Liberty Global Ltd (LBTYK) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's Full Year 2017 Investor Call. This call and the associated webcast are the property of Liberty Global, and any redistribution, retransmission or rebroadcast of this call or webcast in any form without the expressed written consent of Liberty Global is strictly prohibited.

(Operator Instructions) Today's formal presentation materials can be found under the Investor Relations section of Liberty Global's website at www.libertyglobal.com. (Operator Instructions) As a reminder, this call is being recorded on this date, February 15, 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. Also, please note that nothing stated on today's call constitutes an offer of any securities for sale.

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

Thanks, operator, and welcome, everyone, to our fourth quarter results call. We have a lot to cover today, and we always enjoy these opportunities to share with you what we've achieved but I think, more importantly, give you a sense of what we're up to today and where we're headed.

I'm joined on the call by Charlie Bracken, our Chief Financial Officer, who's going to review our financial results, as he always does; along with a host of other senior execs from around the world, who I'll ask to chime in on issues during the Q&A as needed. We are going to speak from slides today. I hope you can grab a copy of those now or later. There's a lot of good data on there.

And I'm going to start on Slide 4, where we lay out a handful of operating and financial highlights for 2017, a year where we not only delivered some solid growth, but perhaps even, more importantly from our perspective, laid the foundation for sustainable long-term operating success and value creation for shareholders.

Now I'm going to run through some stats on the left-hand side as we do every year. We expanded our fixed subscriber base ending with 45.8 million video broadband and voice RGUs, and that excludes mobile. It increased to 760,000 net RGUs year-over-year, and I'll break that number down by country in a moment. But the big takeaway for me, and hopefully for you, is a continued improvement in video losses, which were 30% better in 2017 than 2016 and represented almost twofold improvement over 2 years ago.

So it's clear that our ability to retain 99.5% of our video subs every year, whatever the number is, is directly correlated to the evolution of our video platform, our Go apps, our user interface, our footprint expansion. It's all working from our point of view.

On the financial front, rebased revenue growth was 2.3% for the full year or $15 billion. That's up 3% in the fourth quarter alone, and that was our best revenue growth quarter in 2 years, driven in large part by the 4.5% revenue growth we experienced at Virgin Media. Rebased OCF growth was 4.5% for the full year or $7.1 billion. And as we indicated last time, the fourth quarter and the full year were impacted by Switzerland negatively. And if you exclude that one market, our fourth quarter and full year OCF growth would have been 6% in each period. And Charlie and I will dig into Switzerland in a couple of slides here.

Our CapEx or PP&E for the full year was $4.8 billion or 31.7% of revenue. Again, you'll see how that breaks down in a few slides, but hopefully it's clear to you that we are purposely investing capital into long-term sustainable growth. This level of spend is not the new normal for us. Many of you have asked that question. We are choosing to lean into our customers for all the right reasons, and we're being offensive and smart about our capital spend.

So how are we doing that? I think first, we're driving broadband capacity and quality of service across the platform. That's the most important thing we can do. We're opportunistically expanding the reach of our networks through high-return new build projects. We've talked a lot about that. The new build projects alone represent about 1/4 of our CapEx, so that's clearly a discretionary spend.

We're making discretionary investments in new products, like Horizon, and we're rolling out next-gen digital boxes and 1 Gbps WiFi routers at a record pace. And every quarter, we get deeper into fixed-mobile convergence, which we know drives churn down and drives NPS up. And then perhaps most importantly, we're investing in the digital tools like advanced analytics, AI-based applications, better call center processes, the things that we know will ensure we're retaining customers and growing ARPU.

And then finally, on this slide, on the right-hand side, you'll see that we continue to demonstrate what we believe is an unwavering commitment to value creation for shareholders. And this might be what sets us apart the most. We promised to create a pure-play European platform. With the spin-off of Latin America, we've now done that.

We talked all year about rebalancing our business to focus on a national scale, so trying to be an inch wide and a mile deep in our core markets. And the sale of Austria, obviously, is evidence of that strategy.

We've talked about the disconnect between public and private market values, clearly the multiple of 11x in Austria helps make that point. And then lastly, our prudent approach to balance sheet management, the $5 billion of liquidity we have all support our levered equity growth model, the biggest feature of which is, of course, is commitment to owning more of our stock with $3 billion of buybacks completed last year and another $2 billion already announced this year.

So we remain focused on 3 key strategic goals. They should sound familiar to you: first, driving national scale through both smart rebalancing and footprint expansion; second, investing in profitable customer growth through network and product innovation; and then third, optimizing our levered equity returns for the benefit of shareholders. That's a pretty strong combination, in our view.

Now on Slide 5, we start digging into our 2017 results in a bit more detail, beginning with subscriber growth. In the top left, you'll see again that we've added 760,000 RGUs for the group, split almost equally between the first half and the second half, with the primary difference being slightly higher video losses in Switzerland and Germany in second half. And I'll address that.

Now Virgin Media generated 336,000 net adds. That's up 34% over last year, with pretty modest growth in the fourth quarter. The good news is that we were much more disciplined in the fourth quarter and strategic about discounting in order to retain ARPU, which clearly worked for us. Churn in the fourth quarter was also the lowest of the year and rental ARPU was up sequentially, so as a result of the price increase and our discounting activities. That sets us up really well for continued growth in 2018.

You'll see in the top right that we added 229,000 RGUs in Germany, which was slightly weighted to the second half of the year. We saw a 40% sequential uptick in the second half for data and voice add, and that is not abnormal for us. That's pretty typical. But total net adds were impacted by increased video churn in the third and fourth quarter from the loss of an MDU contract, but also from the analog switch-off initiative, which impacted churn. And we've got both of those things under control, as a matter of fact.

On the bottom left, Central and Eastern Europe generated 266,000 new RGUs for the year, 70% of those in the second half. And as we added video subs, we turned things around in Poland, and we penetrated our new build footprint. Telenet in Belgium lost 54,000 RGUs in the year, about the same in each period. And all of that, almost all of that's related to open access. But as a reminder, there's a silver lining; Telenet largely breaks even economical on the access regime in Belgium, provided that for every Telenet sub we lose, Orange also adds a proximate sub to their wholesale deal with us, and that's basically what's happening.

Lastly, you'll see that the Swiss and Austrian business went from a positive 8,000 net adds in the first half to a loss of 26,000 in the second half of the year. And as we signaled and have been signaling for the last 6 to 12 months, the Swiss market has experienced some pretty intense competition in both fixed video and broadband. And like we did in the Netherlands, we're in the midst of transitioning and investing in our business with new sport services, smarter bundles and a popular fixed-mobile product.

But I want to point out that Switzerland is really not Holland from our perspective. There's a big difference. For starters, there's only 3 mobile operators there today, not 4. And the challenger has an inferior network, and I think Swisscom is largely a rational competitor and has been for some time. We're in a strong position here across the footprint. We have a superfast broadband network that reaches 2/3 of the market. By the way, we just doubled speed this week for half our broadband sub base in Switzerland. And on top of that, we have very high OCF and free cash flow margins, which presents some interesting strategic options for us, as we've discussed.

Turning to Slide 6. As you know, we're in year 3 of our Liberty GO plan. And as we've done from time to time, we've highlighted here on this slide progress on a handful of those key drivers. But we haven't included our new build initiative on this slide, which is arguably our largest source of future growth, because I'll talk about Project Lightning in a minute. But we do talk about 4 other big drivers.

So I'll start with pricing on the top left, and the good news here is that we have been able to successfully take price increases across our footprint, pretty much without exception. And in 2018, we've already announced price increases in most markets, including Germany, Switzerland, Ireland and certain of our CEE countries. But on the other hand, as we've also communicated throughout the year, both competition and discounting have been impacting ARPU growth, especially in the U.K. and Switzerland. So while ARPU was up around 1% for the company as a whole year-over-year, we were flat at Virgin Media for the year and down nearly 2% in Switzerland.

Of course, the U.K. has turned a corner, as I've kind of indicated, and is back to ARPU growth. And I'll cover that in a minute. And Germany and Belgium were both up 3%, so it's a mixed story there, but one we continue to work on.

Certainly a bright spot for us has been B2B. On the top right, you can see some numbers there. We have completely hit the mark here, we believe, and continue to generate double-digit top line growth with 13% growth in the fourth quarter.

What's driving this? First of all, SOHO and SME, which now represent together just under 50% of our B2B revenue. They each grew 27% and 10%, respectively, last year. And there is still significant upside in market share across Europe. Two other quick observations, Germany B2B revenue growth was up 50% for the year, and that's mainly on the back half of SOHO and SME. And Belgium, one of our most mature B2B businesses, was up 21% in the year as Telenet added an MVNO customer to the mobile business.

Now turning to mobile. There are, as usual, some headwinds that we're battling, but also some really encouraging trends, and I'll go back and forth on both. For the full year, revenue was down 1%, but the top line improved every quarter, so from a negative 8% in the first quarter to a positive 5% revenue growth in the fourth quarter. Mobile revenue in Germany, in Switzerland, in Central and Eastern Europe, where we have just launched really MVNOs, well, we're up 30% and 50%. And that's really, of course, from a low base and is organic.

Virgin and Telenet, which account for 90% of our consolidated mobile revenue, were down around 1% and 7%, respectively, last year. While they both added postpaid subs, ARPU was impacted by competition and continued regulatory headwinds, as we've discussed. But Virgin had a strong fourth quarter with revenue up 17% on the back of higher handset sales and added bundle usage. And both markets have some really positive drivers in 2018. Virgin in the U.K. will benefit from the transition to a new full MVNO with EE, which provides 4G, greater control over pricing and bundling and better economics; while Telenet will complete the migration of all mobile subs to the base platform and is going to generate the lion's share of synergies in that period. So good news in both cases.

Finally, on the bottom right, we highlight the fact that we have executed very well on the efficiency plan that we set out for ourselves. I'm particularly proud of the fact that we finished another year with flat indirect costs, steady at $4.5 billion, and that's despite all of our new build product and commercial activity through the year. And these are largely scale-based efficiencies around support function, central cost and our T&I operating model. And as an example, you can see in the callout box that most, or if not all of those savings in central support functions were invested back into customers in terms of both products and marketing.

So to recap. New build, cost efficiencies and B2B are all contributing to grow. Mobile is showing some positive sign as we continue to migrate to truly converged services and better MVNO deals. And we're committed, perhaps more committed than ever, to ARPU growth, especially in the U.K., which is a great transition to the next slide, where we talk about some operating updates for Virgin Media, which is our largest, and as you know, our most valuable operating business. And it ended 2017 on a very strong note.

First, let me address the announcement about Dana, Dana Strong, who'll be joining Comcast at the end of March. Listen, I can't say enough good things about Dana, who I've worked with for nearly 2 decades. And while we're certainly disappointed to see her leave, we all understand the motivation. Comcast is a great company, and after 18 years outside the U.S., I think Dana and her family are excited to get back to her home state.

Over the last year, I think this is most important, she's done everything we've asked of her at Virgin Media. She's built a fantastic team of marketing and product executives. They've implemented the tools and processes we need to grow the base and the ARPU, and they've overseen an aggressive rollout of new products. You can see some of the team's good work on the top left of Slide 7, which shows the step-up in revenue from the 1% to 2% range through the first 9 months of the year to 4.4% in the fourth quarter, and OCF growth increasing from 1% in Q1 to over 5% in Q4.

At the same time, the mobile team on the ground has done some terrific work, adding postpaid subs at a record clip in Q4. In fact, we doubled our market share of Apple products in that quarter and also driving mobile churn down with 4G and SIM-only offers. They're also, by the way, preparing Virgin for a full-on rollout of converged FMC products later this year.

So when you add in continued improvement in Virgin's network and product quality, where broadband congestion has been addressed, where we just rolled out a 350 Mbps product nationwide. You add to that V6 boxes being rolled out and 1 Gbps WiFi routers being rolled out at a record pace, and we think Virgin is in a really strong market position.

And I'll end my remarks with a quick update on Project Lightning, our fiber-based new build program in the U.K. First of all, I'm really proud of the progress that we made through the course of 2017, especially on the construction front. It's night and day from where we were 12 to 15 months ago.

We have a first-rate leadership team. And we have much greater control over the pace and cost of the build at every level, from planning to working with contractors to managing local authorities. And you can see that on the chart on the top right. It really tells the story the best. We've now built and released 1 million homes for marketing, including 536,000 in 2017. That's up 70% from the prior year. And it was ramping in each quarter, as you can see.

Now we're not providing guidance for 2018, but I think it's fair to say that we like this general pace as we go into this year, and we're still targeting 4 million homes over the over -- through the overall project time frame.

Now our confidence in Project Lightning is due in no small part to the fact that we continue to perform well on the key KPIs that matter most. And you can see in the bottom right that customer penetration rates are trending towards our longer-term goal of 39%. We're generally hitting 24% after 1 year and 34% after 33 months.

Also, ARPU is in line with our overall base ARPU after discounts, currently around GBP 50 per month. And build cost, importantly, build cost to date has been steady around the GBP 650 per premise mark with some variance depending, on whether we're doing infill or greenfield. And of course, that number will also vary going forward depending on the start-up CapEx, but also depending on the timing of wayleaves. Remember that in the denominator of that GBP 650 per premise mark, we don't include another 10% of homes that we built, but haven't yet released for marketing because of wayleaves. So -- but that number arguably is a bit overstated, looking backwards.

Now many of you have asked for an example of project return from Lightning. And on the bottom left, we give you some data, some high-level data, which should look familiar to you. Now this assumes we never build another home in the U.K. and simply market to the 1 million premises already constructed and already released for marketing. Now assuming we hit the 39% penetration number and the ARPU aligns with the existing base at GBP 50, those 1 million homes will generate about GBP 230 million of revenue. If we use a conservative range for an OCF contribution margin of 50% to 60%, we ought to generate annual OCF of between GBP 115 million to GBP 140 million on that cohort. Now when you do the math, this should generate unlevered IRRs in the 25% to 30% range.

So I think it's important to note that while in the short term, as we build out new communities with this fiber-based infrastructure, our CapEx spending is rising. But over time, we expect to return to normalized CapEx levels just as we start to really see the OCF growth profile increase. That's the nature of this project: spending today for reservoir growth tomorrow, and so far that's what we're seeing. And you'll see that kick in, in 2018.

Now I'll make one last point before handing over to Charlie. There has been, as you've probably seen, some press speculation and even some announcements, about what we may or may not do going forward in Europe. And I'm not going to comment specifically on any of that. But I want to make one thing clear. We are not "dismantling" our European business, as 1 paper noted; quite the contrary. In today's competitive world, scale matters more than ever, and we are committed to the core markets we're in, where we see a pathway to becoming a national champion.

Now consistent with this strategy, we have a pretty good track record of accretively rebalancing our business from time to time. Those who have been investors would know that. And that allows us to focus on what we do best: innovate, invest, compete and build scale and grow. And the sale of Austria, UPC Austria is really just the latest example of that.

So Charlie, over to you.

Thanks, Mike, and hello, everyone. I will look into our full year financial results, and then provide some color on our segment performance and property and equipment additions. And then finally, I will conclude with a high-level recap and our 2018 guidance targets.

So I'm on Slide 10 now, where we present our full year financials. Now in terms of our top line performance, which you can see on the upper left, we grew our rebased revenue by 2.3% to $15 billion last year. This included 3% growth in Q4, which was our best quarter result in 2 years. And I will get into some of the key growth drivers on my next slide.

On the OCF front, we regenerated rebased growth of 4.5% to $7 billion, with our cost discipline continuing to be a key driver, and that's a point I will elaborate on later. Our 2017 P&E additions increased to $4.8 billion or 31.7% of revenue as compared to $4 billion last year. And more on that in a minute, too. However, our increased new build activity and our commitment to next-generation CPE were the main drivers for the year-over-year increases in both absolute terms and as a percentage of revenue.

Moving to the bottom left of the slide, adjusted free cash flow was $1.6 billion in 2017. From a leverage perspective, our consolidated adjusted gross and net debt ratio stood at 5.1x and 4.9x, respectively, at December 31. We made great progress during 2017 with $24 billion of refinancings that extended our average tenor to nearly 8 years, while our blended, fully swapped borrowing costs was reduced to 4.2%. Finally, we repurchased $400 million of our stock in Q4, bringing our full year total to $3 billion of buybacks.

Turning to Slide 11 and our segment reporting, on the far left, we show our rebased growth for the overall company, including both our fourth quarter and full year results. Moving to the right of Virgin Media, our operations in the U.K. and Ireland posted rebased revenue growth of 4.4% and 2.1% in the Q4 and full year periods, respectively.

The Q4 result was our strongest quarterly performance in 2 years, supported by an improvement in our mobile business, in large part driven by handset sales as well as solid growth in B2B. As expected, in Q4, Virgin Media's ARPU grew 1% sequentially from Q3 as the November 2017 price increase took effect.

Unitymedia delivered 4.3% rebased revenue growth for the full year, while rebased OCF grew 4.9%. Now bear in mind that we switched off our analog signal in June and lost around $7 million of carriage fees in each of the third and fourth quarters. And we will have a similar headwind during the first half of 2018.

In Belgium, Telenet posted 1% rebased revenue growth in both Q4 and full year 2017, mainly driven by strong results in B2B in large part offset by mobile headwinds. Telenet's rebased OCF increased 6.1% in 2017, benefiting from the continued migration of legacy MVNO customers to our own mobile network.

Moving to Switzerland and Austria, we reported relatively flat rebased revenue results in each of the fourth quarter and full year periods. The 8% rebased OCF contraction at [chat] in Q4 was largely explained by increased content costs related to the launch of MySports in September last year as well as competitive pressures.

After considering the distribution fees that we received from other cable operators, our MySports programming costs were approximately CHF 10 million in Q4 and CHF 14 million the second half of 2017. And as we mentioned on our last earnings call, we expect the net expenses associated with MySports to be around CHF 30 million in 2018. And it's also worth noting that the Q1 and Q4 impacts will be higher than the Q2 and Q3 periods, primarily due to the timing of the Swiss ice hockey schedule.

Our Central and Eastern European segment posted 5% rebased revenue and OCF growth for the full year, supported in part by new build activities across the region. Rounding out our segments, we continue to streamline our cost base, reducing our central and corporate expenses by approximately 11% over the full year period.

And then finally, on this slide, taking a step back, the vast majority our operations have been executing at a high level, with the outlier clearly being our business in Switzerland. But when we look at our results without the drag from Switzerland, we're pretty pleased with our performance.

On Slide 12, we provide a bit more color on our P&E additions, which we categorize into 5 main buckets: CPE, new build and upgrade, capacity, products and enablers and baseline expenditures. The key point that I will address is the level of our capital intensity, which stood at 31.7% for the full year of 2017.

Prior to 2015, when our new build efforts began ramping, we were able to execute on our levered equity strategy by growing OCF with a lower capital intensity. More recently and into 2018, the operational dynamic has shifted somewhat as we have been increasingly investing in the customer experience, while pursuing an extensive network expansion program. And this has been reflected in our increased capital intensity.

As you can see from the table, spend on new build and upgrades increased by 24% in 2017 and represented nearly 8% of revenue. And as Mike illustrated earlier, we do believe that our new build program is establishing a reservoir of future growth, with meaningful contributions to OCF expected to begin this year.

In the first line of the table, we detail our customer premise equipment category, or CPE. Growth in CPE of 27% was partly related to new build volumes, but also reflects our decision to proactively increase penetration of next-generation platforms. Today, over 40% of our video and broadband bases have an advanced TV set-top box or WiFi Connect box, and we'll continue to aggressively upgrade our customers in 2018. Similarly, we'll continue to invest in our networks to ensure that our customers experience first-class connectivity. We spent over $600 million on capacity investments to improve reliability and meet the ever-increasing demand for broadband data consumption.

The next category is products and enablers, which increased 28% year-over-year. This spend allows us to develop enhanced functionality and a more robust product suite for both our residential and B2B customers. And then finally, we had a modest increase in our baseline capital spend, where we've been proactively choosing to accelerate certain investments in core areas of our infrastructure.

So in conclusion, we continue to invest heavily across all P&E, or property and equipment classifications. But once our new build program subsides, we would expect to see our capital intensity to fall back into the low 20% of sales.

Slide 13 wraps things up. And to summarize, we are focused on continued subscriber, ARPU growth and top line growth. We remain committed to new build, and expect to see a much more meaningful OCF contribution this year and beyond. B2B continues to achieve double-digit revenue growth, and we expect strong growth to continue in 2018. And from a cost perspective, we have delivered on our promise of keeping our indirect cost base flat.

On balance sheet, we will continue to term out the average tenor of our debt, hedge both currency and interest rate risks and maintain ample liquidity. And as Mike mentioned, we will analyze all scenarios where we can create shareholder value, most recently evidenced by the sale of UPC Austria at a very attractive multiple.

So finally, moving to our 2018 guidance, we expect to generate around 5% rebased OCF growth this year; spend $5.1 billion on property and equipment additions, including $1.2 billion on our new build and upgrade projects; deliver $1.6 billion of adjusted free cash flow; and repurchase another $2 billion of our equity in 2018.

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

(Operator Instructions) And we'll take our first question from Ben Swinburne with Morgan Stanley.

Mike, you talked about wanting to build to be a national champion in the markets you're in. That's consistent with what you've said in the past. Could you talk about both Germany and Switzerland in that context? And what those paths look like in those markets?

And related to just the asset sale idea in general, maybe for Charlie, can you just talk a little bit about your tax assets? And how you can or cannot tax-efficiently sell assets for cash? I don't know if you've talked about any tax leakage with Austria, for example. But just maybe remind us of your ability to be sort of tax efficient on asset sales, particularly for cash as you guys think through your portfolio.

Sure. Thanks, Ben. Look, I have to be cautious here because we're not specifically addressing any particular market in what we may or may not be doing. But I think if you look at Austria as an example, we had roughly 35% reach in that market. We had a business that was, for quite some time, ex growth or low growth, but it's been doing slightly better recently. We had an MVNO deal that was pretty good, but a competitive mobile marketplace. And we felt that in that particular instance, it was going to be a tough path to becoming a national champion. And I'm not suggesting you go through every market, comb through the stats and then draw a conclusion.

Germany, there's optionality there. We have a great business. It's been, for us, a home run investment on any economic basis. And we have, we think, a company that continues to grow steadily with a broadband market that's extremely exciting and continues to be and a great, great management team. So I don't want to be specific about any particular market, Ben. It's a bit awkward for us, and -- but I think that for whatever we do in that particular instance, it's a market we ought to grow with or look at options.

In Switzerland, I've said before, we have greater reach there, almost 2/3, coming up on 70% of the market. I think it's a market that is probably screaming for rationalization on some level. Certainly, there are some options there for us to consolidate and/or become a larger player in that particular marketplace.

We've got challenges. I mean, Charlie mentioned and I mentioned in my remarks, it's a market that will continue to have some issues in the next year. I want people to know that. We don't expect a rapid turnaround in the Swiss market, just as we didn't get a rapid turnaround in Holland. It took us a couple, 3 years to really get the fixed business in Holland back on track, which it is today, as you look at the -- at VodafoneZiggo results.

So I think it's -- we're being opportunistic and thoughtful about that, and I'm trying to dance around your question, as I should in this context. Charlie, you want to hit the taxes? Charlie, you might be on mute.

Yes, as you know, Ben -- I'm sorry, can you hear me now? Ben, we have very substantial tax assets.

Yes, sorry. I'll be more specific than that. I think he may have cut off. Clearly, as you would imagine, Ben, we are, all the time, evaluating our tax posture with respect to all of our businesses. And we plan for many eventualities, and we plan for the long term. And I would say that we have a very efficient tax structure. I'd leave it at that. I think you'll see through what we mean by that.

We'll take our next question from Nick Lyall with Societe Generale.

Just a couple, please, if possible. On the -- just the first one on the U.K. ARPU, please. I'm still a little bit confused why it was down 0.6% year-on-year. Is there anything I've missed in there in terms of discounts? Or maybe a shift in mix of the people you're bringing on -- into the business?

And then secondly, just very quickly, the overall question on fixed and mobile, you sound very convinced on fixed-mobile convergence, but just looking at the Telenet business so far and also VodafoneZiggo, the results looked a little mixed, with Telenet churn being up and also the OCF being really quite sharply down at VodafoneZiggo. So why are you so convinced, given the performance of the businesses so far? Again, is there something I may be missing?

Sure, sure. Tom, I think, you're on, you might want to address the ARPU question. In principle, however, though, as you'll remember, in the first quarter of last year is when we really started managing through some heavy churn related to the price increase towards the end of the year. And so the results at year-end, which is what this is measuring year-over-year, wouldn't have reflected the first quarter's experience around churn and discounting in that business.

And as you may know, our -- we've talked about our average discount rate in the fourth quarter of this year -- last year, it was about 22%, whereas a year ago, it was 29%. So I think we've just been mostly focused in being particularly disciplined about the front book and how we actually -- and the back book, in how we actually maintain ARPU. And that's probably what you saw in the fourth quarter around net adds, and churn was better in the fourth quarter. Sales were also a little bit down as we became more disciplined around the ARPU line.

So you'll -- I think Charlie mentioned that we had sequential ARPU growth. I think you'll continue to see that. But year-over-year, it's just a matter of when you're measuring those 2 numbers. Do you want to add to that at all, Tom?

Yes. I'll just -- thank you. I'll just add that I -- maybe the estimate there of the year-on-year decline was a bit overstated. But remember, a year ago, we actually had 2 concertinaed prices rises, so we were coming off a particularly high. In this period, as Mike's mentioned, we feel we've managed it significantly better. We were always going to see that difference in Q1 of this year rather than Q4 of last year because, as we saw in the deck, it's only half a quarter's price rise, and it's pretty much a nominal increase in the -- in that first period.

So it's really an issue about how we're performing through this Q1 period and through that whole range of actions that Mike's mentioned about a more structured approach to discounting, about the V6 EOS boxes being deployed, about better routers, about better base management overall. We are in significantly better shape than we were 12 months ago.

Yes. On the fixed mobile question, it depends on what you're measuring, right? In [-- in both] Telenet, and in particularly in VodafoneZiggo, we have seen a sort of improvement that gives us confidence. In particular, I'm referring to NPS and churn.

If your NPS spikes, which it has in the case of Holland, for example, and your churn declines, which it has there as well, as you combine and bundle customers across fixed to mobile, that is a really encouraging trend for the long term. And remember, fixed and mobile for us in Europe, it's partly offensive because we know customers want more and more products from us. And in the case of markets where we have MVNO services, we're a challenger, and we're growing revenues 20%, 30%, 40% as we enter markets with mobile.

There's also some defense involved, as there should be, because our competitors, mostly the incumbent telcos, are also converging. And so we have to be responsive to the market in knowing that fixed-mobile convergence is inevitable on some level. It varies by market, some are far more converged than others, of course. But in the end, we want to be in that business, and we want to be in it profitably. And I think we have the ability to do that in just about every market we're in.

There are headwinds in the mobile business. We've talked about them endlessly. And there are some tailwinds, as we've seen both with synergies and with things like WIGO in Belgium, which is clearly improving all sorts of metrics across that relatively small today mobile base.

So I would describe it as being "in transition". As we look out over the long term, we know that being in the fixed-mobile space makes a lot of sense for us, either through an MVNO or an MNO relationship, the latter coming with massive synergies; the former coming with reasonably good economics and the opportunity to be a challenger. So that's how we'd described it.

We'll take our next question from Michael Bishop with Goldman Sachs.

Just 2 quick questions for me. Firstly, just picking up on the CapEx point. So you usually point it out and split out in your presentation. I mean, if I just sort of look at it another way, and I take out the new build from the $5.1 billion, it implies about 24% CapEx to sales. So I was wondering is there anything else that's sort of exceptional one-off in that, and whether we could see the underlying rate fall further toward 20%. You actually had pretty similar debates on the Telenet call about the future level as well.

And then secondly, given your 5% OCF growth guidance for the full year, clearly the U.K. is going to be a big driver of that. So I'm just wondering if you could help us better understand where you're thinking the contributions in Project Lightning will shake out in '18, given your comments that, that didn't really contribute at all in '17.

Yes. On the CapEx point, I think Charlie should be back on. I'll just add one thing and then I'll...

Yes, I'm back on.

Yes, great. So I mean -- and one thing I would add that is happening both last year and should happen this year and contributes to incremental CapEx beyond what we would consider normalized CapEx, are things like what we're doing in the U.K. with the V6 box rollout.

So we had 1 million towards the end of last year. We're going to -- I think we're budgeting 1.5 million or more this year. So we are proactively, both with our EOS box or our upgraded 4K superfast video platform as well as with our Connect Box, so the new routers that provide 1 Gbps of speed in the home, both those sorts of CPE for us are really powerful tools to retain customers and grow customers. So we are, I would say, leaning in to that CPE business a little bit more than we might otherwise.

My view long term is we do trend back down to the low 20s, if you were to exclude all that, and that's kind of where we were before we started the new build. But the one thing beyond new build that we are leaning into, as I kind of indicated, was to get these devices in the home. We know NPS is up by 20 points when we put a V6 box in somebody's house. That's good capital spend. Any other color on that, Charlie?

Yes, the 2 other things I would say, I think Telenet talked about [Project Darwin], which is their investments in customer experience; IT, which is a front-loaded investment as well as their investment in the mobile phone network base, which I'm sure they explained to you that, that it is a front-loaded investment.

The other big numbers is -- as you saw as in products, we're investing a lot of money in products, and that's good capital. We're putting a lot of money to B2B, particularly in SOHO, SME that's front loaded, and quite a bit at other things, what we call enablers, which is driving the digitization of the customer experience, which is giving more payback very richly.

So I do think this year has got a lot of, as you said, one-offs in it. But I also want to make it clear, you threw out a number of 24%, I would go about that the CPE growth is also, as Mike said, to do with the V6 boxes. But it's actually also to do with new build volumes, which are definitely being a part of the new build spend, if you like. So it's not quite so clear. The new build we're talking about on the slide is purely access network investments.

Yes, great point, great point. Yes. Then on the Lightning question in the U.K., we're really not providing any detailed guidance around either Lightning or the U.K., except to say sort of anecdotally that the contribution in '18 will be materially higher than it was in '17, as you would expect because we're scaling through some of those start-up costs. We have now 1 million homes to market aggressively, and I think we're much better and more efficient at that process. So it should be a meaningfully larger contribution in '18 than '17, but we're not going to give you any specifics.

Again, I'd -- just to give you some color on that. As Mike (inaudible), the faster we can grow that sub base, ironically, the more EBITDA we lose because, obviously, of the subscriber acquisition costs. So in some respects, one of the reasons we don't give guidance is because it will take -- if we don't -- we want to grow that as fast as we can. But that, obviously, will have a big impact to the profitability. But just to echo what he's saying, it's generally accelerating in terms of growing our assets and profitability, [year in].

And we'll take our next question from Robert Grindle with Deutsche Bank.

It's another Project Lightning question. You've obviously gaining traction in the market and in the U.K., and you have reiterated the 4 million homes target. I wonder how you feel about the new entrants to fiber rollout in the U.K.? Obviously, you guys are well ahead of the game, and they'll be slow to get going. But is there either an opportunity to help on the cost of Project Lightning by sharing? Or is there an incremental opportunity beyond your original plan by leveraging off some of the other operators' build programs?

That's a really good question. I'll let Tom address what's happening really on the ground. I'll simply say that you're correct. We do have a head start. We've been building for over 2.5 years, now coming on 3 years.

We have been through the challenges, as we all know on the call, but also responded very, very aggressively and positively to those challenges and feel today that we've kind of nailed it. We know exactly what it costs, how to build efficiently and how to get it done and how to market in the wake of that build. So we do feel like we have a big head start, and I think that a lot of the activities you see today in the fiber announcements, I would describe them as, not necessarily projects since most of them haven't really begun much, is partially tactical, partially political, partially also strategic.

So you correctly point out that some of these announcements might create cooperation or collaboration for us or others, who are looking to reduce costs and be more efficient. We'll see. It's a lot of capital. We know we've got the capital. We know we've got the rate of return. We're showing it to you. We know we've the -- both the inclination and the conviction around it.

I don't know whether the rest of them will have the capital, the conviction when push comes to shove. So it does feel like we are way out in front, and it does feel to me like there could very well be opportunities to make our project even that much better.

Tom, you want to add some color to that?

The only thing I would add is that today, this moment, we've got over 500 crews out there, averaging 6 people on a pretty wet and drizzly day actually making it happen. And as Mike alluded to, we've learned some lessons maybe the hard way, but under Rob Evans, and with the cooperation of the core technology and innovation group across Liberty Global, we've really reorganized ourselves, and we are much, much more confident about our ability to execute. And if other people see the opportunity to compete with BT, net/net, that probably helps us.

Next question comes from Daniel Morris with Barclays.

I've got one with a follow-up. I just wondered if you could talk more top down on your ability to take price in the market? I mean, obviously, specifically looking at Germany, that's a market where '18 is going to be quite substantially smaller in terms of price increases versus '17 and that versus '16 as well.

And maybe also, you can also look -- talk a bit more conversely in the U.K. I think maybe the direction of travel is a bit different, and we could actually see year-on-year ARPU growth again in '18. So how do you think about your ability to take price in the market generally? And then I've got a bit of a follow-up.

Well, I mean, as I mentioned in my remarks, we did execute price increases in 2017 pretty much across every market. It wasn't necessarily across every sub in every market, but it was across every market. And generally, they ranged from 2% to 4%, 2% to 5%. In 2018, we've either already announced price increases or intend to in, again, pretty much every market, most of those kicking in, I would say, in the April to March time frame. Really, the U.K. will be the only one that's sort of -- we're benefiting from in the first and certainly all of second quarter because it was a Q4 price increase.

And so we're, unlike our peers in these markets, we are, where we can, being, I would say, optimizing the price-value relationship for customers. And I don't see that changing materially.

What we have to do a better job of, and what I think we have been doing a much better job of, is retaining as much of that price increase as possible. Because clearly, as we learned a year ago, and it was over a year ago now, the price increase that we -- the price increases we do take ultimately have an impact on both churn and discounting. And you've got to have the tools, the right processes, the right people, the right incentives to both retain and manage that base once you take those price increases, especially in large markets like the U.K. I feel really good about our ability to do that today, and that's a good segue to the ARPU question. Tom, you want to hit that in '18?

Yes, as I -- clearly, the -- all the issues you alluded to are going to play out. As I said earlier, we think we are in a much better position, and we're operating in a much better position than we were 12 months ago with a new team in there and a new structure.

Another thing I would point out going forward is the EPL rights deal, which has come through. I know it's not complete yet. But potentially overall lower, certainly no higher than it was beforehand. That's going to give us a cycle of 3 years where we don't have the cost pressures from football rights driving a nominal price rise, which is just a pass-through from our point of view. So that should give us an opportunity to take price rise where we actually can retain a share of that outcome.

That's helpful. And then I think you've kind of partially answered the second half of the question, which is very much that if we look mechanically, the price tailwind in Germany and U.K., your 2 key markets, looks like it's smaller in '18 versus '17. But your OCF growth guidance is stable-ish, and Charlie already mentioned that there's a possibility that actually, Lightning isn't a big tailwind if you're successful, ironically. So I was trying just to understand how you get to a stable OCF growth, but I think you've partly answered that, but if there's anything to add.

Well, I think there's a -- I'll give you a bit more color on the guidance. Clearly, what -- if we're saying around 5%, that would include a range. You can decide what the range is. Our full year results in '17 would have been closer to the end -- lower end of that range. So obviously, we believe there's a very good chance we're at or above the midpoint of that range. And so I would suggest to you that the trend we see for our business in '18 is up.

But we are also being cautious because there are headwinds. And one headwind in particular is our Swiss market. As I indicated just moments ago, we don't anticipate a massive turnaround in Switzerland. We have sports costs, and we're in the investment phase in a number of areas of that business, and so we're being conservative there.

If you took Switzerland out of our results in '17, we would have been at 6% or higher in the fourth quarter. So clearly, we understand the moving parts of our business. But as we aggregate everything, there are always going to be headwinds. And we want to be transparent about those headwinds, but they might impact the overall results. It's not necessarily something that is reflective of our aggregate business. But as we've had in the past, whether it was Holland, or some of you may remember Romania, sometimes with 12 countries, somebody catches a cold. So we want to be transparent about that.

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

First, on U.K. RGU result this quarter, how much of that's related to price hike churn versus backing off aggressive promotional activity? And then assuming you continue with these strategies, is it fair to assume despite the benefit of Project Lightning, that your U.K. net new RGUs are probably going to be lower in '08 (sic) [2018] than '07 (sic) [2017]? Although obviously, you have a higher quality customer and better ARPU trends. And then I've got a follow-up.

Well, I would say, again, I'll provide some color here. The fourth quarter was a function of a number of things. But as I kind of indicated earlier, Jeff, it was really discipline around discounting, and our average discount was meaningfully below the discount a year ago. So year-over-year, that explains quite a bit of it. The other thing I would say -- suggest to you is, churn was down in the fourth quarter compared to a year ago. But also, sales were down a little bit, as we were careful and disciplined about marketing and sales expenditures as well.

So I don't personally believe, and Tom, I'm sure, will agree, that the fourth quarter is necessarily an indication of how we're trending. And consistent with what I just said a moment ago about the overall business and how we see it trending in '18, and I would suggest to you that, that applies to the U.K. as well almost across all metrics.

All right. Fair enough. And then Mike, can you comment on press speculation in the U.K. maybe on 5G? And is that something that might be interesting? How are things different today than, say, compared to your experience in Chile with building out your own network?

Well, there have been some rumors around that. I would simply say that to the extent we were looking at that, it would be really optionality, Jeff, as opposed to something more strategic, where we would be, as we did in Chile, looking to spend all of the capital to build a competitive network. I don't see us doing that in the U.K. I wouldn't consider -- I wouldn't look at it in that light.

And we'll take our next question from Vijay Jayant.

So Mike, obviously you guys have been making a lot of investments with high-end boxes, faster broadband speeds and you keep talking about -- you're really focused on driving ARPU. Can you sort of give us some sort of sense on how sort of the ROIs are sort of developing on these advanced -- advantages that you have? Because when you look at aggregate numbers, we see more CapEx, and we don't see the ARPU rising the way you would see it. So at the unit level, any color -- there's obviously a question about, will customers pay up for these advanced services broadly? And any experience that you could share would be great.

Yes. Well, I'll say that the largest part of our increased capital profile is, of course, new build and upgrade. And we do know, as we showed you in the case -- in the slides, that, that is a very high return on an unlevered basis. So it may be the highest-return investment we're making. It is the highest-return investment we're making today.

So the vast majority of this incremental capital that we're describing here and talking about is rigorously examined and constantly evaluated and must come through a gauntlet of Charlie's team to ensure there's a rate of return on it that's acceptable to us. So hopefully you take some comfort in that.

The smaller piece of the incremental capital that might be related to V6 boxes or Connect Boxes, I'll simply say that we're careful about how we roll those out. It's not indiscriminate. We generally are focused on customers that generate high ARPU for us. And we know that when NPS spikes and churn goes down, a happy customer is a profitable customer.

So that's more anecdotal than detailed, and I'm not going to share any specific product economics with you around that. But if we weren't seeing an NPS spike, if we weren't seeing a churn reduction, that would suggest to you that maybe we aren't -- maybe we should be backing off that. But we are seeing the opposite. And just intuitively, if not financially, that's smart capital.

And just on DOCSIS 3.1 rollout across the footprint, any update on faster speeds? Is that also generating excess returns?

Well, the return on our -- you mean the return on our capacity spend. Historically, if you look at the pace or the rate at which consumption has been increasing 20% to 30% and the rate at which broadband speeds that we deliver have been increasing, say 20% to 30%, there is a correlation between speed and consumption. And generally speaking, whenever possible, our higher-end customers are paying us more.

And if you look at the game -- the business that we're in, which is competing with incumbents and staying superior to incumbents in most instances, that model has worked for us historically.

In terms of breaking down exact capacity spend to return, I mean, I'm not going to do that for you on the call here, except to say that we look at that spend very rigorously too. And that we're always optimizing the capacity in relation to usage and speeds and consumption.

On DOCSIS 3.1, we are darn near all the way there in terms of having our entire footprint gigabit ready. With 3.1, I think we reported last year we were about 75%, 80% ready. I think that will grow to 90-some-odd percent this year. And the expenditure to bring that network up to 3.1-ready has not been material. The only cost we'll really incur down the road, Vijay, is for new 3.1 modems. And of course, we'll do that when we're ready, and we'll do that in the most economic way possible. And to your point, we won't just roll out a 3.1 modem indiscriminately. We'll roll it out to customers that pay us more for the higher speeds and the better services.

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

I was curious. You didn't talk really about the emerging European telecoms framework. ETNO has really come out and said that so much of the profits in the new digital economy are basically being allocated to Facebook, Google, et cetera. And at the same time, you have that interesting consultancy study a few months ago from [RGD Little] really talking about numbers that are just large in the macroeconomic context, even for Europe. How do you see the field moving over there so that your growth could even accelerate as you capture more of your fair share of the innovation in the digital economy?

Well, I think is the framework in Europe is evolving. As we've said many times over the last decade, it's really been very favorable to us: the challenger allowing for consolidation. It's stimulating investment and I would say benefiting and rewarding those who invest and innovate quickly in markets, and the consumer's been the beneficiary, I think. So the last 10 years have been very favorable.

We're in an interesting moment here. We've talked about this publicly. It's an interesting inflection point. You have the commission that, I would argue, is looking to advance the framework exactly as it was for the most part, which is incenting investment, encouraging investment and ensuring that there's a rate of return for all players in the ecosystem.

There are some political winds that are brewing around national regulators in particular, who'd like to get more control over how you define market dominance, significant market power. And we're all scrambling a bit to ensure that the right outcome occurs. It will be some time, Matt. It will be probably this summer before any resolution, and that maybe even summer '19 before there's any real implementation of a new plan.

My instinct is, it's not going to discourage investment. It's not going to discourage competition. It's not going to be something that we are -- that we have to be too concerned about. The European Union, as you have already kind of highlighted, is much more, in my opinion, rational and balanced about the actors in this business. And in particular, I don't know, that -- has a healthy view of digital platforms, and wants to ensure there's fairness in terms of both their contribution to taxes and employment as well as what they're doing to disrupt existing businesses.

I'm not suggesting they're swayed one way or the other. I'm simply saying that they have a healthy view of how that should evolve. And I feel good about it in principle. We have to do our work. We've got to keep making the case, as do our peers. But I think in principle, the European market has historically been reasonable and rational, and I suspect it to continue to be so.

Do you have a personal reaction to the IoT numbers and aspects like that in that in the [RGD Little] report? Because I mean there's just absolutely blue sky, the numbers. I mean, if you got even the smaller percentage of it, it would be integral to your business. And I know...

But that's another -- yes, that's a very -- it's a good point. I think, the IoT business, as it evolves and it will take some time, is going to benefit all players in the market. If you're in the mobile business, clearly, a lot of the applications will be applications that are low bandwidth, that don't require a lot of capacity but require ubiquitous coverage. So that's enough -- a positive for us. But also if you're in the fixed business, those applications that require more bandwidth, having fiber as we do throughout these markets is going to be a huge advantage for us as 5G becomes more prevalent and as these applications develop.

It's early days. I think if you ask anybody, even Vittorio to Randall Stephenson to Brian Roberts, it's early days for everybody in the IoT space, and it's largely application-driven. So it doesn't mean it won't be interesting, and it doesn't mean we won't benefit from it. I just think it's too early to say, here's how we're budgeting revenue, and here's how we're spending capital. We're -- I think it's -- over the next 24 to 36 months, some of that might be clear to folks.

Just not in the '18 budget.

We have one final question from James Ratzer with New Street Research.

So sort of -- kind of last question, I was wondering if I could just come back to the issue around U.K. ARPU, please. I know we had the price rise in -- for 6 weeks of the quarter. You've also talked, Mike, about doing less discounting in the quarter, but yet the year-on-year ARPU trends actually didn't really seem to improve, still down, I think, about 0.4% year-on-year. So just interested in digging in a bit more on what's happening here. Is there something more maybe fundamental that U.K. consumers are just getting more price-savvy and sensitive, and it's just going to be tougher to push through ARPU due to mix effect or spin down. And secondly -- sorry, Mike, go ahead.

No, go ahead and ask your second question.

Yes, the second one's also -- it's about the U.K. but on a slightly different topic. I mean, the Vodafone press release made it clear you're in discussions on the continental European assets only. So if you can comment at all, I'd just be interested in why the U.K. assets aren't part of your negotiations with Vodafone at this time.

Well, I can't comment on the second question. Maybe they will, but we're not going to.

On the first question, the main point here -- and Tom, I'll ask you to jump in. The main point is, when you're looking at year-over-year, so let's say December 31 to December 31, that's ignoring the path of travel throughout the year. So as you may recall, we had some ARPU erosion last year, sequential. And the important point, I think, in ARPU, is to look at sequential ARPU, James. And between Q4 and Q3 and between, certainly, Q1 and Q4, you want to be looking for sequential ARPU growth, which we didn't have -- we had some challenges last year as we went through and talked about quite a bit. The year-over-year number isn't the most important one. It's where we're coming from in the last 2 quarters, as I would say.

Tom, you want to add to that?

I'd reinforce the point. I think it's about Q1 '18. The issue is where we had the particular pressure last year. We're just going to have to prove ourselves to you in 3 months' time when we come to this earnings call that we have a much better team, effectiveness, distance and organization and discipline around that.

You'd be hopeful of more, of some further sequential ARPU growth going into Q1 next year, or this year I should say?

I don't think I meant to say that. I'll just say that we are -- we certainly feel that we are much better organized around the price increase. As was mentioned, we -- at the end, we took some pain on volume in Q4 in order to defend the ARPU. And in combination, we have better systems, frankly, better people, a better commitment around that.

And you're not seeing then -- just to kind of follow-up here from the last question, any kind of general pressure around discounters having more kind of favor with consumers as the economic climate in U.K. bites at all?

No, I think in the broad -- that's less of an issue for Virgin Media versus some of the other operators. We're clearly the highest ARPU operator in this market. And if anything, that position is widening. We avoid the heavily discounted piece of the market there on the bottom, essentially because that's not our product. That's a BT Openreach product that other people sell.

So I think in our position in the market, about primarily being a triple-play operator, about being the fastest, most effective provider and with the best router, frankly, we think now the best TiVo, V6 box to support that, we sustain the highest ARPU. So we're very -- we continue to focus on ARPU accretion as a positive thing for the business.

All right, we appreciate everybody joining the call. Sorry it went over just a little bit. Look forward to talking to you in -- on our first quarter results in a few months, as Tom said.

We remain focused on the few things that I talked about upfront, right: driving national scale where we can; investing in profitable customer growth, and that really means putting money into our networks and our products where it's smart money; and then optimizing levered equity turns for you guys. So we think that's a strong combination, and we'll speak to you in a few months. Thanks very much.

Ladies and gentlemen, this concludes Liberty Global's Full Year 2017 Investor Call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global's website at www.libertyglobal.com. There, you can also find a copy of today's presentation materials.