Telewest announces results of 2002
HIGHLIGHTS
· Record broadband internet subscriber growth; 192,000 broadband subs today
· 1Mb broadband service launched; 15,000 subscribers after only seven weeks
· EBITDA up 30% to £184m year-on-year; Q2 EBITDA of £93m (Q1: £91m)
· Capex down by 25% year-on-year
Commenting on the results, Charles Burdick , managing director of Telewest Communications , said:
These interim results come at the end of a tough quarter in which we introduced a headcount reduction of 15 per cent, increased prices and reduced the capex run rate from a projected £600 million for the year to around £470 million. Nevertheless, the key financials – revenue and EBITDA – have continued to move forward.
The big success story in these numbers is the continuing growth of our broadband internet product. Telewest now has 192,000 broadband internet subscribers installed. In under two months we have signed up 15,000 users to our even faster 1 megabit service, demonstrating there is a substantial market for high-speed communications. The power of our technology is two way interactivity and the ability to bundle video, voice and data. Our triple-play customer numbers continue to rise: 139,000 subscribers now take broadband internet, television and telephony.
However, our other residential products suffered as we had small net subscriber losses in both CATV and residential telephony reflecting churn from price rises, tighter credit policy implementation, and our emphasis on broadband.
The overall operational results are also a testament to the quality of Telewest’s staff, who have coped with the job cuts we have instituted in our attempt to increase efficiency and drive down costs. Their achievements have continued despite the negative noise that has swirled around the company because of our balance sheet issues.
This quality performance from our employees applies across the company. The Business Division managed to grow revenues in the second quarter. Content also has held steady despite the poor television advertising market and the loss of subscription revenue following the demise of ITV Digital. The revenue declines in Content were mainly due to the exclusion of revenues from businesses that we have either closed or sold.
As we communicated to our shareholders on 4 July 2002, our board has concluded that it is in the best interest of Telewest to enter into discussions with the Bondholders Committee and, if approached, Liberty Media to establish whether a proposal which could command the support of the board is capable of being agreed. Our board will continue to progress all available options in order to arrive at a solution, which is fair and equitable to all stakeholders. Detailed discussions will not begin until we have obtained the necessary waivers and consents from our banks.
FINANCIAL REVIEW
Total turnover for the six months ended 30 June 2002 increased 4% to £674 million compared to the first half of 2001. This was driven mainly by growth in the Consumer Division, which grew by 10% to £458 million. The growth in the Consumer Division was partly offset by a £10 million reduction in Content Division revenues, mainly due to the closure or sale of non-core businesses, and a £7 million reduction in Business Division revenues due to weakness in the Carrier market.
Gross margin has improved to 67% for the half year compared to 62% in the first half of 2001 driven by strong improvements in CATV margins, rising telephony margins and the growing number of high margin broadband customers. Gross margin is stated having taken into account cost of sales, before depreciation.
Selling, general and administrative expenses for the six months were £256 million, up 3% on the first half of 2001. Redundancy costs incurred during the second quarter were approximately £7 million and we anticipate that there will be further costs of a similar or greater magnitude in the third quarter as we complete the redundancy consultation period.
As a result of the continuing improvements in revenue and gross margin, EBITDA in the first six months was £184 million, up 30% on the corresponding six months last year. This includes our £8 million share of UKTVs EBITDA. EBITDA margin, excluding UKTV, for the first six months was 27% compared to 22% in the first half of last year.
Net loss for the six months was £239 million, down 42% on the first six months of 2001. This reduction was due mainly to improvements in EBITDA, foreign exchange gains relating to dollar-denominated debt, gains on the sale of investments and lower goodwill amortisation costs.
Capital expenditure in the first six months was £241 million, down 25% or £78 million on the same period last year. This is in line with managements stated aim of reducing capital expenditure to below £500 million for the full year.
As at 30 June 2002, net debt stood at £5,308 million, comprising £3,554 million of Notes and Debentures, £246 million of lease and vendor financing, £42 million of other loans and £1,807 million drawn down on our bank facility, offset by cash balances of £341 million at 30 June 2002. The Groups cash balances have increased by £250 million since the end of the first quarter, mainly as a result of drawdowns from the Groups senior bank facility, £31 million of cash realised on the termination of certain foreign exchange contracts and £29 million received in respect of the disposal of the Groups stakes in TV Travel Group and The Way Ahead Group.
The interim financial information has been prepared on a going concern basis. On the basis of cash flow information that they have prepared, the directors consider that the Group will continue to operate within the Senior Secured Facility currently agreed with its bankers and available for a period of at least twelve months following the date of this interim announcement. The Groups debt obligations begin to mature in late 2003 and as stated in our letter to shareholders, dated 4 July 2002, the Directors are currently considering their options to allow the Group to meet these obligations and stabilise its medium and longer term financial position. In addition, over the next twelve months, the margin of facilities over requirements is not large and consistent delivery of budget is necessary to ensure continued compliance with the terms of the covenants within the Senior Secured Facility. Inherently, there can be no certainty in relation to any of these matters. The interim financial information does not include any adjustments that would result from this going concern basis of preparation being inappropriate.
BUSINESS REVIEW
Consumer Division
Consumer Division revenues for the six months totalled £458 million, an increase of 10% on the corresponding six months in 2001. This increase has resulted from year-on-year subscriber growth and ARPU gains coming from the growth of our successful broadband products, increased multi-service penetration and selected price rises.
During the second quarter, net customer disconnections were 13,000 mainly as a result of the consumer price rises introduced in the quarter and a less aggressive retention policy aimed at customers who wish to disconnect.
At the end of the quarter, our 129,000 triple play customers subscribing to CATV, telephone and broadband accounted for 7% of our customer base. Together with price rises, this contributed to a rising monthly revenue per household which was £41.95 for the second quarter up from £41.48 in the first quarter. (The first quarters figure has been restated to exclude indirect access telephony revenues. See note 2 below.)
Internet
The second quarter was another record quarter for broadband internet growth. Net additions were 51,000 representing 40% growth in the quarter to 177,000 at 30 June 2002. By comparison, net additions were 13,000 in the corresponding quarter last year. Furthermore, as at 31 July 2002, subscribers stood at 192,000 with 139,000 of these also taking TV and telephony.
On 17 June 2002, Telewest Broadband launched its 1Mb blueyonder broadband internet service. This service is available for £35 per month as part of a bundle, or £39.99 as a standalone service. By the end of the quarter, this faster 1Mb service had 8,000 subscribers. As at 31 July 2002, this had risen further to 15,000.
CATV
Net CATV disconnections in the quarter were 25,000 as churn rose to 20.7% from 19.1% following price increases and the changes in retention policy discussed above. CATV subscriber growth was also impacted by a shift in targeted marketing towards broadband rather than digital TV. In the third quarter, we are introducing our digital TV services to the former Eurobell franchises in the south-west. Average monthly CATV revenue for the quarter was £21.47 up from £20.80 in the first quarter as a result of the price rises.
From August 2002, the monthly price of the digital starter pack is being raised from £11.49 to £15 for new acquisitions as we focus on improving the package mix of our subscribers. There will be no price change for existing subscribers.
CATV gross margin has increased to 62% for the half year from 53% in the corresponding period of 2001. This is due to price rises and an actively managed change in the mix between lower margin premium and higher margin basic packages. For example, 78% of our CATV subscribers are basic only (i.e. do not subscribe to any premium channels) and the pay-to-basic ratio has fallen to 69% from 86% at the same time last year.
Telewest Broadband launched its enhanced TV platform with red button functionality during the quarter. The new functionality allows our digital customers to interact with any eTV enabled programming. The service has been well received by our subscribers with 50% of digital customers accessing the World Cup service, 43% accessing the Wimbledon service and over 850,000 Big Brother votes being registered.
Residential Telephony
Net residential telephony disconnections in the second quarter were just under 10,000 as churn rose to 16.8% from 16.2% following the consumer price increases.
Subscribers to Talk Unlimited, our 24-hour 7 day-a-week flat rate unmetered residential voice service available for local and national calls in the UK, continued to increase with 48,000 net additions in the quarter. We now have 300,000 Talk Unlimited subscribers representing 18% of our residential telephony base.
Average monthly revenue declined to £24.89 in the quarter from £25.27 in the first quarter. (See note 2). We believe that residential telephony useage in the quarter was negatively affected by approximately £2.5 million in the week of the jubilee double bank holiday in June which also coincided with some World Cup England games.
Business Division
Business Division revenues for the six months totalled £131 million, down £7 million on the same six months last year. Within this amount, Carrier Services revenues were £20 million in the six months, down from £33 million in the first six months of 2001. Excluding Carrier Services, the Divisions revenues have grown 6% compared to the first six months of 2001.
The Business Division continues to benefit from growth in the provision of data services across all market segments with the launch of IPVPN (Internet Protocol Virtual Private Network) a secure and scalable private network solution that enables companies to send voice, video and data through one single, efficient connection.
Companies taking the full range of business services include new and existing customers such as SAGE, the University of the West of England, Royal London Insurance, British Airways and Sandwell Learning Plus – a project partly funded by the European Regional Development Fund to provide services to 43 schools in the Birmingham area.
Hosted Microsoft Exchange from blueyonder workwise has picked up a second award this year, winning Best Small Business Solution of the Year for Western Europe, in the Fifth Annual Microsoft Certified Awards that recognise partners who have delivered exemplary customer solutions .
Content Division
Content Division revenues totalled £85 million in the first six months, including our 50% share of UKTV revenue. Content Division revenues are down £10 million compared to the first half of 2001 due to the closure or sale of businesses and other one-off effects where revenues of £12 million were achieved last year. These include the sale of Screenshop, the closure of HSNDI and a substantial Government grant payment in respect of the set-up of Living Health.
The closure of ITV Digital has negatively affected the revenues of UKTV. The effect of the closure on the Content Divisions share of revenue is approximately £1.5 million per quarter. As a result of the closure of ITV Digital, UKTV has announced that one its channels, Play UK is to close at the end of the year. None of the Content Division’s wholly owned channels were carried on the ITV Digital platform.
Advertising revenues of £35 million (including our 50% share of UKTV revenue) for the first half of 2002 were up 4% in a market that saw a 3% overall decline. The Content Division’s share of total TV advertising revenues was 3.4%, up from 3.2% a year ago.
On 14 June 2002, Telewest announced the disposal of its stake in The Way Ahead Group ticketing agency for £10 million. Way Ahead revenues consolidated into the Content Division were £3 million up to the point of disposal.
Corporate Developments
On 14 May 2002, Microsoft informed us that it was withdrawing its three non-executive directors Henry Vigil, Salman Ullah and Dennis Durkin from our board of directors. Microsoft holds 23.6% of our issued shares and has the right to nominate up to three representatives to the board under corporate shareholder agreements with us. At that time, Microsoft said: At present we believe that we will be in a better position to manage our relationship with, and investment in, Telewest without board representation.
On 28 June 2002, Microsoft notified Liberty Media that it intended to sell publicly its interest in us and, in accordance with the terms of shareholder agreements noted above, offered Liberty Media the right to purchase that interest within 30 days. We are not aware of the status of the discussions between these two shareholders, if any, as to Microsofts interest.
On 12 June 2002, Liberty Media announced a tender offer for certain of our publicly traded bonds. At that time, Liberty Media announced that upon completion of the tender it intended to propose to the Companys board of directors a restructuring plan pursuant to which all or substantially all of the Companys publicly-traded notes and debentures would be converted into equity of the Company. On 17 July 2002, Liberty Media, citing the deterioration in the US and UK securities markets and the significant fall in the trading price of Liberty Media’s common stock since the commencement of the Offer, terminated the tender offer. We do not know whether Liberty Media still intends to approach us concerning a restructuring plan.
Also on 17 July 2002, Liberty Media informed us that it was withdrawing its three non-executive directors Robert Bennett, Miranda Curtis and Graham Hollis from our board of directors. Liberty Media holds 25.2% of our issued share capital and has the right to nominate up to three representatives to our board under corporate shareholder arrangements with us. Liberty Media said: ‘We are taking this action to eliminate any potential conflict of interest or appearance of a conflict in any upcoming restructuring discussions. The management and the remaining directors of Telewest continue to have our full support.’
We have been approached by a committee representing a significant proportion of our bonds (the Bondholders Committee). The Bondholders Committee expressed the desire to work constructively with us to explore the possibility of bondholders participating in some form of reconstruction of Telewests balance sheet. Telewest has not yet discussed any specific proposals with the Bondholders Committee.
Our board has concluded that it is in the best interest of Telewest to enter into discussions with the Bondholders Committee and, if approached, Liberty Media to establish whether a proposal which would command the support of the board is capable of being agreed. Our board will continue to explore all available options in order to arrive at a solution which is fair and equitable to all of our stakeholders. Detailed discussions will not begin until we have obtained the necessary waivers and consents from our banks.
Subsequent Events
Following the quarter end, further currency contracts were terminated in July, resulting in cash outflows of £31 million and a further £12 million of cash outflows to be incurred in October 2002.
On 31 July 2002, Telewest announced that Adam Singer, chief executive, would be leaving the company and had resigned as a director of the Board. Charles Burdick, previously the finance director, becomes managing director.
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