Virgin Media Business (VMB) remains a key source of revenue growth for parent Virgin Media as it continues on its mission to “shake up B2B telecoms and provide a unique alternative to BT and other providers.” VMB revenue in Q2 was up almost 10% on the same quarter last year to £166m. That compares to 4.2% growth across Virgin Media as a whole, which reported a turnover of just over £1bn in the quarter.
With profitability it’s a different story though. Operating profits at parent Virgin Media are moving in the right direction: up 33% in the quarter to £180m. Whereas gross margins at VMB were down by 5% year on year to 55%, due largely to the rollout costs associated with its large London Grid for Learning (LGfL) contract (see Virgin Media means Business in UK public sector). This decline in margins at VMB comes despite the company’s stated strategy of focusing on higher margin data products and projects – a strategy that on the face of it is bearing fruit with 16% year-on-year growth in data across its retail and wholesale businesses.
The Public Services Network (PSN) remains a strategic growth focus for VMB, which is involved in a number of sizeable regional PSN bids that it expects to drive growth beyond Q3. The impact these deals will have on margins is worthy of note. We would expect large contracts such as LGfL (a PSN-style deal) to require upfront investment and therefore put pressure on margins short term. But if the government succeeds in its PSN mission to commoditise network services, lower margins should remain a feature of public sector deals.
In fact VMB - a new entrant to the market with an existing consumer-focused fibre network to exploit - is set to be one of the suppliers driving down prices and, to paraphrase VMB MD Mark Heraghty, ‘shaking up the market’. The longer term impact on margins is likely to be strongest at incumbents such as BT and CWW. Hence the desire of PSN suppliers such as VMB, BT, CWW, Level 3 and Fujitsu to layer higher margin services on top of the network infrastructure (for more see The Public Services Network: foundation for change in public sector IT? and Fujitsu’s end-to-end PSN strategy if you’re a PublicSectorViews subscriber).