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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global 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. At this time all participants are in listen-only mode. Today's formal presentation materials can be found under the Investor Relations section of Liberty Global's website at www.libertyglobal.com. After today’s formal presentation, instructions will be given for a question-and-answer session. As a reminder, this investor call is being recorded on this date, February 15, 2018.
Page 2 of the slides details the Company's Safe Harbor statements 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 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 on today's call constitute 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 our results call. We had 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 upto today and where we’re headed.
I'm joined on the call by Charlie Bracken, our CFO, who is 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, hope you can grab a copy of those now or later, there’s a lot of good data on there.
I’m going to start on slide 4, where we lay out a handful of operating and financial highlights for 2017. Here 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, did increase 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 an almost two-fold improvement over two years ago. So, it's clear that our ability to retain 99.5% of our video subs year-over-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 two 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, our 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 offense 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 to high return new build projects, we’ve talked a lot about that. The new build projects alone represent about a quarter of our CapEx, so that’s clearly a discretionary spend.
We’re making discretionary investments in new products like Horizon and we’re rolling our next gen digital boxes and 1 gig Wi-Fi routers at a record pace. And every quarter we get deeper in the fixed mobile convergence, which drives churn down and drives NPS up. 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.
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. Now this might be what sets us apart the most. We’ve 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 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 11 times in Austria helps make that point.
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 each of which of course is commitment to owning more of our stock with $3 billion of buyback completed last year and another $2 billion already announced this year. So, we remain focused on three key strategic goals that should sound familiar to you. First, driving national scale to 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 to the benefit of shareholders, that's a pretty strong combination in our view.
Now 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 the second half and I’ll address that. 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're much more disciplined in the fourth quarter and strategic about discounting in order to retain ARPU which clearly worked for us. Showed 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 in our discounting activities that sets us up really well for continued growth in 2018.
You’ll see on the top right that we added 229,000 RGUs in Germany, which was slightly weighted to the second half of the year. We saw 40% sequential uptick in the second half, for data and voice adds 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 and 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 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 is a silver lining, Telenet largely breakevens economically on the access regime in Belgium, provided that for every Telenet sub we lose, Orange also adds across unit 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 last 6 months 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 support services, smarter bundles and a popular fixed mobile product.
But I want to point out that in Switzerland, is really not Holland from our perspective. There are some big differences. For starters, there’s only three mobile operators there today, not four. 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 cross across the footprint. We have a superfast broadband network that reaches two-thirds of the market. By the way, we just doubled speeds this week for half our broadband sub base for Switzerland. And on top of that we have very high OCF and free cash flow margins, which presents an interesting strategic options for us, as we’ve discussed.
Turning to slide 6 as you know we’re in year three of our Liberty Go plan and as we’ve done from time-to-time, we’ve highlighted here in this slide, progress on a handful of those key drivers. 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 Lighting in a minute. But we do talk about four 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. In 2018, we’ve already announced price increases in most markets, including Germany, Switzerland, Ireland in certain of our CEE countries.
But on the other hand, as we’ve also communicated throughout the year, both competition and discounting of an impacting ARPU growth, especially, 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, 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. In Germany and Belgium, we’re both up 3%. So, a mix 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 completed 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 are still 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 of SOHO and SME. And Belgium one of our most mature Belgium 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 usually 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, while we’re up 30% and 60%, and that’s really, of course from a low base and in 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 have a strong fourth quarter with revenue up 17% on the back of higher handset sales and out of 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 share synergies in that period. So, good news in both cases.
Finally, on a bottom right, we highlight the fact that we executed very well on the efficiency plan that was 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 functions, central cost and our T&I operating model. And as an example, you can see in the call out box that most or if not all of those savings in central support functions were invested back in the customer's in terms of both products and marketing.
So, to recap new build, cost efficiencies and B2B are all contributing to growth. Mobile is showing some positive signs, 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 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 will 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 two decades and well 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 tools and processes we need to grow the base and the ARPU and we’re seeing an aggressive rollout of new products. You can see some of the team’s good work on the top left of slide seven, which shows the step up in revenue from the 1% to 2% range through the first nine months 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 meg product nationwide. We added V6 boxes being rolled out 1 gig Wi-Fi routers being rolled out at a record pace. We think Virgin is in a really strong market position.
And I’ll end my remarks with a few 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 months 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 have 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. 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 through the overall project timeframe.
Our confidence in Project Lighting 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 on the bottom right, that customer penetration rates are trending towards our longer term goal of 39%. We’re generally hitting 24% after one year and 34% after 33 months. Also ARPU is in line with our overall base ARPU after discounts, currently around GBP50 per month.
And build cost importantly, build cost to date have been steady around GBP650 per premise mark. You know 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 startup CapEx, but also depending on the timing of where it leaves [ph] remember that in the denominator of that GBP650 premise mark, we don't include another 10% of homes that we’ve built, but yeah, having it released for marketing because of where it leaves [ph] so that number arguably is a bit overstated looking backwards.
Now many of you have asked for an example of project returns from Lightning. 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 with hit the 39% penetration number and the ARPU to aligns with the existing base at GBP50, those 1 million would generate about GBP230 million pounds 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 GBP115 million on that cohort. 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 base infrastructure, our CapEx spending is rising, 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 a reservoir of growth tomorrow and so forth that's what we're seeing and you will see that kick in in 2018.
Now I’ll make one last point before handing it over to Charlie. There has been as you’re probably seeing 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 one 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. Then finally, I will conclude with a high level recap on 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 quarterly result in two years. I will get into some of the key growth drivers on my next slide. On the OCF front, we regenerated rebase 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 5.1 times and 4.9 times respectively at December 31st. We made great progress during 2017 with $24 billion of refinancings that extended our average tenant to nearly eight years, while our blended full swap borrowing cost 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, in our segment reporting. On the far left, we show or rebased growth for the overall company including both our fourth quarter and full year results. Moving to the right, Virgin Media, our operations in the U.K. and Ireland posted rebased revenue growth of 4.4%, a 2.1% in the Q4 of full year periods, respectively. The Q4 result was our strongest quarterly performance in two 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% of 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 quarter and fourth quarters. We will have a similar headwind during the first half of 2018.
In Belgium, Telenet posted 1% rebased revenue growth in post Q4 and full year 2017, mainly driven by strong results of B2B and 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 attached 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 Swiss francs 10 million in Q4 and Swiss francs 40 million in the second half of 2017.
As we mentioned on our last earnings call, we expect the net expenses associated with MySports to be around 30 million Swiss francs 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, supposedly in part by our new build activities across the region. Rounding out our segments, we continue to stream on our cost base, reducing our central and corporate expenses by approximately 11% over the full year period.
Then finally on this slide taking a step back, the vast majority of our operations have been executing at a high level with the outlier clearly being our business in Switzerland. When we look at ourselves results without the tracking system, we’re pretty pleased with our performance.
On slide 12, we provide a bit more color on our P&E additions, which we categorized into five main buckets; CPE, new build and upgrades, capacity, products enablers and base line expenditures. The key point that I would address is the level of our capital intensity, which is at 31.7% for the full year 2017. Prior to 2015 when our new build efforts began ramping we were able to excuse in 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. As Mike illustrated earlier, we do believe that our new build program is establishing a reservoir of future growth with meaningful contributions OCF expected to begin this year. In the first line of the table, we detail our customer premise equipment category of 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 basis have an advanced TV set-top box or a Wi-Fi connect box and we will continue to aggressively upgrade our customers in 2018. Similarly, we will 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.
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 builds and expect to see a much more meaningful OCF contribution this year and beyond. B2B continued to achieve double digit revenue growth and we expect strong growth to continue in 2018. And from a cost perspective, we have delivered on a promise of keeping our indirect costs based flat. Our balance sheet, we will continue term out the average tenure of our debt, hedge both current and interest rate risks and maintain ample quantity. And as Mike mentioned, we will analyze all scenarios where we can create shareholder value, most recently evidenced by the sale of EPC 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 a new build and upgrade projects, to over $1.6 billion of adjusted free cash flow and repurchase another $2 billion of our equity in 2018.
And we've done, 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.
Thank you, good morning guys. Mike you talked about wanting to build to be a national champion in the markets you’re in and that's consistent with what you said in the past. Could you talk about, both Germany and Switzerland in that context and what those paths look like in those markets. Related to just the asset sale idea in general, maybe for Charlie. Can you just talk a little 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 and what we may or may not be doing. But I think if you look at Austria as an example, you know we had roughly 35% reach in that market. We had a business that was you know 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 was going to be a tough path to becoming a national champion. 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 and with a broadband market that's extremely exciting and continue 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. But I think that for – whatever we do in that particular instance it's the market we ought to grow with or look at options.
In Switzerland, I’ve said before we have greater reach there, almost two-thirds coming up on 70% of the market. I think it's a market that’s just 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 even a rapid turnaround in the Swiss market, just as we didn't get a rapid turnaround in Holland. It took us a couple, three years to really get the fixed business in Holland back on track, which it is today as you look at the - Vodafone Ziggo results. So, I think we're being opportunistic and thoughtful about that. I'm trying to dance around your question as I should in this context. Charlie, you want to hit the taxes.
Yeah, we have a very substantial tax asset.
Okay, that's enough. Fair enough.
Yeah, sorry I'll be more specific in that, I think he may have cut off. You know clearly as you would imagine Ben, we are all the time evaluating our tax past year with respect to all of our businesses. 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’ll leave it at that. You’ll see to what we mean by that.
We’ll take our next question from Nick Lyall with Societe Generale.
Hello, there everybody. Just a couple please if possible. Just a 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 into the business? 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 Vodafone Ziggo the results is like a little mixed with Telenet charm being up and also the OCF being really quite sharply down at Vodafone Ziggo. So, why are you so convinced given the performance of the businesses so far? Again, is there something I may be missing. Thank you.
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, when we really started, managing through some heavy churn related to the price increase towards the end of the year. And so the result 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. As you may know like we’ve talked about, our average discount rate in the fourth quarter of this year or last year was about 22% or as a year ago it was 29%. So, I think we've just been mostly focused in being particularly disciplined about the front book and the back book and 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, but sales were also a little bit down as we became more disciplined around the ARPU line. So, 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 two numbers. You want to add to that at all Tom.
Thank you, I’d just said that maybe the estimate there of the year-on-year decline was a bit over stated. But remember a year ago, we actually had Constantine price rises, so we were coming off a particular 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 this year rather than Q4 last year because as we sat on the deck, there’s only half of quarter’s price rise and it's pretty much a nominal increase 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 action as Mike has mentioned, about a more structured approach to discounting that the V6 boxes being deployed about better routers, about better base management. Overall, we are in significantly better shape than we were 12 months ago.
Mobile question, it depends on what you're measuring, right. In MVNO, Telenet and particularly in Vodafone Ziggo we have seen the sort of improvement it gives us confidence in particular I'm referring to NPS and churn. If you're 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. Remember fixed and mobile for us in Europe, it's partly offensive because we know customers want more and more products from us. 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. 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. I think we have the ability to do that in just about every market we’re in. There are headlines 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’ve described it 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 describe it.
We'll take our next question from Michael Bishop with Goldman Sachs.
Yes, hi there. Just two quick questions for me. Firstly, just picking up on the CapEx points, certainly pointed out on the presentation, I'm able to 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 for further towards 20%. We actually have a pretty similar debate on the Telenet call about future level as well. 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 was just wondering if you could help us better understand where you're thinking the contribution from Project Lightning will shake out in 2018, given your comments that didn't really contributed at all in 2017. Thanks very much.
Yeah, on the CapEx point, I think Charlie should be back on. I'll just add one thing and then [indiscernible] yeah, great. So, I mean, 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. Our things like what we're doing in the U.K. with the V6 box roll out. So, we had 1 million towards the end of last year, I think we're budgeting $1.5 million or more this year. So, we are proactively both with our EO's box or our upgraded 4K super fast video platform, as well as, with our connect box. So, the new routers that provide 1 gig 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 into that CPE business a little bit more than we might otherwise.
My view long-term as we do trend back down to the low 20s, if you were to exclude all of that and that's kind of where we were before we started new build. But the one thing beyond new build that we are leaning into that kind of indicated was to get these devices in the home. We know NPS is up like 20 points when we put a V6 box in somebody's house, that's good capital spend. Any other color on that Charlie?
Yeah, some of the things I would say, I think Telenet to Project Darwin [ph] which is investments in customer experience, IT which is a front-loaded investments, as well as, investments in the mobile phone network of base, which I’m sure, I explained to you, but that is a front-load investment. The other big numbers as you saw is in product. We’re investing a lot of money in products and that’s good capital. We’re putting a lot of money to B2B, so it can serve the SME, that’s front-loaded and quite a bit [indiscernible] we call enablers, which is driving the digitization of the customer experience, which we think will pay back very richly. So, I do think this year has got a lot of, as you said, one-offs in it. But I just make you, 24%, I wouldn’t talk about this. The CPE growth is also as Mike said to do with the V6 boxes, but it's actually also to do with new build audience, which we got from part of the new build spend if you like. So, it’s not quite so clear. But the new build we’re talking about on the slide is compared to access networks investments.
Great point. 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 2018 will be materially higher than it was in 2017 as you would expect because we're scaling through some of the startup costs we have now 1 million homes to market aggressively. I think we're much, better more efficient at that process, so it should be a meaningful larger contribution in 2018 than 2017. We’re not going to give you any specifics.
I’ll just give you some on that. As Mike [indiscernible], the faster we can go at that sort of pace, we want to achieve, the more EBITDA we lose because obviously we need some sort of acquisition costs. So, in some respects one of these number you guided because it will take, we want to grow as fast as we can, with that we’ll see how big impact the ability. But just to act there what he’s saying, it was generally accelerating in terms of profitability year-on-year.
We’ll take our next question from Robert Grindle with Deutsche Bank.
Yeah, hi there, thank you. In terms of Project Lightning question, you've obviously gaining traction in the market and in the U.K. and you have retraced it to 4 million homes target. I wonder how you feel about the new entrants to fiber roll out 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 even beyond your original plan by leveraging off some of the other operators build programs. Thank you.
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 three 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. I think a lot of the activity you see today in the fiber announcements, I would describe them as not necessarily projects since most of them haven't really begun much, partially tactical, partially political, partially also strategic. So you correctly point out that some of these announcements might create cooperation and collaboration for us or others who are looking to reduce costs to 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 got both the inclination and the conviction around it. I don't know whether the rest of them will have the capital to 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. So, Tom, you want to add some color to that.
Yeah, the only thing I’d add is that today this moment, we have got out of the 500 cruise out there, averaging six people on a pretty wet and drizzly day, actually making it happen. As Mike alluded to we’ve learned some lessons, maybe the hard way, that under Rob Evans and with the cooperation of the core technology innovation group across Liberty Global. We have really reorganized ourselves and we are much, much more confident about our ability to execute. And as other people see the opportunity to compete with BT, but net-net, that probably helps us.
Next question comes from Daniel Morris with Barclays.
Good morning. Thanks for taking the question, 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 2018 is going to be quite substantially smaller in terms of price increases versus 2017 and that goes to 2016 as well. Maybe also you can also talk a bit more conversely in the U.K. I think maybe the direction of travel is a bit different than we could actually see year-on-year ARPU growth again in 2018. So how do you think about your ability to take price in the market generally? Then I've got a bit of a follow-up. Thanks.
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 range from you know 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 timeframe. Really the U.K. would be only one that sort of we're benefiting from in the first and certainly all the second quarter because it was a Q4 price increase.
So, we're not like 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 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 process, the right people the right incentives to both retain and manage that base. And 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, do you want to hit that hit that in 2018?
Yeah, clearly, all the issues you’ve alluded to the buyout and as I said earlier, I 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 and a new structure. Another thing I would point out going forward is the CPO rights deal which has come through. I know it’s not completed yet, but potentially overall, loss certainly now higher than it was before and that's going to give us a cycle of three 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 color. Thanks. I mean, I think you’ve kind of partially answered the second half of the question, which was very much that if we look mechanically the price tailwind in Germany and U.K. your two key markets looks like a smaller in 2018 versus 2017. But your OCF growth guidance is stable-ish and you know 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 to just understand how you get to a stabilized year growth but I think you partly answered that. Is anything perhaps ….
I'll give you a bit more color on the guidance. Clearly, if we’re saying around 5% that would include a range, you can decide what the range is. Our full year results in 2017 would have been no closer to 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 2018 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 cost and we're in the investment phase in a number of areas of that business. So, we're being conservative there. If you took Switzerland out of our results in 2017, 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 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 the neighbor member Romania sometimes with 12 countries somebody catches a cold, so we want to be transparent out that.
We’ll take our next question from Jeff Wlodarczak with Pivotal Research Group.
First on the U.K. RGU result this quarter how much of that's related to price churn versus backing off aggressive motion activity. And then assume you continue with these strategies. Is it fair to assume despite the benefit of Project Lighting U.K., net new RGU is probably going to be lowering in 2008. Then 2007 although obviously you have a higher quality customer and better ARPU trends none of that follow.
Well, I would say now, again I’ll let, Tom 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 just you was churn was down in the fourth quarter compared to 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 will agree that 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 2018. And I would suggest to you that that applied to the U.K. as well, almost across all metrics.
Fair enough. And then Mike, can you comment on press speculation. In the U.K. you moved on 5G and if that's something that might be interesting. How are things different today than say compared to your experience in Chile with building out your own network. Thanks.
Well, there have been some rumors around that I would simply say that to extent we were looking at that, it would be really optionality, yeah as opposed to something more strategic where you know 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 and in the U.K. I wouldn't look at it in that light.
And we’ll take our next question from Vijay Jayant.
I think so Michael you guys are making a lot of investments with high end boxes, fast broadband speeds. And you keep talking about you know you're really focused on driving ARPU. Can you sort of give us some sort of sense on how the sort of the ROIs are sort of developing on these advantages that you have because when you look aggregate numbers we see more CapEx and we don't see the ARPU right in the way, it would see. So, at the unit level any color because there's obviously a question about will customers pay up for these advanced services broadly. Any experience that you could share will be great.
Yeah, 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 slides that that is a very high return on a 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 interim 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, you mean, the return on our capacity spend, you know 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. Generally speaking, whenever possible are higher end customers are paying us more. If you look at the business that we're in ,which is competing with incumbents and staying superior to the 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, if you have 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 you we’re about 75%, 80% ready. I think that will grow at 90% some-odd 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 is for new 3.1 modems. 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 of 3.1 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.
Thank you. I was curious, you didn't talk really about the emerging European telecoms framework. Aetna has really come out and said that so most of the profits in the new digital economy are basically being allocated to Facebook, Google et cetera. At the same time you have that interesting consultancy study a few months ago from RCC [ph] little really talking about your numbers or just a macroeconomic context even for Europe. How do you see the field moving over there, so that your growth could accelerate as you capture more of your fair share of the unit base in the digital economy?
Well, I think if the framework in Europe is evolving, you know as we said many times over the last decade it's really been you know very favorable to us. The challenger allowing for consolidation and 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 a 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'll be sometime, it'll be probably this summer before any resolution and that maybe even summer 2019 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 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, it has a healthy view of digital platforms and wants to ensure that 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. 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. I suspect it will continue to be so.
Do you have a personal reaction to the IoT numbers and aspects like that, and the RCC little [ph] report because I mean there's absolutely blue sky, numbers you mention, even a small percentage of it would be integral to your business. And I know –
But that's another, yeah it's a very good point. I think there will be IoT business as it evolves and it'll take some time. It’s 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 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 developed. Its 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. I think it's over the next 24 to 36 months some of that might be clear to folks.
Not in the 2018 budget, thanks Mike.
We have one final question from James Ratzer with New Street Research.
Yes, thank you as very much indeed. So, just kind of last question, I wonder, if I could just come back to the issue around you U.K. ARPU please. I mean, I know we had the price rise in – for six 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 taking in a bit more on what's happening here. Is there something more maybe fundamental that U.K. consume, is it just getting more price savvy and sensitive and it's just going to be tough to push through ARPU due to mix effect to spin down. And secondly – sorry Mike go ahead.
No, you go ahead and ask the question.
Yeah, the second it’s also about the U.K., but on a slightly different topic. I mean, the Vodafone press release made it clear in discussions on the continental European assets only. So, if you can comment at all, 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. On the first question, the main point here and Tom, I’ll ask you to you 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 call, we had some ARPU erosion last year sequential. And the important point I think in ARPU is to look at sequential ARPU change. 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, its where are we coming from in the last two quarters as I would say. Tom, do you want to add to that?
Yeah, I’ll reinforce the point, I think it's about Q1 2018 is the issue, its where we had the particular pressure last year. We just going to have to prove ourselves to you in three months time when we come to this earnings call that we have a much better team effectiveness systems, and organization and discipline around that.
You’d be hopeful of more of sequential ARPU growths going into Q1 next year or this year I should say?
I don’t think, I meant to say that I'm just saying that we are – we certainly feel that we have a much better organized around the price increase. As we have mentioned if anything we took time 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.
You’re not seeing then just the kind of [indiscernible] just from the last question any kind of general pressure around discounters having more kind of favor with consumers who see economic climate in the U.K. bites at all.
But I think in the broad that’s less of an issue for Virgin Media, than it is to some of the other operators. We are clearly the highest ARPU operator in this market. And if anything that position is winding. We avoid the heavily discounted piece of the market down the bottom, essentially because that's not our product. That's a says BT open rich product that other people sell. So, I think in our position in the market about primary being triple play operator about mainly fastest, most effective provider having the best router. Frankly, we think now the best TiVo V6 box to support that. We’re trying harsh efforts and we continue to focus on ARPU accretion as a positive thing for the business.
All right. Tom and Mike, thank you very clear.
Sure. Thanks guys, all right we appreciate everybody joining the call. Sorry, it went over just a little bit. Look forward to talking to you 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 work smart money. And then optimizing levered equity churns for you guys. So, we think that’s the strong combination and we’ll speak to you in a few months. Thanks very much.
Operator: Ladies and gentlemen, this concludes Liberty Global 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.