Liberty Global Ltd (LBTYA) 2004 Q1 法說會逐字稿

Welcome to the UnitedGlobalCom first quarter 2004 investor call. This conference call and associated webcast is the property of UnitedGlobalCom Incorporated. Any redistribution, retransmission, or rebroadcast of this call or Webcast in any form without the express written consent of UnitedGlobalCom Incorporated is strictly prohibited.

At this time all participants are in a listen-only mode. Following today's formal presentation, instructions will be given for a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded on this date, May 10, 2004. I would now like to turn the conference over to Mike Fries, President and Chief Executive Officer for UnitedGlobalCom. Please go ahead.

Thanks and good morning, everybody. Thanks for your patience. On the call with me this morning is Rick Westerman and Charlie Bracken, our co-Chief Financial Officers; Gene Schneider and Gene Musselman. Before we get going I'm going to let the operator read a quick Safe Harbor statement, and then we'll get into the call.

Thank you. Page 1 of UGC's presentation details the Company's Safe Harbor Statement regarding forward-looking statements. Any forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these statements. In the Company's press release, its first quarter SEC filings and in the appendix of the presentation, the Company has provided the definitions of frequently-used terms, GAAP reconciliations of non-GAAP financial measures, and additional financial information for investors. I would now like to turn the call back over to Mike Fries.

Thanks. And as she pointed out, we are live on the Website, so you can follow along on the slides that I will be speaking to on the Website, and there are a number of appendices there that do define some of the terms that we're going to be using today.

We have a pretty straightforward agenda. I'm going to start with a quick review of our financial and operating results released this morning. To supplement these numbers, we will walk through some segment detail on revenue and operating cash flow by division and by country. I'll take the key balance sheet metrics quickly and then review progress on some of the key initiatives that I identified on the last call. All that should take about 10 or 15 minutes, at which point we will get to your questions.

First slide here just provides some quick highlights. Just one moment here. Here we go. Some quick highlights for you. By any measure we had a very strong first quarter, financially operationally and strategically. We added over 92,000 RGUs; that's ahead of budget and almost double last year's results. Revenue increased 26 percent to over 547 million and operating cash flow was up 67 percent to 204 million.

Strategically, we also made good progress on key initiatives with respect to products. I will speak about data and voice. On the system front, we made significant strides on customer service. The acquisition pipeline is filling up, and we're active, as usual, on the balance sheet front. And not to preempt the punchline here, but we will be confirming our 2004 guidance.

We'll start with a look at our subscriber activity for the quarter. As I said at the outset, we added 92,000 RGUs in the first three months, which, given the seasonality of our business, puts us slightly ahead of plan and on target to achieve our full year guidance of 500,000 net adds. If you look at the individual products, we had a very strong quarter in the data business with 61,000 net adds, 51,000 of which were in Europe; that's a 22 percent increase over our fourth quarter results in Europe, which were very strong, as we've said. Europe is still a very competitive data market, as you know, and we're feeling the effects of that competition.

On the positive side, sales and net gain year-to-date are very good, and they're about 50 percent and 80 percent higher, respectively, than the same period last year. Our sales mix is about 50 percent light products and 50 percent basic or classic products -- not far off our targets. And we are experiencing the expected churn or downgrades from higher priced tiers; as a result, our data ARPU in Europe is down about 3 percent from 12 months ago, but still averages €36.50, or nearly $44 per month. The bottom line is we are profiting from the price volume equation as we maintain our share of a market that's growing much faster than we expected.

Turning to telephony, we had a modest increase in customers, driven by Chile and our bundling initiatives in The Netherlands, and these numbers were offset by the closure of a small Czech telephony operation. Our DTH business in Central Eastern Europe now serves over 200,000 subscribers, as you can see, and we had the best digital quarter ever with over 22,000 net adds. This was largely driven by the launch of our French HITS service, where we experienced three times the forecasted sales activity and have a significant backlog yet to install. Analog TV subs were down slightly due to seasonality, but actually performed better than expected. And on a regional basis, at the bottom of this slide, there's really two points to make there. One, Chile continues to perform consistently and on track, and Europe contributed nearly 80 percent of our net gain versus just 60 percent for the full year of 2003.

Next slides just gives you headline numbers as reported. Revenue of 547 million, up 26 percent from the prior year. Approximately 74 percent of this gain was attributable to favorable foreign currency movement, leaving underlying or organic growth of 7 percent. I'll did into that number in just a second. Operating cash flow, which is our new term for EBITDA, was 204 million, up 67 percent year-on-year. And if you net out the FX gains, growth in operating cash flow was still a very strong 42 percent year-on-year for the quarter.

Obviously, we feel pretty good about our guidance of $100 million of operating cash flow for the full year. Even though we had a slightly stronger Euro in the first quarter, if you ran the numbers at the guidance rate of 1.20 for the dollars to the Euro, annualized EBITDA is just shy of 780 million. So we feel good about the guidance number.

Our operating cash flow margin reached 37 percent on a consolidated basis, up nearly 10 points year-on-year. As I'll speak to in a minute, we continue to improve the efficiency of our operating platform. CapEx was $80 million, up 39 percent, primarily due to higher subscriber activity, and free cash flow doubled year-on year-to 36 million.

Next slide -- we're moving ahead here. Pardon me. The next slide provides a second level of detail on revenue by key division in both dollars and functional or local currencies. The left-hand side, you can see the 547 million of revenue breaks down in dollars. About 87 percent of that, or 474 million, in Europe, and the balance of 74 million in Latin America.

If you focus on the right hand side of the slide which shows revenue in local or functional currencies, you'll see the European broadband division, or UPC, reported €353 million of revenue for the quarter, up 6.2 percent over last year. That's slightly below our guidance of 10 percent for two primary reasons -- first, we did not recognize the rate increase announced in The Netherlands, and I'll speak about than just moment; and second, we had negative currency movements relative to the Euro in many of our Central and Eastern European markets. If you added back the FX movements, we would have been in the 8.5 percent range, and with the NL rate increases, back in a double-digit zone. Chellomedia revenue was 48 million, flat year-on-year. But as we'll see in a minute that was entirely attributable to the CLEC operation. And Chile performed very strong in local currency, generating 1 percent revenue growth year-on-year.

Next slide provides a third level of granularity on our revenue results, in particular our European broadband division, where we've provided some detail by major country and region. Starting at the top, you'll see that The Netherlands generated €137 million of revenue for the quarter; that's up 7.6 percent year-on-year despite not recognizing the rate harmonization I just referred to. Austria was also up over 7 percent, while France was largely flat due to a decline in voice traffic, and little to no impact from the new digital customers which should kick in in the second quarter. The rest of Western Europe was impacted by strong growth in Sweden of nearly 10 percent, but a decline in Norway in Euros due entirely to currency movement in that country. Organic growth was closer to 7 percent.

Using constant exchange rates, revenue growth in Central and Eastern Europe was actually in the mid teens. The €86 million of revenue you see in the quarter here reflects negative currency movement, in particular Poland, where we couldn't keep pace with the zloty in that market. The two lines of detail in chellomedia demonstrate that our core access and media businesses grew nearly 14 percent but were offset by a decline in revenue in our CLEC operation due to competitive pressure and a shift out of less profitable wholesale businesses.

Slide eight provides the same sort of second level of detail on operating cash flow by division and by currency. On the left-hand side, you will see how the 204 million of cash flow breaks down in dollars -- 183 million in Europe and 25 million in Chile, before other items. Again, focusing on the right-hand side of the page which provides results in local currency, you'll see that operating cash flow in our European broadband division with €149 million for the quarter, up 30 percent year-on-year. And chellomedia, while small at €9 million, was up nearly 90 percent. And the European group as a whole was up 37 percent to 146 million for the quarter. And again, Chile continues to outperform, with organic operating cash flow growth in the quarter year-on-year of 60 percent.

Digging a little deeper on the operating cash flow numbers, you'll see results by major country or region on this slide, along with our operating cash flow margins. I think the first key take-away is on the very first line, and that's The Netherlands, which reported a 46 percent improvement in operating cash flow for the quarter year-on-year, to over 70 million for the quarter itself. The Netherlands now represents about 50 percent of our broadband operating cash flow in Europe.

In addition to the 8 percent growth of revenue in The Netherlands, we continue to realize significant operating cost efficiencies in our largest market, with total operating expenses and SG&A for the quarter down 16 percent year-on-year, as we have consolidated call centers, reduced headcount and realized pan-European synergies in our network backbone and SLAs. If you move to the right-hand side, you'll see that The Netherlands now operates at a 51 percent operating cash flow margin, up from 38 percent last year.

Overall, the broadband division in Europe generated (technical difficulty) €137 million of operating cash flow for the quarter, up 35 percent year-on-year and its expenses were largely flat outside of The Netherlands. In chellomedia, cash flow grew 88 percent, driven by revenue growth in the access and media businesses and cost reductions across the entire group, including Priority, of 9 percent.

Slide 10 is our traditional balance sheet snapshot, (indiscernible) you'll see actual -- the actual debt balance at March 31 was down to 3.9 billion from 4.4 billion at year-end, primarily as a result of the Polish restructuring. Cash at March 31 was 1.3 billion, reflecting the completion of our rights offering in February. And net debt due to last quarter annualized operating cash flow was 3.14 times.

The pro forma column adjusts March actuals for the convertible bond offering completed last month. You can see that both debt and cash were up about 600 million and leverage stayed the same. (indiscernible) over 1.9 billion of cash, and together with our revolver capacity in Europe and our public holdings of total potential liquidity of $2.9 billion, and no near-term amortization issues whatsoever for the next three years. As we previously announced, we have initiated partial refinancing of our bank facility in Europe. We intend to drop a portion of this cash, as much as€450 million, into the bank group in an effort to reduce the borrowing cost and create further flexibility and capacity as we look at acquisition opportunities.

Page 11, our next slide, is the -- lists the key initiatives that we discussed on our last call. I'll just touch on a few of these key items, starting with topline growth. I've been through the revenue growth numbers, and so while 7 percent organic growth year-on-year is below the 10 percent target, I think we have explained clearly the unique reasons for this in the quarter. RGU growth was strong across all markets and products. And as we disclosed, we're making very good progress in our rate harmonization initiatives in The Netherlands. We now believe we have either no problem, an agreement reached, or an agreement pending, with cities representing over 80 percent of the 1.1 million affected subscribers or impacted subscribers. If successful, the revenue impact will still be substantial this year, and an annualized impact in '05 will be north of €40 million.

I've touched on the data environment; the market is competitive, but there's plenty of good news and we're live with our VoIP trial in Rotterdam and planning on a launch late this summer. And we continue to evaluate alternative digital rollout models in The Netherlands. On the system front, I think the most impressive news again revolves around The Netherlands, which is now by far our best performing customer service operation. And I'll just throw out a few statistics here, and these are changes over the last 24 months.

Average calls received down 32 percent. The percentage of calls disconnected or abandoned in The Netherlands, down from 20 percent to effectively 0. Average speed of answer down 2.5 minutes to less than 30 seconds, and all of this while reducing headcount in our customer service organization by 35 percent. These are world-class results. And I think you'll find, anecdotally or otherwise, that Holland is by far our best customer service market.

With respect to expanding our footprint, I think everyone is aware of the Noos transaction. That's on track for a Q3 close, and we do have a few transactions that we're working on, and we'll keep you posted on those as they get -- as they become more live. And lastly, on our capital structure, I think -- both the convert offering and the recently announced bank refinancing help to reduce our borrowing costs, enhance our flexibility and liquidity and increase our free cash flow.

In conclusion, we feel pretty positive about our first quarter. I don't think we could have asked for better performance on the subscriber and the cash flow and the balance sheet front. The second quarter is shaping up very nicely as well, and we look forward to reporting those results in the summertime. And we're making progress in all our key initiatives. And I guess to conclude, we're very pleased to be able to reaffirm our 2004 guidance.

So with that, operator, we would like to turn to questions

(OPERATOR INSTRUCTIONS). Ned Zachar, Thomas Weisel Partners.

Well done on these numbers. Firstly, on the bank deal, can you give us a bit of a status as to when you might get a bank deal finished? Should we look for that in the second quarter, for example? Secondly, I am guessing the Noos transaction is not really in the guidance. I think I know the answer to that, but I want to make sure that that's in fact the case. And lastly, as you look at your portfolio of countries, to what extent are you thinking about -- as you increase your exposure to certain countries, i.e. France, does it make sense to be in all the countries that you are in now? Would you expect to bulk up in all the different countries, or does it make sense to do some rationalization? Thank you.

Sure. On the bank deal, as I did mention, it has been initiated and we would expect that would be a second quarter event. You're right about the Noos transaction, it's not included in the guidance. And with respect to acquisition opportunities, I think we feel that sort of the priority that we have set from the very beginning was that we would like acquisitions to sort of satisfy four main criteria -- number one that the valuation makes sense given where we are and given our ability to drive growth in that particular business or that particular market; or that we're able to achieve meaningful synergies from the business, which implies that we will likely be going into markets that look like our markets or where we are already operating; and thirdly, that we can do so while maintaining an appropriate leverage ratio of between 4 and 5 times, and we think we'll be able to do that given our current cash balance and our current net debt to EBITDA. In terms of specific countries, I can't be really more clear than I have been. As we get closer to having certain transactions completed or near completed, we'll get those announced. But we are looking at those four main criteria -- markets where we realize meaningful synergies, rationalize existing businesses, where we understand the business model, and where we can finance reasonably and appropriately within our leverage targets.

Just a quick follow-up, Mike. Are the transactions moving along at a pace that you're happy with?

Yes. If you looked at the pipeline -- if you looked at the European marketplace as a whole, there are millions and millions of (technical difficulty) that could potentially be for sale. I think we are finding that for a period of time here in the early part of the year, evaluation expectations on the side of sellers were perhaps a little out of proportion. So if you look at the most likely candidates, and in particular assets that are currently owned by private equity investors, you might have made an argument that given how robust people are feeling about their business and their multiples, that maybe transactions wouldn't happen. Although we did get the Noos deal done, and there were certain circumstances around that. We still believe that 8 to 9, maybe 8 times multiples are achievable in this marketplace. Free synergies. If we ever did a transaction north of that, it would mean that there are meaningful synergies, or perhaps the business is not running on a best-practices basis. And our ability to come in and drive mid-40s up to 50 percent EBITDA margins on our businesses is pretty unique at the system level. So a multiple that looks higher than what we we've said in the past we would like to target would usually be on an asset that, for example, in Eastern Europe has a tremendous amount of rationalization and cost improvement to be realized. Or perhaps, even Western Europe the same story.

Last question. The sellers are more likely to be PTTs or private equity entities? How should we think about that?

I think it's more the latter than the former, but it's really situational. Certainly, private equity investors that got in early and over the last 12, 18 months at some distressed levels -- the question will be how much is enough for them in terms of realizing returns? Many of them have cashed out or at least taken their cash out in the form of debt financings. But I think it would be more the latter than the former. But we'll see? We have a really very full pipeline, and we'll -- we have prioritized that pipeline, and we'll see what makes sense. But we also -- let me just make this point -- we won't make acquisitions for acquisition sake. The nice thing about our business is that we have good organic growth that we're sitting on top of. And as you can see from the guidance we have provided and from the results we're generating, the organic story in our business and in my opinion is a fantastic one. So we'll be prudent and smart about acquisitions, you can be sure of that.

Matthew Harrigan, Janco Partners.

Two questions. Firstly, can you talk about how your competitive positioning is relative to DSL, in terms of price per bid and the speeds and the Euro DOCSIS 2.0 migration. Hopefully, you'll get some migration from quasi broadband to true broadband, how that shakes out. And then secondly, in Q2 I there's a noise in Q1 from last year; I guess the Darby (ph) (indiscernible) cut over and all that. In Q2, relative to Q1, would you expect to see a normal seasonal pattern, or do you think you're seeing an acceleration at this point on RGUs?

On the first point, I think you can almost be certain that to the extent we are in a competitive data market in whatever country we operate in, that our pricing and our speeds and our offering -- our tiered offering is more or less nearer the competition for the most part, Matt. We're not necessarily leading the competition; in some cases we might be, in other cases we're not. But if you lined up the various offerings -- for example, in Holland we have upwards of five, six tiers of service, meaningful tiers of service. And you lined up our offering versus a competitor's offering, you would see that they're largely the same both in terms of price and speed and data features, in terms of data limits as well as e-mail accounts and things of that nature. So I can start positioning vis-à-vis DSL on the pure data product, as well as a comparable. Where we're trying to build a broader position is with respect to the bundle itself. And we've had very good results so far in the first quarter on the bundling initiatives we have launched in Holland. And in particular, both on voice and data, we're finding that that bundle -- at the lower end price that bundle makes a lot of sense to folks. And so we're getting good pickup there. And broadly speaking, over time, we believe that our ability to not just bundle digital and telephony and the video product with data, but also to add to and provide robust content over that portal, will be the differentiator.

Let's be clear, and I've used this term before, we are in a race for market share. And in our view, we want that market share, because we're in the data business for the long-term. The beauty of our markets in Europe is that we're getting much more rapid migration from DSL than they are experiencing here in the US. With The tiered services, at the pricing levels that our tiered services are, we are seeing massive migration from DSL. We want those customers, because we're in this business for the long-term, and having that -- our modem in that home gives us the ability to up-sell products and services overtime, bundle services over time. And so this is a good race to be in and the right race to be in. The positive thing from our point of view and from our economics is that we have significant gross margins on data as high as 90-plus percent. We have significant EBITDA margins on data well over 50 percent, and so we are still generating meaningful profit out of these customers even with the sort of mix that we're seeing on a net RGU basis. And so this -- the price -- as I said in my comments, we're still winning that price volume game. We're still generating meaningful revenue and EBITDA growth despite the fact that we're offering lower service, or perhaps because of the fact that we're offering lower tiered services, and the market is growing much faster than we had originally forecast, say, 6, 12 months ago. On the Q2 numbers, we haven't traditionally given quarterly guidance; I don't want to start here except to say that we did get a nice run-off from the fourth quarter sales activities in the first quarter. There are some periods in the second quarter, Easter and a few months, that are, generally speaking, (indiscernible) a few weeks; pardon me. There are, generally speaking, shorter weeks around Easter timeframe. But you should expect good results in the second quarter. I don't want to be more specific than that.

(OPERATOR INSTRUCTIONS). David Joyce, Guzman & Company.

I echo the comments on the good subscriber numbers, particularly on digital. Are you seeing the benefits of new content deals yet, or is that -- are a lot of those still in the works?

The digital results were as I said, largely attributable to the French HITS platform launch. As you'll recall, at the beginning of the year we decided that on the -- oh, I think roughly 600 to 700,000 homes in France that are not digitally upgraded -- that we would provide sort of a Headend in the Sky digital service to those markets, and allow ourselves to market and bundle a digital product into those more regional rural markets. And we just simply underestimated the demand for that product. And as I think I indicated, sales are roughly three times what we expected, our backlog is massive, we're out of inventory; good sort of problems. So the net gain the number you'll see in France and digital in the first quarter actually is nowhere near the sales number we actually did, and you'll seem, I think, very good numbers in the second quarter as well. The digital numbers largely relate to that specific marketplace. We continue to make progress in the other markets, and as I mentioned in my remarks, we are evaluating alternative models for digital rollout in markets like The Netherlands, where we believe there is an opportunity to shift the paradigm here in the digital (indiscernible) I think same sort of questions U.S. operators are struggling with, or at least considering -- do I want to be all digital? And in a market like ours, the beauty of a market opportunity like ours is that we're already 90 percent penetrated so we have a wire into 90 percent of the homes. We're not taking much money out of those markets; we're only taking net €12 out of those homes today. So there's a fairly large share of wallet available in those homes for digital services. And I think with pricing of the boxes and the hardware and the software where it is today, you can make economic sense -- much better economic sense of the digital proposition from an NPV point of view, and it would take a lot of pressure off both the content equation and the expected ARPU equation. By that I mean the amount of ARPU you need to generate out of the home is less, and the ability to get meaningful content in those markets is easier, because you can demonstrate to people that you have the scale. So if we did -- and I'm not trying to be coy about this topic, but we're just still really evaluating it. And it's not in our numbers, it's not in our guidance, it's not in our long-range plan. And we certainly wouldn't put it in there unless it was meaningfully accretive to our numbers. And so as we get closer to making some sort of decisions around that, we'll certainly let people in on it. But we are intrigued by the opportunity in a market (indiscernible) to change the digital paradigm, and, I think, generate some pretty meaningful results out of that marketplace on the video side.

Will the same issue or same potential of taking the pressure off ARPU be the same story with your Eastern European markets where there's currency conversion, maybe a long-term economic benefit?

Yes. I guess on the currency point, I would say that certainly over time these markets will be Euro-denominated markets. So we would expect that the Central and Eastern European countries, with the exception of really Romania, will over time be Euro-denominated markets, that we won't have the same currency issues that we've been discussing today. In terms of the Eastern European marketplace, where we are only about 30 percent rebuilt today, we will certainly -- we are evaluating the right way to get into the digital business there and when. What I can tell you is with respect to almost every product -- whether it's VoIP, whether its data tiering and advanced data services, or whether its digital -- I think in almost every instance if you looked at our product timeline, the road map is moving up, it's not going back. Six months ago we probably wouldn't even have been thinking about digital in Central Eastern Europe. But today, given the success of the HITS platform in France, perhaps the extent to which we're seeing good, meaningful results out of the data market in Central Eastern Europe, I would argue over time it's an accelerating road map and not a decelerating road map for new products and services in Eastern Europe. Where as you can see from the revenue results, we're doing double-digit revenue growth, mid teens revenue growth, on a local currency basis in those markets in general. So those are fast-growing markets for us and ones that I believe you'll be hearing a lot more of as both the year progresses and in the coming 18 to 24 months, in terms of our growth story.

Ted Henderson, Stifel Nicolaus.

Mike, you were mentioning that Eastern Europe's 30 percent rebuilt and that, obviously, you're going to -- what is the gross number that it takes you to rebuild it?

On average in Eastern Europe, we're talking about rebuild numbers in, I think, the 100 to €150 type range. And it's relatively inexpensive to upgrade and rebuild those markets. They're largely aerial plant for the most part, and in many instances fairly dense. We haven't really quantified it and we haven't provided a lot of information around that. We can as we move forward. But you can suffice to say, Ted, that the cost to rebuild in those markets -- given labor costs, given the aerial nature of the plant, given the densities -- is going to be a fraction of what it would cost here in the States. And I would say -- I don't know, Charlie, if you want to add, or Gene -- €150-plus (indiscernible).

But a pretty efficient rebuild when you decide to go after it, too. Because it's not digging up a lot of streets, because a lot of it is aerial -- correct?

Right. You want and to add anything to that, Gene or Charlie.

I'll tell you, it does vary because some of the stuff is quite rural. So (indiscernible) in Eastern Europe we would never rebuild. Notwithstanding the GDP characteristics, it's a bid like France. (indiscernible) and they're quite rural (indiscernible) in the Czech Republic. But by and large Mike's right, the lower labor cost means that the upgrade and the (indiscernible) is quite a bit cheaper than Western Europe.

Mike, just on the great margin improvement in The Netherlands -- 38 percent last year to 51 percent this year -- is the North of 50 percent target margins in the other Western European markets? Is Netherland an anomaly there? Or do the others have the potential to drive those type of levels in your view?

I think it's case-by-case, but The Netherlands I don't think really is an anomaly. It is and it isn't. It's certainly our largest market. And the management team there driven by Musselman really have done a fantastic job of, I would say, realizing easy wins. You consolidate call centers from 5 to 3 to 1; you eliminate headcount where there were redundancies; you centralize the operations of the country in the one headquarters. We made some very straightforward kind of simple efficiency moves that are starting to pay off, and I don't think we are done. I think that those same types of best practices apply, quite frankly, to other markets. In Austria, Austria has a slightly lower video penetration so it doesn't have quite as much scale on its networks, so the EBITDA margins there should get into the 40 range, but perhaps not quite as high as 50. I think it's fair to say that between 45 and 50 percent is a good target for all of these markets. We're at 42 percent in Hungary, we're at 47 percent in most of our Western European Central Eastern European markets. Mid-30s in Poland, but that's because we have a large number of Lifeline customers who don't generate as much ARPU. So I think mid-40, 50 at the system level are achievable results.

Just as a final thought -- I think you used the word outperform three times when you mentioned VTR in your initial comments, and it's an old triple-play market that hardly ever gets any play on these conference calls because of so much of the focus on Europe. But is there things to be learned from what's going so well in that triple-play market, and could you comment on why every quarter it seems like the words outperform go alongside VTR?

Sure. I think the theme that you'll pick up on here is Chile has done several things well, and it's similar to many of our markets in Europe in that it's fully rebuilt, a nationwide network for the most part. But their strongest suit thus far has been their ability to bundle product, and to completely present the company as a bundled company. By that I mean there's no communication, there's no marking, there's no advertising, there's no mail drops that aren't about the three products. And they have done that very effectively. They've made that -- in everything they do that's what drives their strategies and their services and their marketing campaigns. So that as much as anything, I think, is the benefit. Their bundled ratio is almost 1.6 to 1; by that I mean they have 1.6 RGUs for every customer relationship. So they're selling data, they're selling voice. The other thing is you've got a market that's relatively robust from a demand point of view. We have gotten nearly 30 percent penetration in certain markets, and I think we're in the mid 20s on penetration generally in those markets on the voice product, because the voice business is ripe in that marketplace. In many instances we're being knocking on doors that don't have telephones. And they're doing all of this with relatively low cable TV penetration. And that's probably the last factor, that because it's a -- the cable penetration is relatively low, at least in certain of the core markets in Chile, we've had to really drive the voice and data products to create the revenue and cash flow opportunities. And so the answer is yes, there are things to learn from that. I think -- hopefully at the conference this week in New York, at Liberty's conference, we'll give a little more detail on our bundling initiatives outside of Chile and Austria. And I think you'll find that we have got a lot of upside when it comes to realizing the same kind of bundling benefits that we have realized in places like Chile and Austria. But thanks for bringing that up because you're right, it definitely does not get enough airtime.

Frank Knowles (ph), New Street.

Actually a couple of questions on The Netherlands. You mentioned that ARPU was declining a bit, but you said that about 50 percent of the adds were in the light category and about 50 percent were still in the classic category. But if I understand the pricing right, light is in the sort of high teens low €20s and the classic is in the sort of 30 to €40s. So it seems that the modest decline you talked about is -- I find it hard to understand why it's only quite such a modest decline, and is that something you expect to trend towards the sort of mid 20s level of ARPU at the time.

I'll answer that question. I think you need to distinguish -- in the case of data, you need to make sure you are distinguishing between both what is happening on an activity or a net adds basis and where we sit on an advocate or cumulative ending RGU basis. We have 840,000 Internet -- high-speed Internet subscribers throughout Europe. We've only been selling light or entry or sub entry products for roughly six to nine months, depending on the marketplace. So the vast majority of our customers are still paying us in fact on a pre-VAT basis, somewhere closer to €50. Net of that, mid to high 30s low €40 type numbers. So most of her customers are still the high-end basic customers for the most part. So the mix numbers I gave you were mix of net adds for the quarter, not mix of current customers. That's point number one. Point number two -- the ARPUs on our subscriber base or on our data services, (indiscernible) some mid teens, high 20s; in fact, if you look at the retail rate, it's as low as 14.95, and at the sub entry level it's in the €20-plus up to €30-plus at the entry and light level. So we are still in that sort of 15 to €30 range in those lower end products. It's not all in the teens or the 20s. We are still actually seeing -- and we're seeing pretty meaningful sales growth and net add growth across those products, both in terms of the light and the entry. And light is really our best seller; it has been year-to-date, relative to sub entry and entry. You have to kind of slice and dice it that way. You've got to look at the mix of net adds versus the mix of aggregate customers to see the impact on RGUs, and you'll also need to look at the fact that we're still generating somewhat meaningful ARPUs even in these lower end products, because we're starting at a €49 retail rate in that basic level.

If I could sort of follow-up a little bit also. You mentioned that success in bundling, unless I'm misreading the numbers, you only added about 1500 telephony subs in The Netherlands over the quarter, whereas you added a very impressive 20,000-plus Internet subs. So in fact, do you expect that actually -- the bundling to become more and more effective and the (indiscernible) to start catching up, especially once you get the IP rolled out? And then actually I did have one just sort of definitional question. As you start being able to roll out voice-over IP telephony, does what you define as sort of telephony homes serviceable actually become the same as what's now Internet homes serviceable, sort of implying you've got a much bigger potential telephony market over time?

Yes. Let me answer the first question -- the second question first. Yes and no. And by that I mean, certainly your data customers are your best target customers for voice-over IP service, but there is -- you've got to do some network upgrade and integration work before its VoIP capable. So the answer is until such time that you've actually done that work in any one marketplace, for example as we have done in Rotterdam, then the network has got to be VoIP-capable first, whether it's integrated into a hard switch or soft switch and (indiscernible) etc. At that point, essentially any IP-enabled home is a VOIP-capable home. That's the answer to that question. Sorry; your first question was --?

How the bundling is going? (Multiple speakers)

On the bundling point, I would only have anecdotal data. I may provide a little more data on Thursday. But for the most part we are seeing the sort of results we would want to see from bundling, in terms of I think 50 percent of our telephony sales now are coming with a data service. So we're actually seeing the sort of results on a week-by-week basis relative to day ones, if you will, pre-bundling, as we want to see. But that's anecdotal, and I'm not prepared to provide you any more information than just anecdotal. I think as the numbers evolve we'll give you more transparency in that. But it's good news.

Ethan Fucoh (ph), Mento (ph) Capital.

Most of my questions were answered. But I was wondering, in The Netherlands, do you expect -- what do you expect from the video subscriber base this year? Do you expect to lose, stay the same or add subs there, in video?

I think it's probably expected. I have the numbers right in front of me on the budget. But I think for the most part -- we certainly expected to lose customers in the first quarter here across our analog base. We lost fewer than we actually had anticipated. I would say if it's not slightly negative it's flat, and I think that's a safe assumption for the most part across our entire analog video base across Europe. If you looked out over five years, if we sit at 90 percent penetration in Holland, do we expect to be at 90 percent in five years? Probably not. It's hard to tell you where those customers will be, because the competitors haven't really emerged. But a prudent look out would argue that in a place like Holland perhaps you're going to go from 90 to something less than 90 if video over DSL or IP TV evolves, or things of that nature. We certainly have a much less robust competitive environment in video than in the U.S. or the UK or any other typical competitive market, so that there isn't any immediately explainable reason for it except that I think a prudent look would say -- yeah, you're probably going to lose a few points of penetration overtime. Not necessarily the same in other markets; it's really situational. In a place like Austria where we're 50 percent penetrated, we think there might be a few points to gain and in another markets. It really depends on the actual market itself. But in Holland, I think a prudent look, and certainly our medium-term forecast would show over time perhaps a slight reduction in penetration in that marketplace.

One follow-up. You did speak a lot already about digital, but can you just describe where you are on your thinking. If I go back probably a year, you were downplaying the digital opportunity broadly speaking across your subscriber base, and have appeared -- as far as I can tell -- to kind of warm up to the opportunity over the last year or so, as you've seen set-top box prices go down, etc. So what's your kind of current thinking overall on that? Also, do you expect -- to the extent that you do ramp up digital in the months and years to come, do you expect to actually take equity stakes in content as you do that?

You're right about the comment that over the last 12 months or 18 months we have certainly downplayed it, and there were good reasons for that. The reasons were twofold. One, we wanted to make sure that people understood as you looked at our '03 or '04 guidance, that given the history of the manner in which this company pursued the digital opportunity, that people weren't -- we were setting expectations properly in that '03 '04 timeframe. And by that I mean we were making sure people understood that digital wasn't moving our needle upwards or downwards. And that if we missed or made a digital target, that it would have a marginal impact on the '03 and '04 numbers, because of the particular economic model or digital model we are pursuing, which is a higher cost at higher subscriber acquisition cost, higher ARPU proposition. And it's been a higher acquisition cost and higher ARPU proposition as much as anything because of the technology component end in principle of the box and the software associated with that platform that we have developed. What has changed are several. Number one and most importantly, the technology platform costs themselves, we believe, have declined meaningfully. And when you sit in front of a traditional set-top vendor and you start talking about millions of boxes instead of tens or thousands of boxes, not surprisingly you find that pricing comes down pretty meaningfully. So that's certainly one thing we've found, and that allows you to sort of revisit the opportunity from a different economic point of view. And so we have sat back and looked at that, and it may make sense. We will see. That -- if we do go that direction, then, and you can bet, we'll be talking about digital or something that will move the needle. As it sits today, it doesn't. So that's to put those comments in proper context. With respect to the content side of things, we certainly do and will look to own stakes in content opportunities. And I think you will find that over the next six to 12 months, as this proposition evolves and matures, that either owning content or sourcing content is one of the two or three main drivers of the opportunity itself. Without that content, without significantly improved content -- whether it be sports or movies or otherwise -- the proposition doesn't make a lot of sense to customers. And so we are certainly in dialogue with and developing and actively pursuing a number of content initiatives. And I would expect that we will certainly own equity where we could if it made sense. It's not the first order of business. The first order of business is driving that distribution platform, but it's certainly a close second order of business, which is making money on that content as well.

Steven Laner (ph), Morgan Stanley.

Nice quarter. A question for you regarding the comment both on the call and in the release that you're contemplating doing something with the credit facility. It wasn't clear if you're looking to refinance the whole facility or certain tranches. If you could just maybe elaborate on that.

I've done a lot of talking; I'll let Charlie answer that one.

I think that as far as (indiscernible) our current bank facility is, it's very robust, as you know that we have committed capital, we have no amortization issues for at least three years with a very supportive bank which we're very appreciative of. It's been trading very well. The only issue for us is some of the tranches of the debt are quite expensive. LIBOR 550 it what was the pricing on what is the current tranche D, and as well as on the tranche C. And clearly, what is in our minds is is there an opportunity to opportunistically reset that pricing. And I think we have been exploring with our banks the possibility of doing that. It would not be a complete refinancing. What we would do is preserve the existing facility but essentially replace some of the more expensive tranches with higher -- with lower-priced debt. Clearly, if we can't get the pricing on the terms that make sense for us, then, obviously, we're not under any pressure to do it. But we are very appreciative of the supportive of our bank group as it currently stands. And as part of that, we are looking to contribute some equity into the bank group to help them in the reset of that pricing. So we'll have to kind of keep you posted. I think Mike said that it was a Q2 event, and we would hope to get something announced by then. But the net effect of it will be to keep the existing facility in place, but replace one of the more expensive tranches with cheaper debt.

I would describe it is an opportunistic opportunity to -- or an opportunistic transaction to improve free cash flow over time, reduce borrowing cost and enhance flexibility. It's not a must-have, it's a nice-to-have. And I think so far the reaction has been positive.

Is that 450 in addition to the 750 that's required to be repaid by the end of the year? Or is that part and parcel (multiple speakers)

That 450 would obviously be going some way towards the 750 that is required to be repaid, albeit -- you may recall that the -- it's not a sort of cliff thing; you don't have to pay 750 off to -- you do get credit for paying off 450 of the 750. Any refinancing would, obviously, be paying off more than the 750. Any refinancing will be exchanging at least another 300 million of debt. So I think you can assume this transaction would eliminate the need for -- eliminate that 750 issue.

Jason Anderson, Ritchie (ph) Capital.

As far as the -- there was a question about the Noos transaction. I was just wondering if you had any pro forma indications about -- on '04 guidance, with respect to cash flow and CapEx?

No. In our last call we indicated that the deal was struck at a trailing annualized EBITDA basis of 7 1/4 multiple. And I think we indicated that EBITDA range was 70 to €90 million for that annualized picture or snapshot, and let's say it's at the third quarter. I think we still think the number is somewhere in the middle of that. They're tracking well thus far. So I wouldn't want to be any more specific than what we said last time, which is somewhere in the middle of that 70 to 90 million range is probably a good number.

And as far as the CapEx?

Charlie, do you have that number handy?

I'm sorry. Which number was that, the Noos CapEx number?

Their CapEx is pretty marginal. The CapEx that they have actually forecast for the year is relatively marginal, and the business is free cash flow positive. We didn't really provide any guidance on CapEx as we see it in the sort of following 12 months after acquisition, but I think today they are not spending a lot of money on the network today.

I think it would be -- we feel that given what we would expect to do in the network, there could be quite substantial capital expenditures.

I think we made that clear, that we felt that to get the network to our level of quality and service, we would have to be spending some capital in the first, I think we said 12 to 18 months against that. But in terms of more -- it's just on a run rate basis. And if you were looking at a pro forma '04 number, I don't think they're spending a significant amount. I don't think we have that number, though, publicly.

(indiscernible) going to do a positive free cash for the day, but we're spending money.

Alex Henry (ph), Corsair (ph) Capital.

Just another CapEx question. Sequentially, CPE was up a good bit, and it looks like infrastructure spending was down. I guess if you could just sort of -- I assume a lot of this had to do with high-speed data mix on that CPE piece; but if you could just take us through why, and how do you expect CapEx to go for the rest of the year, and if 20 percent of revenue is still the right sort of ballpark number? I think this quarter is about 15 percent.

I think -- my reaction to 20 percent is it's a conservative number. We wanted to be somewhat conservative on guidance. What I'll tell you is that there is a shift, as you would expect, from fixed to variable CapEx for the period. Our expectation is to still spend sort of what we budgeted to spend. We don't see any huge movement in sort of our internal forecast around CapEx; perhaps some shifting from one area to another. But based on the activity we forecast, we'll argue for the most part the budget is going to be the variable CapEx component, CPE and variable network expenditures. Do you want to provide any more caller than that, Charlie?

The only thing I would say is the good news story in Q1. We actually were over budget on CPE, because we did so well on data adds also in digital HITS adds in France. I think in terms of the non CPE CapEx it's phasing largely, because as you know, Q1 is not a great month -- (indiscernible) not great weather in Europe, so we don't do a lot of construction in Q1. But I (indiscernible) the 20 percent would be an upper limit based on what we know today, absent some major initiative like a big digital rollout or something

Which would be incremental (indiscernible) separately. That was Mike Fries.

One other question; with the -- it was about 62 million of stock compensation expense, could you just give us little color on that, and what we should expect ballpark that to be going forward? Because that was sort of a bigger number than a year ago and what we have been seeing.

Rick, do you want to address that?

Sure. We changed to variable plan accounting for our stock options. And as a result of that, you will see movements in that line corresponding with movements in our stock price. So to the extent that our stock price is volatile, I think you'll see additional charges. But it's all noncash.

And that was simply a catch-up, because we haven't done it prior to this quarter is what you're saying.

That's right.

(indiscernible) if you've got a further -- a follow-up question on that, you're welcome to give us a buzz.

I may just give you a call just to walk through the nuts and bolts.

Ned Zachar.

Thanks for taking the follow-up. A couple of questions. (technical difficulty) change in digital paradigm in The Netherlands -- I'm not -- and take some pressure off of ARPU, I'm not sure I understood what you were trying to get at with that comment. And secondly, as far as HITS is concerned -- Headend in the Sky -- in France, mechanically how does it work for customers? I'm not sure I follow the concept.

Let me start with the second one first. When we say Headend in the Sky, it's (technical difficulty) a means of (technical difficulty) and more cost effectively digitizing our networks. And so what that means is rather than going out to the more remote headends in France, of which there are about 60 or 70 plus in the more remote rural areas, and rebuilding every headend, what you would simply do is you put together a digital package, you transmit that via satellite to the headend, and you the pass it through to the customer. From the customer's point of view, there is no difference. The customer has no idea how the digital content is getting to their home; we use the same digital devices in the home, same marketing and everything. So it's simply sort of a back-office, if you will, approach to digitizing your networks in more remote rural areas, and not dissimilar from what's happened here to a large part of the U.S. cable market, where the original Headend in the Sky concept, the PCI launch ultimately became one of the primary backbones, if you will, of digital content to certain marketplaces. So that's what we mean by that. From the customer's point of view it doesn't change anything. Same equation.

On the digital paradigm, what I meant to say was today and historically, we have pursued the digital opportunity. And I say opportunity because historically that's really what it was. We don't have a lot of satellite competition if any. So it wasn't a necessity per se, it was an opportunity. Historically we pursued that opportunity with what I would describe as a high cost, and therefore a high ARPU economic model. We had a very sophisticated device that was expensive, and as a result we needed to generate meaningful ARPU out of the home, and therefore our penetration was lower. And those three things work together -- right? A high customer acquisition cost requires a high ARPU to drive MPVs (ph), which, generally speaking, means you're going to reduce your potential marketplace. By shifting the paradigm what I meant was -- is going from sort of a marketed approach to more of a utility approach, and essentially looking at the Dutch market -- or any market for that matter -- the same way the U.S. guys are, and going 100 percent digital so that there's a box in every home and there is -- and over time you are switching off the analog network. And about 50 percent of our bandwidth today is taken up with that analog network, and we have a pretty sophisticated network. So it's really a digital switchover. The benefit of that is you get the bandwidth back, number one. Number two, you've got a device in every home to up-sell services; it'll have a modem in it. Instead of making it the customer's choice you're making it a much easier decision by pushing the digital network out into the field.

And on DSL, when you said people were racing from DSL -- did I get the terminology correct there?

No, I said it's a race for market share. What I meant to say was that the data market is growing faster than any of us predicted, and it's growing faster because prices have come down. Speeds have come down, too, but the product has become more affordable. Therefore, we want to be right at the -- we want to be pole position in that market, in that race for market share in this ever-expanding sector. And that's really what I meant by that comment.

(indiscernible) concentration in terms of your net adds for the year; but that's where a big chunk of the RGUs are going to come from.

Exactly. Well that's exactly an hour, so we certainly appreciate spending that time with us. And again, if you have further questions you know where to find us. And we look forward to talking to you in August. Thanks very much.

Ladies and gentlemen, this concludes the UnitedGlobalCom first quarter 2004 investor call. If you would like to listen to a replay of today's conference call, please dial either 1-888-203-1112, or 719-457-0820, followed by the pass code 421324. (OPERATOR INSTRUCTIONS). You may also access the replay of today's conference call by visiting the UnitedGlobalCom corporate Website at www.unitedglobal.com. Thank you for your participation. You may now disconnect.