and so we absolutely want to accelerate that. That means customers have higher ARPUs and lower churn. And also next to that, obviously, we are building our digital capabilities. So understanding, Mike said it at the beginning, every second household is a customer of ours in the U.K. So we capture all the data to understand the customer better, and we have built a machine that allows now to digitally offer the right product at the right time to the customer. So this is absolutely the name of the game.

Having said that, there is huge opportunities for further cost savings in this company. And I think one I mentioned before, more and more, we are able for the - these mid-tier Pay TV content to get to variable content deals, which then puts us in the position to be not so much bothered about that.

And obviously, the synergies help as well, right? I mean, we are - we have delivered now or we are on the way to deliver 30% of the run rate synergy end of this year. We are well underway here, and it's only 30%, so that means 70% to come. So therefore, I think we are in a good position, high level, but as a living crisis pushes us not to change the strategy, but to now shift gears and turn even faster into the convergence game.

[Mike Fries, CEO]

Yes on your second question, I think we're not providing that detail, sometimes we do, sometimes we don't. But it hasn't changed materially with respect to new build and business as usual. I think we are largely flat, but business as usual, marketplace, and most of those net adds came from the lightning territory. But those numbers move both directions. Sometimes we're adding customers in BAU and less customers in lightning.

But we're not going backwards on BAU we're still either flat to slightly up depending on the quarter. And then the adoption rates around so there is a two-player, triple play, did that move materially. I mean, I think there are about a third, a third, a third, for the most part, Lutz. And - but a small movement to one or the other can have an impact in a quarter over a period of time.

So I think we're just seeing a bit more - so less or broadband-only customers lately, which is driving a slightly lower ARPU. And so customer mix fluctuates but does have an impact on ARPU.

[Lutz Schüler, CEO, Virgin Media]

Yes, sorry, I forgot to answer that. Thank you. I think, I mean, the last thing to comment is, I mean, it's absolutely important to understand that our lightning penetration stays on the same level, right? So we are not getting to lower penetration. Sometimes also now where we expand our network, there's another fiber network. And even then, we get to the same penetration.

And I mean, if you compare our penetration, the run right at the end in the steady state after three years, you get to close to 30%. Compare this with any odd net in this country, right? So it's a - I think it's very strong achievement, and so far, we are able to keep this.

[Jerry Dellis, Jefferies]

Okay, thank you very much.

[Operator]

Thank you. The next question comes from the line of Matthew Harrigan with Benchmark. You may proceed.

[Matthew Harrigan, Benchmark]

Well, thank you. Mike I think you alluded earlier [O-RAN] for the first time. I'm curious if you could put that in European context? I mean, you're less far along in 5G. Does that actually refer some advantages because you don't have as much legacy infrastructure, or do you see it as a big cost saver? Do you have advantages in your international footprint? Does it do a lot for your flexibility on the business services side with mobile? I just love to get more broader view on that? Thanks.

[Mike Fries, CEO]

Yes. I mentioned it along with a few other things that we are excited about with our 5G rollout. I would say we're -- I'll let Enrique jump in here. I'd say we're early, early days on O-RAN as are most operators Matt. We're watching and learning. There's multiple approaches to O-RAN, there are clear advantages to O-RAN, but you've got to do it in a, I would say, a careful and thoughtful way.

We're not ripping anything out as such, and we're not building from scratch like Charlie and others. So we have to be thoughtful about when and how we implement, but we think there's opportunities there. Enrique, do you want to add anything there?

[Enrique Rodriguez]

Yes, I just would emphasize that given our legacy and existing radio networks, we will likely be using a number of solutions. And in 2023, you will see us at trial some these solutions in several of the countries as we set the strategy on rollout of O-RAN. But it is extremely important for us when you look at 2024, 2025, 2026.

[Matthew Harrigan, Benchmark]

Thanks Mike, thanks Enrique.

[Operator]

Thank you. The next question comes from the line of James Ratzer with New Street Research. You may proceed.

[James Ratzer, New Street Research]

Yes, thank you very much indeed. So a couple questions from me. I mean, maybe just sticking with the last question on mobile. But on the top line trends, I mean, mobile over the last few quarters has been getting increasingly strong as a part of your business. I was wondering if you could just talk a little bit more about how sustainable some of those trends are?

I mean, to what extent is Q3 being boosted by roaming? Is there the potential for future price up in that segment where at the moment, it seems like with lower prices, it's easier to land price rises in mobile then in fixed. I mean, is that a fair conclusion?

And secondly, just in the last few days in the U.K., we've heard about Equinox 2. It'd be interesting to get your response to that and how you think it might affect your both your existing business and maybe the new joint venture within Infravia? And might you consider actually any legal challenge against it? Thank you.

[Mike Fries, CEO]

Listen, on Equinox 2 in the U.K., like everybody else, we're waiting to see what it really means. And we're confident that regulators will evaluate it in the context of its impact on competition and network development, so we don't have much to add to the commentary there. We're really waiting to see what it all means. And when we have more information, we'll certainly comment. At this point, it's not really impacting how we see the market because we just don't have enough data.

But I'm sure they'll make that data clear in the next couple of months, and we'll know more, I think, early part of next year, maybe sooner. On mobile, I'll ask anyone to jump in here, but I'll simply say that you have to remember, and you would know this, James, mobile ARPUs have been eroding for a decade. And as you identified, are relatively low today. And so, it's easier to see sustainable ARPU growth and service revenue growth when you're starting at such a low level in Europe.

And whether it's roaming or pricing, contractual price increases or just demand for connectivity, I think it is sustainable, this growth in mobile service revenue, I think our peers are showing and saying the same things. And it's one of the tailwinds that we identified, quite frankly, early when we decided to combine with mobile operators or acquire mobile operators that we thought this was a revenue stream that had probably reached a bottom.

And it had lots of tailwinds and opportunities to grow and thrive, and we're seeing that take place. So we're pretty bullish on that. Anyone else want to talk about mobile revenue in their markets?

[Lutz Schüler, CEO, Virgin Media]

No, I mean, I can - I think what I can add from the U.K. perspective is that, as Mike has said, right, it's now a step change in the industry. And my personal view is it is driven by 5G. So right, I mean, customers have roughly 30% usage increase year-over-year used to pay less and less. I think we are building now, right, a great new infrastructure with 5G, and I think the industry has managed now to invite the customer also to pay a bit for this high usage.

And as you also have said, we, as Virgin Media O2, we only apply this price rise through the airtime, which is a relatively small amount, and therefore, the sensitivity we have seen is pretty low.

[James Ratzer, New Street Research]

Okay great, thank you.

[Mike Fries, CEO]

Is that it, Rick, do we, operator

[Mike Fries, CEO]

Great, all right. Well listen, thanks for joining us. Sorry, we went over a couple of minutes. I always appreciate your questions and your feedback and input. Just - we really think that we're managing well through these difficult times, and whether it's our connectivity trends or our revenue or EBITDA growth that we're demonstrating, again, that we can perform well when times are tough.

And that's, I think, one of the hallmarks of this industry and we're certainly demonstrating that. And we'll continue on our network investment strategies, we'll update you on those regularly. And we think, we're in a fortunate position on our balance sheet with our cash position, and we look forward to both acquiring more stock, but also finding ways to be opportunistic with that capital. So thanks again, and we'll speak to you next quarter. Take care.

[Operator]

Ladies and gentlemen, this concludes Liberty Global's third quarter 2022 investor call. As a reminder, a replay of this 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.