Nov 2, 2017
Executives
Mike Fries – Chief Executive Officer Charlie Bracken – Executive Vice President and Chief Financial Officer Manuel Kohnstamm – Senior Vice President and Chief Corporate Affairs Officer Thomas Mockridge – Chief Executive Officer of Virgin Media Lutz Schüler – Chief Executive Officer of Unitymedia Balan Nair – Senior Vice President and Chief Technology Officer
Analysts
Robert Grindle – Deutsche Bank Jonathan Dann – Royal Bank of Canada Jeff Welder Schaap – Pivotal Research Polo Tang – UBS Vijay Jayant – Evercore Michael Bishop – Goldman Sachs Ulrich Rathe – Jefferies Saroop Purewal – Winburn Simon Weeden – Citi
Operator
Operator
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global’s Third Quarter 2017 Investor Call.
As a reminder, the first portion of the call will focus on Liberty Global’s European results and the second portion to begin at approximately 10:30 a.m. Eastern will focus on the results of the LiLAC Group.
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.
Following each of the European portion and the LiLAC portion of today’s formal presentation instructions will be given for question-and-answer session. As a reminder, this call is being recorded on this date, November 2, 2017.
Page 2 of the slide 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 facts.
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 from time to time 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 note that nothing stated in today’s call constitutes an offer of any securities for sale.
I would now like to turn the call over to Mr. Mike Fries.
Mike Fries
All right, thank you operator and welcome everybody. Appreciate you joining our call today we’re going to start of course with Liberty Global and then in by an hour we’ll have LiLAC hope you can join as well.
Going to keep our prepared remarks sort of efficient today when jump right in and Charlie and I are going to take care of the operating and financial highlights and then I’ll ask others for the management team many of whom are on here to chime in on the Q&A as needed. We are talking from slide as we always do and hope you can get those downloaded or access those going, I’m going to being on Slide 4.
With what we believe are the five key takeaways for the third quarter in Europe. Beginning with our top line results, which came in at 3% fee based revenue growth, up from 2% in the first half of the year.
Several factors contributed to this uplift including another great quarter of B2B, which continues to ramp with 13% fee based revenue in the quarter. Revenue in our mobile business was also up year-over-year after declines to the first half, and we had strong mid-single digit growth in markets like Germany, and Central Asia and Europe.
Now you know the fixed residential business remains competitive in Europe and nothing has really changed on that front, but every quarter it just reinforces our strategy, which is to grow scale through new builds drive market share with the best broadband products and fantastic video experiences and to improve customer retention and happiness with quad play bundles. And as you’ll see, we believe that strategy is working.
And despite spite these competitive challenges, we continue to drive operating cash flow growth after second big takeaway, rebased OCF growth is up 4% in the quarter and bring in the year-to-date figure to around 5%, which is our guidance for the full year. I’ll dig into this a bit more in a moment.
But we continue to drive our operating margins up in Europe. We now 47% for the nine months it’s up 120 basis points over last year.
And the good news is, we’re not done realizing scale based efficiencies. When you dig into the numbers you also see that operating cash flow performance was strong across Europe.
So every market grew rebased operating cash flow between 4% and 7% in the third quarter with the exception of Switzerland, which had a more typical quarter due principally to the launch of our new sports service and the impact of those content costs. As well the tough competitive environment, we understand the concern around recent performance in Switzerland, right.
Swisscom, in particular has responded to pressure on fixed mobile pricing. But it’s largely a rational market with only three mobile players improving year-to-date RGU trends and for us a growing B2B in mobile business.
It’s going to take time to regain OCF momentum there that’s for sure. But we have a good plan and also some interesting strategic opportunities as well.
Third key message is that loss subscriber growth of over 200,000 RGUs was a bit lower than the prior year there are some really positive trends here. And most important of which is steady and consistent improving in our video business, especially in contrast to the U.S.
pay TV market, which you’re all familiar with. And you can see in the bottom right through nine months we lost 60,000 video RGUs in our core markets.
That compares to nearly 200,000 losses, just two years ago in that same nine month period excluding Holland. And the good news is even in Holland, we’ve seen that same sort of improvement, so three years ago we lost 150,000 video subs in the first nine months in this nine months 60,000.
Really three key things happening here. First and foremost, our video platform has totally transformed with beautiful user interfaces, multi-device access, great content, great apps.
And secondly we’re succeeding in our new build market, right. When we show up folks subscribe in third the quad-play really does reduce churn.
All of these factors bode well for continued strong retention even growth in some markets of our video sub base. Now certainly our largest market, is UK and all eyes are on Virgin Media.
So the fourth big takeaway for us is that we’re seeing improved operating momentum at Virgin. Our weekend price increase which kicked in yesterday in fact has landed better than last year, which means a better MPS impact better retention, lower disconnects, and held bit more that in a moment.
In RGU volume continue to strengthen and that’s supported by, of course new marketable homes and Project Lightning, but also the success of our V6 box is now on 20% of our video homes and the quality improvements we’re making in the broadband business with the Connect Box and better capacity in network management. Now lastly, we’re confirming our guidance today for the full year of around 5%, operating cash flow growth maybe say it in different way, we believe our year-to-year date operating cash flow results should carry through to the fourth quarter.
And with about a billion of new build expenditures relating mostly course to relieved homes and work in progress. Our CapEx to sales should be in line as well at 29% to 31%, and our adjusted free cash flow at $1.5 billion.
Three more quick points, before I move on from the opening slide. As you all know or should know the new electronic communications code in Europe is working its way through the political process.
With some progress expected perhaps by June and new policies in place perhaps by early 2019. Everybody involved in this is supportive of creating a favorable investment client – climate, especially as 5G and other big initiatives are on the horizon.
But the battle lines have been drawn to be clear around national regulators, and how much authority they’re going to have to manage competition, to define market power going forward. We remain totally aligned with the E.U.
Commission on this, and in fact totally aligned with other telcos and our view that the current rules are sufficient in Europe, in fact should be deregulate, not regulating more. The Parliament and the European Council are grappling with their own interpretations, their own biases, and let’s keep you posted on how that process unfolds.
The second you may have heard or read that the European Court ruled recently that the E.U. has to now reexamine the original approval of our UPC and Ziggo merger years ago, really on technical grounds, and the technical grounds are that they didn’t properly address the sports market.
To be honest with you, we view this as more of a nuisance again a highly technical matter and given that the Dutch market is meaningfully more competitive today than it was and we first got there, or got the approval, so pretty confident of the new clearance in due course. And then finally, I have to say, I couldn’t be happy or more proud of my colleague Balan Nair who had accepted the role of CEO for Liberty Latin America after we split off the business at year end.
You all know this, but as CTO over of the last 10 years for us, he has put in place all the building blocks we need in Europe to be competitive for the long haul including a robust technology and network platform that is gigabit-ready and fit for fixed to mobile convergence, a product roadmap that allows us to compete on every level for every customer against all comers including the big OTT guys. And perhaps most importantly a centralized operating model that capitalizes on our scale and really turbo charges innovation, and even know he is moving to a different floor here in Denver, he had going to remain a part of the family and we’ll continue to work closely together with us to realize global scale and procurement technology and products across both region.
So congratulations Balan. Now with that as a scenes that I’m going quickly run through a few more slides, and then I’ll hand it over to Charlie.
Now I’m going to turn the Slide 5. Most of you know, we are rapidly approaching year three of our Liberty GO operating plan.
And I think it’s important that we keep reporting on our progress here. On the key initiatives that we set out for ourselves, two of which are highlighted here on the slide first, of course is our aggressive plan to contain costs, and execute on scale based efficiencies.
The chart on the left tells that story very well. And despite building out in marketing you know the two million new homes in our footprint in the last seven quarters since we got started.
Despite launching new and competitive video and broadband services over that time period and adding 1.6 million new RGUs. We have been able to keep our direct – indirect costs flat year-over-year.
That is a significant achievement. And we’re not done yet and as I said Charlie is going to walk through a few examples of how we’re – how we found synergies and what we’re doing to drive scale based efficiencies across our business.
And you can see in the middle of the page, we’ve pretty much reinvested most of that data it’s into grow. So labor costs are down 3% and other external costs are largely flat up 1% due primarily to higher network taxes in the UK.
But our investment in sales and marketing is up 2%. So some of that money, of course, is going into our B2B business, another big Liberty GO initiative, and you can see on the right hand side of slide, how that’s been going, as I mentioned double digit revenue growth.
Our strategy B2B is clear in our view, right, we’re focused on superior speed convergence and simplicity as we grab market share in the SOHO and SME segments, and those two segments now make up 40% of our B2B revenue. Our investment and products like 500 megabit broadband speeds static IP, managed Wi-Fi, hosted voice, cloud based services, and of course mobility, really allow us to be super competitive on service, and disruptive on pricing.
And when you exclude Holland, we pass around four million SOHOs and over 450,000 SME premises. So there is significant runway for growth in this space.
Two other importantly Liberty GO initiatives are covered on Slide 6. Starting with our new build program, which is not only fueling growth today, but it is laying the strategic foundation for sustainable growth for years to come.
Since we’ve got started, we’ve built and released over 2.7 million new homes, including over 900,000 in the UK. Over that time period that we’ve been able to add a half a million new customers and 1.2 million, new RGUs on this extended footprint, 40% of those just in the first nine months of this year.
And we’re on track for 2017 to be our biggest build year yet, over 800,000 new premises released in the first nine months, and I show you some Project Lightning numbers in a second. But all in our new build program has really worked up, is paying off.
We can toggle the pace of construction and capital investment, and we can actually monitor the bill cost, the subscriber adds and the financial returns to optimize growth and cash flow in anyway we want. And we think we continue it’s a flywheel in my view for subscriber growth sure, but also scale, strategic scale and B2B.
Now the right hand side of the slide summarizes Q3 results in our mobile business, which showed overturn to nominal growth compared to the first half as I mentioned. And that’s largely until two strong handset sales in Germany and UK, better mobile interconnect result particularly in Belgium and some good post paid growth, especially in Switzerland where we kind of rolled out a disruptive offer with three EU roaming.
And we’re still going backwards in subscription revenue you can see that in the call out on the right hand side, but there are plenty of an issues underway in every market to turn that around. Virgin is going to kick off their migration to the new Full-MVNO deal with BT with some aggressive products rolling out in the first quarter and now keep momentum going.
And Telenet is marching forward as they do on the integrated quad-play bundle we called We Go. And importantly for cost here finalizing the migration of their MVNO subs to the MNO platform and that’s going to certainly have a big impact on synergies and operating cash flow growth next year.
I’ll wrap up our remarks with a few quick updates on our largest operation Virgin Media, which by the way delivered its best OCF growth quarter of year. When I focused on three key topics here, beginning with the price rise, which took effect yesterday.
And as we foreshadowed all along this year’s pricing approach has landed very well, compared to last year and just about every measure so the NPS impact is better, churn is lower. Call volumes have subsided and this can be attributed in our view to a handful of key tactics that Tom and Dana have implemented this time around.
And most importantly you tailor the timing of the customer notification letters, the marketing message and the retention offered by customer segment. So some people are offered speed boost, others new bundle and still others is CP upgrade like the V6 box a new Connect Box.
And leasing tools are helping to stabilize ARPU and together with a more tightly managed discounting strategy, and implementing engagement level revenue tracking and using our data and new digital tools to tailored for sale strategy, win back and up sell strategies these problems have worked. Even more importantly that can help us retain more of the 4.7% price increase to the rest of the fourth quarter and into 2018.
Here’s another point that I feel has been for lost bit perhaps as a result of our bumpy start to the year. We’re generating three times as much RGU growth today, Virgin Media than we did two years ago.
Through nine months we’ve added nearly 330,000 new RGUs, in 2015 the year before we go and Project Lightning began that number was 90,000 accumulated homes for marketing in the UK and Ireland with steady growth in the build program you can see that again the top right of Slide 7, from an average of 60,000 and then go to 80,000 homes per quarter last year. We just in the third quarter of this year really to 150,000 homes.
So we’ve had a nice steady pickup in our capacity. We have a very good handle on build cost, partner capacity and permeating at this day.
And we continue to penetrate a very good level at the bottom right you can see we’re reaching 30% penetration on average after two years. And over the course of the project, we’ve already added 180,000 new customers in the UK and Ireland and about 4,000 RGUs since we got started.
So as we continue to build and release more homes, add customers and scale to early marketing and acquisition cost, we’re going to begin to generate meaningful and sustainable operating cash flow growth for some time in this market. So we’re actually pretty excited about it.
I like the approach we’re taking today in terms of pacing ourselves appropriately, but it’s going to pay off it’s already starting to pay off. Charlie I’ll turn it over to you.
Charlie Bracken
Thanks, Mike. I was working through the Liberty Global Group financials for the third quarter.
And then provide some color on our segment performance, and then highlight some benefits that we’re seeing in combining fixed mobile products. In addition to showing an update in our procurement savings that we’ve been able to secure.
So I’m on Slide 9 now, we present Q3 financial results. In terms of our revenue performance as you can see on the upper left, we grew our rebased revenue by 3% to $3.9 billion for the quarter.
This was a sequential improvement from 2% growth in Q2 and our best quarterly results so far this year. And where it is coming from our fixed residential business will be flat, but our B2B operations had another very strong growth quarter with 13% growth.
We also had improvements in residential mobile including handsets and interconnect which Mike spoke about earlier. On the OCF front, we generated rebased growth of 4% for quarter, so which $1.8 billion and this is driven by our operations in Central and Eastern Europe, Telenet and Virgin Media.
With each of those business is posted – posting rebased OCF growth of 7%, 6% and 4% respectively in Q3. On a year-to-date basis our rebased OCF growth was 5% in Europe.
Our Q3 P&E additions increased to $1.3 billion or 33% of revenue, and on a year-to-date basis, our capital intensity stood at 30.5%. The main driver for the year-over-year increase in both absolute terms and as a percentage of revenue was once again higher new build activity, particularly with respect to Project Lightning in the UK, as well as higher CPE spend partly related to the continued penetration of our next-generation video and WiFi boxes across Europe.
Adjusted free cash flow was approximately $715 million in Q3 and for the full year we continue to target $1.5 billion of adjusted free cash flow, with a majority of our free cash flow to be weighted towards Q4 a similar phase in prior years. With respect to our European balance sheet, we ended the quarter with the total third-party debt in capital leases at $42 billion as well as liquidity of nearly $5 billion.
After excluding $2.3 billion of debt backed by shares that we hold in ITV, Sumitomo and Lions Gate and including our derivative assets, our consolidated adjusted gross and net leverage ratios in Europe stood at 5.2 times and 5 times, respectively, at September 30. Who made great progress during Q3 in the refinancing front and extended our average tenant to 7.5 years.
Well our blended fully-swapped borrowing cost stood at 4.5%. First quarter end we reminded active, refinanced approximately $3 billion at our UPC credit pool at attractive terms.
Emerge new term loans in our Unitymedia credit pool, pushing out our average tenant close to eight years. And finally, we repurchased $400 million of our stock in Q3, with the similar number to go in Q4 under this year’s $3 billion repurchase plan.
Turing to Slide 10 at our segment reporting. Our combined Virgin Media business in the UK and Ireland reported rebased revenue growth of 1.5%.
Virgin Media’s revenues improved sequentially but as expected remained impacted by flat ARPU. Virgin also decreased its mobile revenue headwinds as the Q3 decline of 2.5% was a significant improvement over 8% decline in Q2.
So the improvement driven by much higher handset sales. Rebased OCF at Virgin Media grew 4% in Q3 reflecting revenue growth, as well as a net effect of lower marketing in employee costs as well as higher network taxes and programming costs.
Unitymedia in Germany delivered 5% rebased revenue growth in the quarter, while rebase OCF grew 3.5%. Bear in mind we switched off our analog signal and related to that lost around $7.5 million of carriage fees in the third quarter and we expect to similar headwind in Q4.
In Belgium, Telenet posted 2.5% rebase growth in Q3 that was mainly driven by strong growth in B2B partially offset by mobile headwinds. Telenet’s rebase OCF increased 6% in Q3 as we continued migrating our legacy MVNO customers from Orange to our own mobile network.
In Switzerland and Austria, we achieved rebased revenue growth of 1% after two quarters of declines and OCF decreased 3% in Q3. And a rebased revenue growth resulted from a higher mobile revenue contribution and higher growth in B2B, partially offset by lower ARPU for RGU, which is primarily related to tier mix and competitive pressures.
OCF growth was negative due largely to the increase of content costs related to the launch of our MySports platform in Q3, and we expect another negative OCF quarter in Q4 due in part to the fact it will be the first full quarter with this higher content costs. Diving a little deeper on operations in Switzerland, our refresh connect and play portfolio is delivering better incoming ARPUs of Swiss francs 80 plus although volume growth in fix was still impacted by competition in Q3.
B2B is delivering and on the mobile front, we have better subscriber volume since the introduction of three EU roaming as part of our Swiss mobile portfolio that we launched in June. The new MySports platform launched in early September is resonating in the market and the early take of our premium MySports Pro premium package is promising.
Running other operations, our CEE segment posted 5% rebased revenue and 7% rebased OCF revenue growth, largely driven by B2 B and growth in residential cable. Slide 11 gives you an overview of the significant synergies that we’re seeing from combining fixed and mobile assets as well as an update on our procurement savings.
So a quick update on Telenet and our fixed mobile convergence transformation data. The modernization of our mobile network is well underway and the migration of customers MNO platform to the network is ahead of plan.
54% of MVNO mobile subs have already been migrated at the end of Q3, and we targeting the full migration to be complete by the end of Q1, 2018 rather than later next year. Now remember that a good chunk of our anticipated EUR 220 million synergies are coming from MVNO savings.
The quality of the four based mobile network has improved significantly, and 4G Plus technology is now available in over 80% of Flanders and also in parts of Valunia [ph]. And in WIGO, our refreshed quad-play bundles are seeing good take-up and now 12% of all Telenet cable customers have bought or migrated to a WIGO subscription and nearly 4% have some kind of quad play combination.
Looking at Vodafone Ziggo. The Non-stop Gratis extras converged offers in the Dutch market have been in the market for about six months.
And the JV is continuing to see very good adoption rates within its customer base. By the end of Q3, the JV had nearly 800,000 households and 1.1 mobile subscribers, enjoying JV’s new quad-play benefits.
So put differently, of the 24% of the joint ventures broadband-based and over 55% of the Vodafone Mobile postpaid customers in the consumer segment are now fixed mobile convergence customers. The two biggest benefits the joint venture is seeing for the fixed mobile convergence customers are higher NPS scores and significant churn reduction.
On the cost front, the joint venture is confident in delivering on the OpEx and CapEx synergy plans over the next few years. Mobile has seen so far confirmed those views.
The synergy this year is de minimum, but the joint venture remains on track to deliver over EUR 210 million of cost synergies longer term. And give you feel on the split of those synergies, we believe that around a quarter will come from IT savings, another quarter from redundancies with the rest, coming marketing and sales, savings, termination of renter fiber and other items.
On the right of the slide I want to highlight some achievements are securing savings to our cost base from a revamp procurement process. We’ve focused our efforts on establishing a standardized end-to-end procurement process that allows us to leverage our scale and reduce the numbers of vendors we work with.
This has allowed us to reduce our unit costs, and we estimate we would be able to achieve approximately 5% of savings across the organization, most of which benefited our capital spend. Just to be clear, we are expanding our network and spending more on absolute terms, especially on the new build activity and CPE front to achieve meaningful price per unit reductions.
As you can see on the slide, we are grouping our procurement spending to different buckets namely: Access, service and delivery platform, core network and IT, customer service and business services. We achieved significant savings in three of the buckets already as detailed in the slide.
And the biggest savings had been achieved on the core network category that includes outsourced IT and network components. We estimate that we’re achieving 8% unit savings in this bucket at this year.
In the access and service delivery platform categories, which mainly represent our HFC plant and head ends and on a combined basis, totals roughly $3.4 billion of spend, our increased scale new build initiatives has helped drive an estimated 3% price per unit savings versus last year. And lastly, on the customer-facing front, where pricing has come down an estimated #%, we reduced unit pricing by among other things, negotiating more favorable sales and marketing contracts and leveraging our mobile handset spends across the group to achieve estimated per unit savings of 10%.
So all in all, we’ve made some good progress in the procurement front and have a clear roadmap that will allow us to achieve additional savings through further standardization and vendor optimization. So slide 12, to summarize.
We delivered a 4.6% of rebased OCF growth in the first nine months of the year and showed sequential improvement in most of our Western European markets in Q3. Virgin’s results improved sequentially and Project Lightning just delivered its strongest quarterly build to date.
We continued to make good progress on delivering the savings from our cost efficiencies and from a balance sheet perspective, we remain in great shape with long tenured maturities and near-record low borrowing rates, complimented by nearly $5 billion of liquidity. So we’re confirming around 5% rebased OCF growth for the full year, as well as our adjusted free cash flow target for $1.5 billion.
And with that, operator, I would like to turn over for questions.
Operator
[Operator Instructions] And our first question comes from Robert Grindle with Deutsche Bank.
Robert Grindle
Hi, there. My question is with regard the preparation to the LiLAC spend.
Clearly, you’re getting very close to that now and have confirmed the timing. What remains in terms of the work to affect the spin at this stage?
And other costs within the corporate part of reporting that will either increase or decrease when this spin takes effect? Thank you so much.
Mike Fries
Well thanks Robert. As we said, we’re on track for year-end completion of that transaction.
The major step between here and there is a filing again with the SEC or S1 document, which will do during the next couple of weeks. And once that is approved, we’ll be shipping out and mailing those document.
So we don’t see any real impediments beyond that at all between today and getting that transaction complete. And the costs will be essentially are going to be shared, if you will.
So that point of view is that LiLAC now is a separate public company. We’ll have to assume responsibility for certain of its expenses, whether they be public company expenses or otherwise.
But they’re not material so we have to treat these companies as separate companies and with an arm’s length, agreement between them, there will be a lot of things we try to do together in terms of the, as Charlie mentioned, procurement and the global scale benefits that will come from the relationships. There would quite be a detailed framework agreement summarized in the S1 that would explain exactly how the two companies will interact and share resources and expertise and knowledge in its arm’s length and that would be quite straightforward.
Robert Grindle
Many thanks.
Operator
We’ll move now to Jonathan Dann with Royal Bank of Canada.
Jonathan Dann
Hi, there. It’s a question for Charlie.
And I think in the credit docs, you talked about upstreaming cash within the sort of few weeks or months, could you sort of – how does that – it looks to me like it’s about $2 billion, how does that balance – is that effective – is that preparing for the 2018 buyback? And then have a slightly – I’ll follow-up my UK question in the second.
Charlie Bracken
I think your question, we actually had cash as we given the bump up in any of the up close within the company policy that we always sweep cash what it means into the holding companies. What we do have though, as you know, is significant undrawn revolvers.
I think all our focus today in Europe, so we always have the ability, should we choose to do that, to draw the revolvers, as you said. To be honest, we have no plan or no need to do any of that, debt and pay interest on it and returning the cash.
But it’s generally, the cash we have on the balance sheet represent [indiscernible] we have today. We’re not giving guidance on next year’s buybacks.
It is a fair statement that we are in a very liquid position both in terms of cash in the bank but also in undrawn revolvers.
Jonathan Dann
And then, can I ask a UK Project Lightning question. I accidentally – I drove passed them one of the builds in Wales.
It occurred to me that unlike last year, there must be a large backlog of homes that have been trapped are now basically ready to go but they’re not yet counted in the homes passed. Could you give us some idea on sort of how big the backlog of sort of homes that are weeks away from being connected?
Mike Fries
We’re not really going to discontinue that kind of guidance but you’re correct when you say that as we build, what you see on the balance sheet, the capital expenditures includes both work in progress and home as released. And the home doesn’t show up as a home passed until we’ve actually released it to marketing.
So there’s always going to be a backlog of homes, both homes we have constructed but are requiring some permit or homes we’ve identified, didn’t know existed in our existing footprint and there’s always going to be quite a sizable backlog, but we’re not going to quantify that on a quarterly basis.
Jonathan Dann
Okay, thank you.
Operator
Will move now to Jeff Welder Schaap with Pivotal Research.
Jeff Welder Schaap
I wanted to get some additional color on the European Electronic Communications Code review. Realistically, when are we going to have an idea whether the EU is going to be taking sort of the original deregulatory stance or a regulatory stance?
And then I’ve got a follow-up.
Mike Fries
Well, as I’ve mentioned in my prepared remarks, Jeff, the expectation is that by midyear in this trial log that’s occurring between the Council, the commission and the Parliament, should be concluded. So it’s going to be 6, 7, 8 months.
And it’s a fluid process. We believe that industry and the commission, quite frankly, are aligned on the need for clarity and the need for a level playing field and the need to encourage investment.
I think it’s Parliament and the Council itself that are being persuaded by some instances, local regulators, to have greater control. So it’s a bit of a tussle and I don’t think will have significant authority on it until midyear.
But Manuel, do you want to add anything to that?
Manuel Kohnstamm
You said it all, Mike. The Council decision is planned for April, May.
Parliament negotiations and with counsel are going on as we speak. And there’s still various shade of gray.
So it’s not going to be black and white decision, and we’re confident that reason will prevail.
Jeff Welder Schaap
Thanks. And on the UK, do you all expect a material ARPU increase in the fourth quarter?
I mean you got customers coming off retention. You’ve got the November price increase, you changed the packaging promotions and I assume Project Lightning is probably a positive.
Mike Fries
Yes. I think it’s fair to say that with the price increase kicking in this week for the remainder of the fourth quarter, we will have the benefit of that price increase in our ARPU.
So I think that’s fair assumptions.
Jeff Welder Schaap
And so it’s fair to say the UK ARPU issues that sort of freaked the market out were more sort of Virgin operational issues rather than sort of broader market issue being able to take price?
Charlie Bracken
Well, I think, Tom here, within the market is still the rational on price increases are common among our competitors. I think it’s fair to say that last year at this time, we were doing things differently.
We had our second price increase. We were managing the call volumes and customer reactions in a different manner.
So it’s kind of apples and oranges. This time around, it’s one increase.
It’s been managed at a much more sophisticated manner and so far, the reaction has been more positive. So in some respect, yes, how we go about promoting and managing reaction to the price increase and what we’re offering customers and that is going to make them happy and keep them on board, it’s very different approach this year that I think is paying off.
So a part of it is, as you say, is control. Tom, would you add to any of that?
Thomas Mockridge
The only thing I would add, Mike, is the evidence in the results today from BT would be that ARPU is a bright spot for BT. So the possibility to continue to take price in the UK continues, and it is a common market practice.
So I think the answer is yes, we will see an ARPU improvement and is a market factor.
Mike Fries
By the way, based on BT’s result today, we estimate that on our footprint, we’re still getting approximately 100% of all new net adds in the broadband business. So clearly, price has an impact to that.
Operator
We’ll go now to UBS’ Polo Tang.
Polo Tang
Yes, thanks for taking my question. Just two points.
The first one is can you expand on your comments about having strategic opportunities in Switzerland, so was this a reference to mobile or fixed line? And the follow-up question is based on the UK ARPU, so just if you look at the pricing, I think the price rise is on average about 4.5%, so mechanically, can we just expect ARPU to rise by 4.5% after kind of Q4 or are there offsetting factors to consider?
Mike Fries
Tom, let me address on ARPU point. On Switzerland, Polo, in every market, we got strategic opportunities.
Sometimes, they come in, in greater focus. I think Switzerland, certainly, has those opportunities.
You mentioned a couple of them. There are some opportunities to extend through fiber, our reach in the market and that we’re operating some money behind that, and that’s going to have a positive impact.
And then secondly, it’s a market that we see down the road, an opportunity to potentially get involved in the mobile business in a more concrete way. Today, our mobile business is growing around 40% quarter-over-quarter as we add customers and being a bit disruptive.
But we do believe there’s an opportunity there to look at strategic options. And it can’t be more specific than that.
Tom, do you want to address the ARPU point?
Thomas Mockridge
Look, on the ARPU. I think the simple answer is no, it’s not a mechanical percentage up and maybe flow through your ARPU.
While obviously, it’s only halfway through the quarter, in any case, effectively a 6-week impact on the quarter. Of course, there is a reaction to the price rise, we never get the full view.
We’re managing that, I think, much better this year with Dana Strong team and the team with her and a combination of a bit of network, performance – box performance particularly with the V6, the EOS, the global box they’re operating in the UK So there’s a lot of things helping us maintain that yield and inevitably, there will be some spin down. And that will flow through ARPU price rise and also to some degree through Q1.
But net-net, we are definitely getting to a better result than last year. In particular, we are seeing a fundamental improvement in the churn rate compared to what we had at this time, not evident in the q this time last year, not evident in the Q3 numbers, of course, we track prospective churn very closely, and I think we’ll see that flow through into Q4.
Polo Tang
Great, thanks.
Operator
We’ll go now to Vijay Jayant with Evercore.
Vijay Jayant
A couple, if I could. First, on Switzerland, I think you called out EBITDA pressure into next quarter.
Just trying to understand how much of the MySports car sort of float in. You’ve mentioned that there’s 26,000 subscribers on that premier tier.
What is sort of the breakeven, is the reduction of churn? Any benefit of having this inflated cost on the Switzerland operations?
And, Mike, just more on structural question, obviously, in LiLAC, you have some potential breach of covenants in the Puerto Rico bank facility, which could be cured in many different ways. Is there any way that the European operations could be a source of those cures or just completely siloed already in your mind between the two companies?
Thank you.
Mike Fries
Yes, I think on the second question regarding LiLAC, but LiLAC has the liquidity and resources to solve whatever covenant issues might arise. We’re going to address that in more detail on the LiLAC call.
But I think the answer is it should be and most likely – not should be, and will be is the answer. It should be and will be addressed by LiLAC in the liquidity that they have.
In Switzerland, the programming costs, I think, are ranging in the EUR 25 million to EUR 30 million per annum amount, and its mostly all sports rights related. And we believe the business should be next year, if you look at the gross margin line, not breaking even but it doesn’t need a massive number of customers to break even.
It’s going to impact Q4, Q1, Q2 as the business starts to scale and the sports subscriber started to be added to the network. But over time, it should be a small positive to the gross margin line, if you just isolate the revenue from sports and the costs of the sports.
Vijay Jayant
Mike, if I could add one quick one more on Project Lightning, obviously, that’s helping your top line growth already. Is there a time frame you can help us of when that could actually improve EBITDA growth, OCF growth?
Mike Fries
Yes. Lightning, Charlie, you can chime in, Lightning.
I believe today is operating positive operating cash flow. Of course, there’s a lot of costs in starting up that project and reaching customers.
But it will start to scale, we think, in the next two to three years materially. It is providing cash flow to Virgin’s bottom line today.
Any color on that, Charlie?
Charlie Bracken
The only thing I would say is that the impact would depend on the pace you got. So, for example, there’s a big drag every time you add a customer, we pay an upfront subscriber acquisition cost.
Sometimes, it’s in a form of sales commission. Sometimes, it’s in a form of a discount.
So at a 10,000 per view, the faster you go, the more near-term EBITDA head. For those of you who’ve been investing for us in some time, you may remember in the broadband pay in the early in 2000, we have a concept of EBITDA precisely because we’re adding lots and lots of broadband customers on a relatively small base.
We have lots of upfront marketing costs. So the pacing of when you’ll see the benefits on Lightning comes, it will depend on pace of build.
I think Mike made a point in his remarks, and we are really thinking about the best way to optimize that from a shareholder point of view.
Vijay Jayant
Great, helpful. Thank you.
Operator
We’ll go now to Michael Bishop with Goldman Sachs.
Michael Bishop
Just two questions from me. Firstly, on the direction of build costs and the UK, I think you said previously that you’re going to look towards building fewer but bigger new builds.
And so I’m just wondering if this means that the current build cost that you’re disclosing today should stabilize in that level in the future or whether that should come down again because of the size of the builds increasing? And then secondly, all of the cost metrics are very helpful in assessing Liberty GO but I’m just wondering if you could give us some indication on where you are versus the original $1 billion growth savings because it feels like you’ve obviously got a lot of cost- cutting come into the numbers already.
Mike Thomas
Yes, I’ll handle the second one. Charlie, you may want to prepare comment on the build costs that we are disclosing.
In terms of the $1 billion, and that, remember, was – it was so much savings, meaning it wasn’t taking 2015, OpEx and brining it down $1 billion. It was looking out over three years and saying that the normal course as we grew the revenue, as we grew customers, as we rolled out Project Lightning, we expected cost to go up by a certain amount and we’re not going to let them go up.
The $1 billion in savings is really $1 billion in costs that we have basically deferred or not realized at all and that’s impactful to the margins. I’d say, we’re three quarters away there, plus, minus.
And this year, going into the budget, obviously, we’re looking to finish that out but more or less, we’ve hit most of our targets on that billing through the first two years. Charlie, do you want to talk about build cost in Lightning?
Charlie Bracken
Mike, as I pointed out, I think they said in my remarks, there’s still a lot of opportunities on the cost side as we continue to see processes drive procurement scale and obviously, the best practice benchmarking. But if I have a new build, we trying to score and give you quite a lot of disclosure because that’s a quite a complicated question.
And I won’t go through all of it now, but I’d encourage you to read the disclosure report, which I think is in the 10-Q. It’s also on the press release.
The 10,000 project we’ve done is to give you an estimated cost for home, which is the cost of expanding the access network which is the bit from the kind of hub to the home. On top of that, we’ve also made a point that this has an assumption about homes that we built passed but haven’t connected because either the customer today doesn’t want to be connected or hasn’t been connected to do that last little bit.
To the extent which those customers convert and our experience in all once in a period did convert, the build cost would go down to the number we’ve given you. We’ve also disclosed that in the process of the Project Lightning project, which is what we expected, as we review our records and the existing network, we discovered a number of homes that weren’t probably recorded before we bought the company, which has expanded our addressable customer base.
And we also discovered that the stranded homes, if you like, people that – with a very small incremental dig that you could build to that a number of these homes weren’t probably recorded either in our records. Now whether or not we could convert them, we don’t know.
But the least we can now market to them on a cost-effective basis, it’s similar to what we do in Germany. There’s a lot of reasons to believe that the number we’re getting in the disclosure possibly is a very narrow definition and possibly a little higher than what you might expect a blended average.
In terms of future guidance, I think we said virtually, we’re going to get out of the game of future guidance because it will depend on the mix. It will depend on how many of these stranded homes we can convert, how many fiber builds we do, whether we decide to go into certain areas or other areas.
But we also have made a point that we will continue to be mindful of the internal capital we get. We will only do stuff that we think would be very accretive to our general capital.
And we also think there’s a lot of opportunities along that basis. And in terms of cost per home, that’s only one way of looking at it and to the extent which is a material deviation, we’re going to keep you informed.
But for the time being, we think we simply have given you a pretty good indication of where we’re at.
Michael Bishop
Thanks. That’s really helpful.
Operator
We’re moving now to Jefferies, Ulrich Rathe.
Ulrich Rathe
Thank you. First one from me would be on Germany.
Could you maybe shed a little bit of color on what timescale you expect the situation after the spectrum sort of reallocation to normalize there? And so in that context, also talk about the specific benefits you expect from getting more capacity on the network.
How are you going to use it and what timescale are the benefits going to come through? So that would be my first question.
The second one is on the UK, on the set-top box strategy, you mentioned the V6 box several times in the presentation as a support factor. I wanted to ask a bit about the strategy there.
We have seen announcement from TiVo that you renewed a platform recently. I also do remember that some time ago, you talked about the TiVo platform as looking a bit tired and potentially, pointing towards a rollout of more something like Horizon in the UK.
I was just wondering how do we sort of put all this together, vis-a-vis the set-top box strategy in particular in the UK?
Mike Fries
Okay, Balan, I’ll let you and Tom prepare for the V6 box question, in particular, as it relates to TiVo. Lutz, I believe you’re on the line as well.
Do you want to address the German spectrum reallocation issue? And how that’s impacted your Q3 in terms of truck rolls and where you intend to go?
Lutz Schüler
Yes. I think the biggest benefit now from the analog switch off is that we are now able to roll out DOCSIS 3.1.
and the first city which will be completely enabled for 1-gigabit download speed is up. So first of April, very tangible benefit out of the analog shutoff.
And also be used the now freed up capacity for more HD channels, so we have now added nine HD channels on top. The analog shutoff and the lineup change have been executed completely.
We haven’t seen any increase in video churn out of that. So it was, overall, it was managed very well way.
Mike Fries
Balan, I’ll let you and Tom to…
Thomas Mockridge
Tom here. As mentioned several times, we’re very happy to how the V6 which is boxes deploying in the UK.
We have gone well past 800,000 customers on that box already. We’ve got an ambitious program continuing that deployment through next year, and we see churn significantly better through customer experience.
So we think we are well placed with the product we have at the moment. We’re getting a synergy benefit across the group for using the EOS box so we’ll continue with that customer-focused strategy there and make decisions going forward as we see necessary.
Balan Nair
On the TiVo contract, what we had announced, really two components to that. One, where we’ve restructured how we pay TiVo for the maintenance of the existing software on existing boxes in the UK And the second part was in IPR deal.
We had an existing IPR deal with Rovi that became TiVo. And we just extended the patent portfolio onto that and extended it on a pan-European and Latin America basis.
So it was a good win- win deal for both of us and Rovi, or the new TiVo, that. And that V6 box that we deployed, sorry, it’s the EOS box, it’s a 4k box that we plan on deploying on a pan-European basis in every country as well.
It’s a great box.
Mike Fries
That’s the point I was going to make. You should appreciate that we are heading towards a common video platform everywhere in Europe, which has massive benefits from the point of view of product innovation, time-to-market, procurement benefits and costs.
And UK’s doing great and we’ll push even more of that next year. But we intend to have, at some point, to have the entire European digital footprint operating on a common platform and perhaps a common UI, the user experience, and that’s where we need to be, I think that should be clear to folks.
Ulrich Rathe
Perfect. That’s very clear.
Thank you.
Mike Fries
Couple more questions operator.
Operator
We’ll go to Saroop Purewal with Winburn.
Saroop Purewal
Thanks very much. I just had a more general question on convergence.
So you had a couple of quarters now, three quarters, where you’ve been managing the Vodafone Ziggo entity. And I just wanted – I just wondered if you could share with us what you’ve learned about convergence and how that might apply and benefit you in other markets through an MNO purchase?
Thanks very much.
Mike Fries
Sure, I’ll a handle a few of those. I mean, the first thing we learned is the synergies are real, that you can, in fact, achieve what appeared at the outset perhaps ambitious synergy targets.
And when you put these two networks into operations together. So in both instances, if you look at Telenet with the acquisition of base or the Vodafone Ziggo JV, I think we have gone in with one set of the expectations around synergies and the more you dig in, they’re probably bigger than we thought.
So synergies are realized. The second big takeaway is when you can converge customers, when you can offer them a mobile product or fixed product and you can give them the benefits of a quad play bundle, NPS goes up and churn goes down.
And in this competitive B2C environment we’re in, those are two huge drivers of growth and value creation. So that is also quite real.
There’s a lot of work to do around the product, and I think Telenet’s a little bit further along than the Vodafone Ziggo JV is, or they’ll be there in terms of how you continue to evolve and innovate around the product. It is simply justified euro discount or double data, if you take all four things of that nature or if you provide them with a sophisticated product around broadband, content.
And I think what we believe in the end, you got to get to that place that WIGO is today in Belgium. So I think probably the fourth learning is probably that the mobile-only business, when it’s not converged, can be challenging business.
There are meaningful headwinds in the mobile-only space, as you would all know. Some are regulatory, some are competitive.
There’s – it’s a high transactional and promotional business line. And that it really needs, and I would think, thrives in the context of a fixed operation because you’ve got not just the benefits of synergies but it’s much easier to sell a mobile product to a fixed customer than it is to sell a fixed product to a mobile customer.
So, so far so good. We learned that kind of relationship in Holland is superstrong.
The management team has blended very well, and I think both parties have learned from each other.
Saroop Purewal
Okay, thanks very much.
Operator
We’ll move now to Simon Weeden with Citi.
Simon Weeden
Yes, thanks. I wondered if you could elaborate a little bit about the backlog in Germany and what you see happening to RGUs or RGU adds as you free up results and start to see the backlog to the size that we’ve talked about 3000 maybe the middle of next year.
And also I wondered if you’re seeing, if you look at across TV customer base, if you’re seeing customers trading down and if you’re seeing customers retaining broadband or switching to HD players, if any, if that’s happening in any one country more than another, perhaps?
Mike Fries
Yes, I’ll handle the second question. Lutz, maybe you can prepare to – add to what you already said around Germany and the backlog there.
As I made mention in my prepared remarks, we feel like we are doing pretty well and not just retaining video customers but in many markets like UK growing our video customer base. And that has a lot to do with the ecosystem we’re creating around our video products, in particular, the user experience, the ability to use, to basically consume your content that you’re paying us for on any device, adding things like Netflix onto the box.
Those things are allowing our customers to stick around longer, I think, report higher NPS and consume more videos. That’s all good stuff.
No question about it that Netflix and Amazon and other OTT applications are in Europe and are gaining meaningful share. And that Netflix in particular is a huge source of traffic on our networks.
But we know that we put them into our ecosystem and they become an app within our environment, they actually have greater viewership and, in our opinion, all customers are happier. So it’s not the U.S.
We don’t have a satellite business like the U.S. is showing that’s sort of hemorrhaging or experiencing challenges in the face of inexpensive over-the-top services or skinny bundles.
We don’t have that issue in Europe. It’s a market-by-market thing but for the most part, if you look at our trends, we went from losing hundreds of thousands of video subs a year to maybe tens of thousands, and that’s some pretty good sign that we’re investing in the right things in our video platform and also I think an indication that Europe is experiencing a different type of competitive environment around OTT.
It doesn’t mean that Netflix isn’t popular. Of course, it is.
But remember, when you unbundle the bundle, when you disaggregate the pricing that reside within our bundle, we’re charging a relatively low price for video, in the teens, in some cases, or lower. So it’s a pretty good deal in Europe.
And when you add in 100 megabit to 200 megabit broadband speed and you added a mobile product invoice services, the video product becomes really inexpensive. And by the way, you’re not sacrificing anything.
You get all the contents you want, we’ll fill Netflix in, and you can watch it in any device. So it’s a pretty good quote, we think.
We have to be better and smarter about the next generation of consumers and we’re launching products in many markets that are focused on alternative ways of reaching younger consumers and I’ll talk about that on the next call but I think, so far, we’re feeling pretty good about it. Lutz, anything to add on spending?
Lutz Schüler
So the broadband order intake is stable if you compare to the previous quarter. So we have still good demand.
The backlog has increased a bit on top to last quarter, so it’s now overall 15,000 customers, So that means for the customer, a longer time until the product is deployed. However, we managed the expectation of the customers that way that they are not churning in the implementation process.
It will take us until Q1 next year until the entire backlog is gone. But it is on a control – for me, the good thing is demand is there, customers are treated well, expectations is managed in the right way and customers wait until they get our product.
Mike Fries
We’re at the bottom of the hour and we’ve to slide over to the Latin American call. So we certainly appreciate everybody joining us this morning and this afternoon, wherever you may be.
Feel free to stay with us, if you’re interested in what we’re doing in Latin American region in the spin that’s coming up. We certainly appreciate your support.
We’re excited about the quarter we just had. We feel good about the fourth quarter and as we work our budgets for next year, I think a lot of the things that we’ve been talking about will come into fruition.
So we’ll speak to soon, and take care.
Operator
Ladies and gentlemen, this concludes Liberty Global’s third quarter 2017 Investor Call for our European operation. 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. The third quarter 2017 Investor Call for Liberty Global and LiLAC Group will begin shortly.