Liberty Global Ltd (LBTYB) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's 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 a listen-only mode.

Today's formal presentation that materials can be found under the Investor Relations section of Liberty Global's website at www.lgi.com. Following today's formal presentation, instructions will be given for a question-and-answer session. As a reminder, this conference call is being recorded on this date, August 3, 2012. I would now like to turn the conference call over to Mr. Mike Fries, President and CEO of Liberty Global. Please go ahead, sir.

Thanks, and hello, everybody. I hope you're doing great, enjoying the olympics, wherever you may be. We have the usual cast of characters on the call with us today. My Executive Vice President, Diederik Karsten, of our European Operations; Charlie Bracken and Bernie Dvorak, our co-CFOs; Balan Nair, Chief Technology Officer; and Brian Hall, General Counsel, and others on the call who might chime in from time to time. Our agenda is as it has been in prior calls. I'm going to make some opening remarks, and then we're going to -- Bernie's going to go through the financials on this call and then we'll get to your questions. But before we do that, we want to read the Safe Harbor statement. so, Operator, please?

Thank you. Page 2 of the slides details the Company's Safe Harbor statement regarding forward-looking statements. Today's preparation 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 for 2012 and future growth prospects and other information and statements that are not historical fact. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risks include those detailed from time to time in Liberty Global's filings with the Securities and Exchange Commission, including its most recently filed forms 10-K and 10-Q. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or on the conditions on which any such statement is based. I would now like to turn the call back over to Mr. Mike Fries.

Great, thanks. So as usual, we're going to go through some slides, which you can access.

I'm going to start it off on slide 4 with a quick recap of the quarter and where we are today in a few key areas. I think what you'll notice straight away is that the best part of our story continues to be our subscriber growth, given the focus in our industry today on competitive platforms, and disruptive technologies and the European market situation, I think you'll be pleased to learn that we continue to grow at record levels. We added 364,000 RGUs in the three months ended June 30, which is significantly higher than last year. Not surprisingly, Germany continues to be our primary growth driver representing about 50% of our net adds, but we're also performing well across Europe, and I will show you those numbers in a minute.

Revenue for the three months was $2.5 billion. That's the second straight quarter of more than 5%, rebased growth, and operating cash flow was $1.2 billion, that is up 2.5% rebased year over year. I think it's important to point out that our operating cash flow growth figure is in-line with expectations, and actually, a little better than budget. So obviously, we are anticipating an acceleration in OCF growth in the second half of the year, and we are on-track to do just that. Adjusted free cash flow was up 24% for the quarter, and 19% year-to-date, which is also on par with our guidance. In fact, not surprisingly, we're confirming all of our financial guidance targets today.

Switching gears, it was a relatively quiet quarter in the M&A area, but I'll provide with you four quick updates. I assume everyone knows at this point that we closed the sale of AUSTAR at the end of May, and banked $1.1 billion in proceeds. We also recently announced that together with Searchlight Capital, we've begun the process of consolidating the market in Puerto Rico with the acquisition of the largest cable operator there, OneLink. Together, we're paying about 6.3 times synergized 2012 OCF for 263,000 RGUs, which will merge into our operation. So essentially, with no additional capital investment on our part, we'll own 60% of the business with a combined operating cash flow of approximately $120 million, 70% of the market and pretty reasonable scale and growth aspects. With no obvious exit today, we think it's a proven way of rationalizing this asset.

Also, Chellomedia, a programming division, announced two transactions this week. The first is a deal with MGM to acquire the 13 MGM channels in Europe, Middle East and Latin America including the remaining 50% of MGM Latin America, which we launched together in '98 and the remaining 49% of MGM Central Europe, where we're partners. And then the second deal is a continuation with our partnership with CBS, whereby we will be rebranding several of our channels with the CBS name and improving the quality of the programming and issuing them a minority stake. So all in all, I think those are both smart and accretive deals with Chellomedia.

Lastly, the integration of Unitymedia in KBW in Germany is right on plan. We officially launched -- officially announced the combined management team on July 1, and we are moving out of the investment phase and beginning to generate net positive synergies on the operating cash flow line, which is great. So when you combine that upside with 11% revenue growth in the second quarter, it should be clear that Germany continues to be a big value driver for us. On the innovation front, our Horizon launch is right around the corner; I'll touch on that in just a moment. And we rolled out VTR mobile in Chile, which is off to a really good start.

And then finally, our balance sheet remains in great shape. At June 30, we had roughly $4 billion of total liquidity, about 50% of that in cash including $1.3 billion at the parent level. Essentially, all of our debt is fixed, hedged and long-term, I think, we all understand how important that is to us. We're on track to hit our target of $1 billion in buybacks for the year, which would bring total stock repurchases to $9 billion. Another strong quarter, in our opinion, across the board. Good growth in our operating and financial metrics, four transactions completed or announced that further rationalize our platform. VTR mobile launch and Horizon are weeks ago, and I think we're marching ahead on our levered equity capital strategy.

So let's dig a bit deeper on the operating results starting on slide 5, which is a pretty compelling picture. It shows our subscriber net adds over the last 3.5 years, broken down into six-month increments. You'll see that in the first half of 2009, we added 240,000 new RGUs, a number which has steadily increased every quarter since then and totaled over 800,000 in the first six months of this year. If you exclude the impact of acquisitions, we have added 3.4 million RGUs organically since January 2009, which has helped bring our total RGUs to 34 million today. Essentially, all of this growth is attributable to the strengths and competitive differentiation of our Triple-play bundles. We have talked about that quite a bit, whether it's in Germany or Holland or Ireland, we are gaining market share from incumbents of steady clip. In just the last 12 months, for example, our Triple-play base has expanded by 39%, to 5.6 million, and is going nowhere but up since these products represent the vast majority of our sales.

Slide 6 provides some geographic context to our reported subscriber growth. First point to make here is that 10 of our 12 European markets are up over last year, so broadly speaking, we're performing well across the board. The main graph on the left breaks that growth out by region, so if you start at the bottom of the chart, the green portion of the bar is our German operation, which, as I mentioned, represented over 50% of our 800,000 net adds year-to-date. All three products are showing improvement in Germany as a result of lower video churn and strong bundled sales of voice and data. And we're managing through the impact of the SCO's remedy package pretty well so far.

The middle bar, the blue portion, shows our European operations excluding Germany, so this is all organic. You'll see that combined, net adds are up to 322,000, with all but one country showing significant improvement. In fact, we doubled net adds in Switzerland, Austria, and in Central and Eastern Europe. The top portion in orange shows that Chile and Puerto Rico were positive, but flat year-on-year on a combined basis. So year-to-date -- whether you are looking year-to-date or the second quarter, sub-growth is very strong for us, especially compared to US or EU peers. Many of you follow those companies, so you know the numbers.

Now slide 7, we've talked a lot about our wireless strategy in the past, usually highlighting three things. First, that the jury is out on the quad play, in our opinion. Second, for us, the decision on how to do mobile will vary by market, so one size does not fit all. And lastly, wherever possible, we'll take a capital life approach. So consistent with these tenants, in the category of one size does not fit all, we did embark and our own roll-out of our own mobile network in Chile. Where our scale, and brand and market share, we believe, warranted this approach.

I'm happy to report that even though we are only 2.5 months into it, things are looking very good with our 4G launch in Chile. Technically, operations have been smooth, and we're now at over 40,000 mobile subs and expect the pace of growth to accelerate as we expand our retail points of presence. From a product standpoint, we're really pushing the competitive advantages that flow to us from having a robust fixed network and customer base. Like unlimited free fixed to mobile calling for VTR customers, rollover minutes and rollover megabytes, mobile data plans with very convenient entry points for our Triple-play subs, which represent about 50% of our mobile subs to date. A byproduct of the service success is a $40 average RPU, roughly double the industry average. Over time, we expect that number to come down as we penetrate more of the market, but it's a great start. So we look forward to keeping you posted on this new product launch, as well as our European MVNO platform, which is slated for 2013 rollout.

One last slide of Horizon. This will be the final time that we'll speak about this product in the future tense since we're on track to launch in Holland in September, with Switzerland right behind. Just a couple of anecdotal points. We had Joe Malone and the entire LGI board in Switzerland last month where we demoed the platform live, and things are looking very good on all fronts. The stability of the software, the functionality of our online and iPad applications, and the depth of our content offering are in good shape.

I also attended, just coincidentally, an event yesterday with Brian Roberts, and Steve Burke, and Neil Smit here in London, where they provided a demo of their X1 platform. I'll simply say we're in sync with Comcast on many levels, the multi-screen, multi-device elements, even the move to a cloud-based UI, where we are using their RDK software stack; we're our next generation Horizon box. Of course, I'm biased. I think we're head on a number of fronts, mostly as a result of the greater sophistication and computing power in our gateway, but our road maps are very similar from a technology and product point of view.

So I'll wrap it here with just saying we've got market-leading sub growth. I think we've done smart M&A activity in the second quarter and we have made important progress on new products. You add to that, a strong balance sheet and a very motivated and focused management team, I think it's fair to say we feel very good about the second half of the year. And I'm looking forward to your questions, so before that, I'll turn it over to Bernie.

Great, thanks, Mike. Hello, everyone. I will begin on slide 10. We generated revenue of $5.1 billion for six months ended June 30, 2012, which was up 8% on a reported basis as compared to $4.7 billion for the comparable prior year period. Similarly, our OCF increased 8% to $2.4 billion for the first half of 2012, up from $2.2 billion for the first half of 2011. In terms of our OCF margin for the same periods, it was essentially flat at 47.2% for the 2012 six-month period, versus 47.3% for the respective 2011 period. Both our revenue and OCF results were driven, in part, by continued subscriber gains over the last year and by the contribution from acquisitions, particularly, KBW.

From a reporting perspective, and as most of you are aware, the translation effect from foreign currency movements has been a head wind for us. For example, the euro has depreciated versus the dollar, on average, by 8% in the 2012 year-to-date period, as compared to first half of 2011. Adjusting our results to neutralize for the effects of M&A and FX, we deliver re-based revenue growth of 5% and OCF growth of 3% for the six months ended June 30. Several specific factors that impacted our OCF growth. First the incremental OCF deficit of our Chilean wireless business was over $20 million higher during the first half of this year, as compared to the first half of 2011. Second, the costs of Belgian football rights acquired by Telenet in Q3 2011 exceeded $20 million during the first six months of 2012. Lastly, we incurred higher costs in sales and marketing to support our strong RGU gains including costs related to our Go for Growth initiative in Germany. Adjusting for the combined impact of these factors, a re-based OCF growth would have been meaningfully higher than a reported 3%.

Slide 11 captures our Q2 results geographically. Our European broadband operation, excluding Telenet, posted comparable results to Q1, generating $1.7 billion in revenue and $880 million in OCF while obtaining a modestly higher OCF margin at 51.9%. Year over year reported growth was approximately 8% for both revenue and OCF, while on a rebased basis, it was 5% for revenue and 3% for OCF. Principal driver of our Q2 rebased growth was our German operation, which delivered $566 million of revenue and $334 million of OCF and a rebased revenue of 11%, and rebase OCF growth of 8%. In Belgium, Telenet generated 7% rebased revenue and 5% OCF growth in Q2 on revenue of $466 million and OCF of $237 million, resulting in an OCF margin of 50.8%. Q2 revenue growth was driven primarily by improved -- are approved from Telenet's digital TV and broadband internet services. RGU growth and increased revenue from mobile services and handset sales. Additionally, Telenet's Q2 OCF growth was adversely impacted by roughly $9 million in programming costs for Belgian football, a cost that Telenet will begin to lap in Q3.

Finally, VTR, our Chilean operation, produced $227 million in revenue and $75 million in OCF in the second quarter. VTR's results reflect rebased revenue growth of 5% and a rebased OCF decline of 8% for Q2. Since we launched our mobile services in Chile in mid-May, we recognized limited mobile revenue during the quarter. Although, moving forward, we would expect this revenue stream to positively impact our top-line growth in Chile. With respect to our second half OCF rebased growth, we expect to generate accelerating rebased OCF growth due largely to the strong volume growth that we've experienced so far in 2012, as well as margin expansion in Germany. From a phasing perspective, we would expect a significant portion of our growth to occur in the fourth quarter. Overall, we remain comfortable confirming our mid-, single-digit growth rate targets for both revenue and OCF for the full year.

If you go to slide 12, this focuses on our big four markets. On this slide, we've highlighted our rebased revenue growth in Q2 as compared to the second quarter of last year. On a combined basis, these four markets achieve rebased revenue growth of 7% in Q2 2012, up from 5% in Q2 2011, with three of the four markets posting improved revenue growth year over year. Beginning in the upper left, Germany remains our strongest performer. We generated 11% rebased growth compared to the Q2 2011 rebased growth rate of 8%, and the Q2 growth rate represents Germany's best top line performance since our investment in Unitymedia in 2010.

Moving to the upper right, our Swiss business has shown steady improvement over the last year in top line growth with the Q2 rebased growth rate representing Cablecom's highest growth rate in over 3.5 years. Our Swiss results were driven, in part, by growth in advanced service RGUs, as we've added over 200,000 digital cable broadband internet and telephony RGUs in the last 12 months. On the bottom left, our Dutch business posted rebased revenue growth of 4% down from last year's 6% or relatively consistent with the growth rates that we've seen in the previous three quarters. We're optimistic about the prospects for improved top line growth in the Netherlands during the second half of this year, due in part to price increases on our Triple-play bundles, which take effect on July 1. On the bottom right, Telenet continues to post strong top line growth at 7% for the quarter, as we discussed previously. However, this growth rate is likely to trend down somewhat during the second half of 2012 with certain factors such as price increases and handset sales are expected to have a smaller, positive impact during the second half of this year.

Slide 13 highlights our revenue by country and product. Revenue in our big four markets of Germany, Belgium, Switzerland and the Netherlands accounted for 65% of our consolidated Q2 revenue. This is an increase from 57% in Q2 last year, when we did not own KBW, but we did own AUSTAR. Suffice to say, with four markets comprising two-thirds of our business, our story is simpler today than it was a few years ago. The right-hand chart takes a snapshot of our Q2 revenue by product. Our overall subscription revenue, which accounted for 84% of our revenue during the quarter, increased 5% on an organic basis with telephony and broadband internet services growing at the fastest pace. Our other revenue, which includes our programming B-to-B and mobile revenue, among other items, increased 6% organically.

Slide 14 summarizes the level of our capital expenditures and free cash flow generation on the year-to-date basis. For the first half of 2012, we incurred $994 million of CapEx, or 19.6% of revenue, as compared to $967 million or 20.6% of revenue for the first half of 2011. The decline in CapEx measured as a percentage of revenue was largely related to a $76 million increase in vendor financing and cap lease additions. Our overall property and equipment adds, which includes CapEx on an accrued basis, and all vendor financing and capital lease additions, were 21.9% during the first half of 2012, as compared to 20.3% during the corresponding 2011 period. The higher percentage during the first half of this year reflects our higher volume of RGU adds, and a larger and relatively faster growing Germany operation with KBW in the mix. Along these lines, it's worth noting that the percentage of our property adds represented by CPE and scalable infrastructure increased from 55% during the first half of 2011 to 58% during the first half of 2012.

The right hand chart illustrated our adjusted free cash flow results. Our adjusted free cash flow for the first half of 2012 increased year over year by 19% to $466 million with Q2 adjusted free cash flow of $186 million, reflecting growth of 24% over Q2 of last year. As you recall, our adjusted free cash flow principally removes the impact of our mobile initiative in Chile, which generated an incremental cash flow deficit of $74 million through Q2 of this year or $41 million higher than last year's first half results. Similar to the phasing of our adjusted free cash in prior years, we anticipate that our adjusted free cash flow will be substantially weighted to the fourth quarter as compared to Q3.

If you move to slide 15, I'll recap our leverage position and share repurchase activity. Our debt position at June 30 amounted to $23.9 billion, reflecting a decline of approximately $1.3 billion from the first quarter. This decline resulted mainly from FX and modest deleveraging as we repaid nearly $500 million of debt in the quarter. At June 30, we had total consolidated liquidity of $4 billion, consisting of cash at the parent level of $1.3 billion, cash at the operating subsidiaries of $600 million and maximum borrowing capacity under our revolving credit lines of $2.1 billion. Relative to the first quarter, our total cash position increased approximately $200 million to $1.9 billion, and our corporate cash increased $500 million to $1.3 billion. Based on the quarter ending debt and cash levels, our adjusted leverage ratios were 4.8 times on a gross basis, 4.4 on a net basis for Q2, reflecting deleveraging from our Q1 ratios of 5 and 4.7, respectively.

Turning to the right-hand chart, we have repurchased $434 million of equity during the first six months. As Mike mentioned earlier, we are committed to completing our $1 billion target for 2012. So in summary, consumer demand for our products remains healthy. With the rollout of Horizon beginning this fall, we are up to speed about our growth prospects over the balance of the year and heading into 2013. So Operator, this completes our prepared remarks today. So we'd like to open it up for Q&A.

Thank you. The question-and-answer session will be conducted electronically.

(Operator Instructions)

In order to accommodate everyone, we request that you ask only one question with one follow-up, if needed.

(Operator Instructions)

We'll pause for just a moment to give everyone an opportunity to signal for questions. And we'll take our first question from James Ratcliffe with Barclays.

Two, if I could. First of all, regarding the chart on video revenue exposure and just subscription exposure, can you give us an idea of what that pie chart on slide 13 looked like a year, or say, two years ago? Secondly, you mentioned potential price increases going through on your Dutch bundles. How does that compare to price increases you've taken or could take in other markets, and what are the opportunities for that for the remainder of this year and next year? Thanks.

Thanks, James. Bernie, I don't know if you have that chart handy, but I think it's fair to say that all revenue streams are growing roughly comparably. Digital video would be one of our fastest revenue streams because we're able to, essentially, add digital and double revenue per each digital home, but all revenue-ships are growing. Do you have a sense of that, Charlie or Bernie?

Mike, we don't have the numbers right at our fingertips, but the is guess there is a -- the sense is that it's relatively, from a year ago, let's say around 80%. So it's been fairly constant.

Yes, in terms of subscription revenue -- (multiple speakers) Right.

Yes, in terms of geography, it's significantly more concentrated than we were a couple of years ago.

Right, and I think in terms of price increases, I'll let Diederik handle that, but we are, I would say, far more focused on pricing power and relative pricing of our products today than perhaps ever. And our finding opportunities, to take rate increases where appropriate and price our bundles competitively. That's because we still have a far superior broadband service or offering in every market in which we operate. But why don't you take us through in specifics, Diederik?

Yes, thanks, Mike. In the strategy, what we do is also, I would say, have separate sets for both acquisition, as well as base management. In acquisition, we've been successful in lifting prices behind speed increases, creating superior value. We'll keep doing that. It doesn't only work in the Netherlands, but also currently, I'd say, it's a reason for success in Switzerland, as well as in Germany. What we do know is that base management where we lift the base in terms of adjusting the rates. Also, mostly behind adding value via speed increases. All in all, like Mike said, it's more focused on that widespread in most countries.

So far, we see, I'd say, it's a rewarding strategy and with Horizon, we will have a next opportunity via added value to move up in the price range. But what we do keep in mind, obviously, is the so-called bullseye, the marketability of our product versus competition. Because Swisscom and [KVM and Deutsche] are keen to see how good we are.

Mike, just one add, if you look at subscription revenue as a percent of our total revenues for both 2009, 2010, 2011, it's right around 80% to 83%, so it's been constant.

Thank you.

Thanks, Dan.

All right. We'll take our next question from Jeff Wlodarczak with Pivotal Research Group.

Good morning, guys. Switzerland had another sold accelerating result, it's looking more and more like the Netherlands, I guess. Do you feel like that upward trend could continue given what you've sort of -- given the trends now, and what you have in place? And then the other questions related to the Horizon box. Should we expect a material EBITDA hit related to marketing spend around that box launch in the fourth quarter Netherlands and I think, it was the first quarter in Switzerland? And can you remind us what the cost of that box is, and the incremental revenues that could generate from it? Thanks.

Well, Diederik, you can handle the Switzerland question, on Horizon, Jeff, we haven't really disclosed in any detail the business model around that. We are obviously well prepared to roll the product out and feel very, very positive about the returns on that product, both in terms of the cost of the box overall, as well as the incremental RPU and margin we think we can generate from the device. It will be a premium product, but over time, probably only high-end device we'll market. So at some point very quickly, we won't be offering our own HD-DVR, this will be our HD-DVR high-end box. The goal is to tray to migrate the base efficiently. All news customers will try to move into the Horizon box at a premium, so there'll certainly be an increased revenue in margin, but we aren't going to get specific on it here in this call. Except I'll tell that you it's a very, very attractive MPV as far as we can tell, and if we hit the numbers that we're projecting to hit. In terms of Switzerland, you want to address that, Diedrick?

Yes, it's not a coincidence that business is foraging and thriving. It's almost at best results since '08, and from an operational point of view, we don't see reasons for a slowdown. And Horizon being part of it, that triggers for a second half to further boost business. Next to that, our base portfolio shows strength; it's the Triple-play, it's CI Plus bundles that increased internet speeds work. The Swiss channel is moving to HD, works for us. So all in all, we don't see concern for a real slowdown. Although, as a disclaimer, I have to say Swisscom has been aggressive, also launching a new mobile plan, extra HD channels and so forth. So it's a two-horse race.

Yes, but we're still really outperforming on the broadband speed. On average, our broadband feature 5 times there on comparable bundles, so we really have an edge, and with Horizon rolling out later this year, we think that is going to be very impactful in terms of the attractiveness of the bundle, so it's looking positive in Switzerland.

Are you guys priced well under Swisscom, in terms of your broadband offering?

Diederik, you want to address that?

You mean priced under Swisscom?

Yes, sorry.

Yes, there is a certain range of which we know our pricing works versus Swisscom, them being the, call it, maybe the superior brand in terms of reputation, but that's been the challenger with superior value. We keep close track of that range. We also sometimes see Swisscom coming up with offers trying to kind of change that relationship. But so far it worked, like Mike said, the Triple-play and the superior broadband.

Relatively speaking though, I would say Switzerland is on the higher end of pricing. Our bundles and their bundles, so I think it's a rational market. That's the main point.

Okay, fair enough. Thank you.

We even showed the higher data RPU, so -- last year. So that's a good illustration of it.

Great, thanks.

And we'll take our next question from Matthew Harrigan with Wunderlich Securities.

Thank you. I was just curious if maybe Charlie could update us on your thinking on the cash angle, the euro at the levels of volatility that it's at. I guess you could even see that the Swiss franc could break at some point, and then there's some other good markets like Poland and Czech, as far as the macro economy, our non-euro markets. Are you starting to think about, you know, changing your currency exposure a little bit on the financial side? And then secondly, I'd like to get Mike's rethink on Wi-Fi 802.11ac coming along, and some of it has [fallen] a little bit over hype, what that presents as a business opportunity or business challenge. Thank you.

On the country side, I still feel pretty comfortable with our position. As you know, we fully hedged the debt, so from the financial risk point of view, we are in a situation where we're pretty underexposed to any kind of fluctuation because the debt moves up and down with them like currency. So I'm pretty comfortable with that. I think operational currency match, with match, we've really minimized those. We've got very little dollar spend left in our CapEx and OpEx relative to our size. Once we have some inherent exposure, we have quite a lot of euro, thus far, our read of it is that we have very low volatility. So I think despite all of the ups and downs of the currency market, our results and our projections are that we'll weather it pretty well.

The one area where we won't weather it is on the equity, which we don't hedge. With that said, we have allocated a significant amount of dollars, which we hold in our cash in dollars, because clearly, we have the buyback commitment. In that sense, we've been making money relative to the currency movements. In terms of the macroeconomics, the cable business is still very resilient, even in Ireland, which, as you know, has had some tough times. It's all holding up pretty well. I think that fingers crossed, we feel like we're riding through the economic turbulence, and pretty well. And we're in some great countries; Germany is thriving, Switzerland's a very safe haven, et cetera.

On the Wi-Fi question, Matt, we continue to debate this internally on a regular basis. Certainly, on a -- intuitively, you would think, geesh, there must be a plan and an opportunity in it for us, but when you take a step back at our business model and our core value drivers, we believe that most of the opportunity resides in the four walls of the home. And that the vast majority of wireless usage, whether it be mobile, smart phones or tablets, is occurring in the home. And our Horizon box, as you know, comes with two Wi-Fi chips. One dedicated to moving content around the home within the platform, and other dedicated to your internal Wi-Fi usage. We will also have the ability to create a neighborhood of Wi-Fi users if we choose so that you can share and roam on other Horizon boxes at some point.

But our main objective here is to satisfy the demand for wireless broadband in the home, and to do it with massive pipes and bandwidth. We see that going nowhere but up. In terms of outside the home, where we have two basic approaches, one, obviously, resides within our MB&O / mobile plans, all of which include a broadband, a mobile broadband component to them. So you should expect us to be offering mobile broadband in every market where we roll out wireless, and so we'll have some opportunity there.

Secondly, we do continue to look at Wi-Fi networks outside the home. I think the challenges we face in many of our markets, unlike the US operators, is that we don't have the quote-unquote, furniture in the way of a lot of outdoor or above ground infrastructure. A lot of our plant is underground, so we don't have easily identifiable or cheap places to hang radios. So that makes the Wi-Fi opportunity a little more challenging, but nonetheless, we're evaluating it six ways to Sunday in many markets. Maybe Balan, you can be specific about a couple of examples.

Sure. You know, we thought that the 802.11ac, we are certainly monitoring that, however, the chips for that won't even be out until next year and consumer devices, probably not a year or two before that even takes off. 11n has been out for a while, and it's only now just taking off, so -- but it's a future thing. However, I would say, 11ac doesn't change the economics of outdoor Wi-Fi implementation; it's still pretty challenging.

Since the ac is just a standard evolution, is that something that is easily incorporated into the Horizon box, over time? I assume the initial prototype boxes wouldn't be boarded compatible for that, but it would probably be pretty easy to do at some point.

Yes, so the way we put our chips in that today, it's a data board for Wi-Fi; the 11n. The 11ac is backward compatible, as well, so I'm not too terribly concerned.

Yes, that's what I thought. Great, thank you for your time. I appreciate it.

We'll take our next question from [BJ Giant] with IFI Group.

Hi, I have two broad questions. First, Mike, can you just give us some sense of what's really happening in the market on the ground with the euro zone effectively deemed in recession? Obviously, your numbers are not showing any of it, but is there consumers spinning down services, cutting back at all? All the gains you are seeing are mostly share shifts, and so in the market penetration at all, or are these products being viewed as staples like I think they are in the US? Second, I just want to get your comment on the euNetworks' comment a couple of weeks ago about potentially not requiring fiber networks to unbundle. Do you think that could sort of spur fiber deployment across Europe, and change the competitive landscape? Thanks.

I'll address the second one, and Diederik, maybe you think about the first one. We welcomed and support Neely Cruise's comments or statement that, in essence, something needs to be done to rationalize the reseller regimes across Europe. Her basic objective there is to eliminate the excuse that every incumbent has utilized to slow down or stall fiber to the home development, and that excuse being a reseller regime that doesn't support the investment required to build those networks. Now, when we look at the -- it's a lesser of two evils in our opinion, because I fully expect at some point, and we have always maintained this publicly, that incumbents will build fiber. They have to build fiber. There's no question about it, and in that instance, we feel really good about our ability to compete from a number of perspectives. So we've never pretended that this wasn't going to happen.

The second main point, though, is that I'd much rather see this happen in an ecosystem or a structure -- a market structure that's rational, and doesn't encourage senseless short-term reseller models that ultimately fail and destroyed economics of the business for everybody. And I think the EU has recognized that while reseller models worked effectively at one point in time, that going forward, if they want to stimulate two next-generation networks in every market, they need to think more carefully about pricing and wholesale regimes and relationships. To us, that is a net positive. In fact, if not, just an absolute positive. Because remember that we are superior in all respects to the current incumbent offering, and anticipate being superior, or at least as good for forever.

What we struggle with is the irrational pricing model or the economics of our business deteriorating. Now, it hasn't yet, but we worry about that. So I think the approach that they're taking is a smart one. I think that we came out as an industry in support of her comments, just to tell you that it's not just me thinking that, and that I believe in the long run, a more rational regulatory environment for telco's is a good thing for cable operators. You want to deal with the second question? Diederik, I think it was Diederik?

Yes, Mike. Thanks. (multiple speakers)

What impact, if any, we're seeing from the market environment?

I would say overall, and you said it as well, Mike, before, we see the strength of our products reflected in relatively stable, they are small reactions, marginal. Nobody's going to throw away their internet or their TV. Actually, there's still demand for conversion to DTV, because people spend maybe more time in the home. Having said that, with the strength of our products, there are areas of concern, and -- but for us, they're marginal. What you may have heard from others, telco's, things decline in fixed telephony usage and obviously, we see that also amongst our user base, but we don't depend on that user base as much as they do. So for us, that's factored into the total, that is one thing we see.

We also started in Ireland to see a slowdown and a pickup of premium DTV because that is one premium product. DTV is probably one where we have to be careful in Ireland. Actually, the government is actively informing people on savings areas and one part of their, I'd say, information bulletin is to review your TV subscription. Now, it makes sense for people there, but it's only there where we now see some premium, let's say, slowdown in premium TV. Also in Central Europe, so far, we hardly see any negative reactions or impacts.

One last comment, BJ, on the fiber point. Your question is, will it hasten? Will it speed up? What will it do to fiber builds in principal? In Western Europe as a whole, we estimate at something around 4% penetration of fiber to the home networks, 4%. So will it take that 4% to 100% meaningfully faster? I doubt it. I don't know, but there is a long way to go for our key competitors in our core markets to build fiber and tens of billions of euros of investment.

The incumbent telco's, if you're watching that environment, you're seeing that they are going through very structural change with respect to either ownership, dividends, market position, mergers, cost cutting, they are rethinking their business models in a significant way. And I think that's going to take some time. I think it's going to take a couple of years before most of our major competitors land definitively on a geographic, financial and product strategy. And ownership model, because several of these -- the rumors around mergers are real. They're real. I think the Telemax investment, and the KPN, for example, is signaling that perhaps there are some large scale movements occurring in ownership, and so what does that mean for me and my assets? Not us, particularly, but if I'm on incumbent, and that's probably going to take time to shake out. So I see lots of open space here in front of us.

All right. Thanks so much.

Yes.

We'll take our next question from Will Milner with Arete Research.

Thanks very much. Just a couple of questions. One, just coming back to the out-of-home, mobile strategy, you talked a bit about it earlier, but clearly, you own mobile spectrum now in Belgium and Holland. I just want to understand if you're actually rolling out any mobile base stations yet. Maybe only in test mode, just to see how they will fit in with your existing systems, but are you doing anything there yet, or just holding onto the spectrum for the time being? The second question is just on the debt, a sort of technical question, the fully swapped borrowing costs looked like it fell 20 basis points to 7.8%. I just wondered if you could talk about the reasons for that and what we should expect going forward. Thanks.

Sure, Charlie, you can prepare the swapped borrowing costs question. In terms of the build-outs in say, Belgium or Holland, where we own spectrum, I'll go back to the three I articulated. One, is every market will be different; two, we're going to look for the most capital-light approach that we think achieves the objectives. And three, we're not yet convinced, and we'll need a lot more market data to be convinced, that the quad-play is a critical part of our offering. Those are a lot of if's, if you follow me. Having said that, so which would imply that, no, we are not definitively committed to a build-out in Belgium or Holland, but we remain opportunistically investigative, how's that?

The point being that we are always revisiting that question based upon new information, either technical, strategic, market-driven or otherwise. The beautiful thing about the Chilean build, if you focused on it, is we're not building out the entire country. We're building network in relatively small geographic spaces where's the vast majority of traffic exists. And in the balance of the market, we have roaming arrangements and sharing of infrastructure. So there are very creative and accretive, high creative approaches to build-out that we'll be exploring.

So, just to come back to the specific question, you have not rolled out any mobile base stations in test mode in either of those markets yet?

I don't believe we have. We may have had one or two. We have done a few to maintain our license status, sorry --

Exactly.

Yes, but that wasn't -- that was to maintain our licenses.

Great.

And Charlie, you want to deal with the second question?

Yes, on the debt -- there is no real step change in the debt. We think everyone should be aware that we fully swap out debt, both from a currency match, but also from an interest rate point of view, so we're totally fixed on interest rates. Because of that, we have a relatively high cost at 8%, with short-term and floating. We'll obviously be able to be significantly lower, but we think that's an insurance worth paying, given the long-term nature of our business. The (inaudible) is down 20 basis points in the quarter reflects the fact that we're always looking for ways to optimize the cost of our swaps, and optimize the borrow down of our evolvers and the like. But I don't think you can assume there is a step change occurring in the near-term, although we continue to try and look at ways to reduce our cost of debt. And as through our refinancing program, we always try to refinance so the price that is at least the same as, if not, less than the current cost of the debt we are refinancing. But gets its extra maturity, and that's what worked pretty well for so far this year.

Thanks a lot.

Yep.

We'll take our next question from Hugh McCaffrey with Goldman Sachs.

Good morning, guys. I have a couple of questions, please. Firstly, can you just give us a view on the Dutch market? It seems like growth might be getting a little bit incrementally harder there, and on some color on that would be really great. And then secondly, in terms of just the call stock in the second half of last year compared to what you're sort of expecting to see in the second half of this year. Do you expect any incremental step up in marketing and acquisition costs in the second half of this year, relative to last year? Thanks.

Okay. Diederik, you want to take the Dutch question?

Yes. Talking about the Netherlands, if you look at the trends, second quarter has always been slow. Even -- so that compared to zero -- and if you compare this year versus last year, what happened is that have I to say KPN as a competitor started to act more, I'd say, more aggressively. They changed and upped some of their propositions, included HD, second boxes, so they're trying to step up to regain what they have been losing. And with that, it means that for us, there's that, I would say, a somewhat bigger fight, but the market is still up there. If you talk, for example, the outlook for Horizon, I do believe that a high number ratio item on high-speed internet, Wi-Fi, HD, and I think we're well poised to tap into that continued demand. But KPN is stepping up, as well. For example, they're now trying to build some fiber through their home areas, which, like Mike said, is still limited, but they're aggressive in sales techniques like door-to-door. So I think with Horizon, you'll see revamping of their growth, and again, combined it with the historically slow market in Q2, we think they're doing well.

Yes, I think, you mean, Hugh, you're following their results, so you know what they're doing in the various business products and they're challenged, of course, but we don't expect them to lay down. I hope that's clear. We expect all of these telco's to regroup and re-evaluate their strategies, maybe even quarterly in terms of how they're going to stem the loss. This is what they're paid to do, but we have equal and just as powerful response tools. I feel much better about our ability to be creative and quick and focused in the product offering and for the foreseeable future. We have much more robust ammunition in terms of the speeds we can offer. And with Horizon, a very sophisticated and elegant user interface, and multi-screen device that is going to get people's attention. I really believe that, firmly.

I think it bodes well for Holland in terms of we still have lots of room on product comparability, and we have product additions like Horizon that will make it easier for us to excel. In terms of the marketing [timing], in general, we have all said it here, we do expect the second half of the year to be higher in OCF growth than the first half of the year. But I don't know that we should be pinning it on any one element or another. I mean, as you heard on the call, there is positives and negatives, we're going to lose -- we're going to have some revenue and better results in Chile, but we continue to grow very rapidly in Germany. So I think in principal, maybe just the best way to leave it is we do anticipate better OCF results in the third quarter and fourth quarter. We did provide mid-, single-digit OCF guidance, and as a result, based on where we are year-to-date, it's theoretically obvious we anticipate higher OCF growth in the second half of the year. The puts and takes and the reason for that will vary and we'll afford to explain it to everybody when it happens.

Okay. That's clear, Mike. Thanks.

We'll take our final question from Ben Swinburne with Morgan Stanley.

Thanks, two for you, Mike. I was curious if you could just comment on the acquisition disposition sort of pipeline, and level of activity out there as you guys look out over the next 1.5 years. You expect to see a lot more transactions out there? You guys have been active, but I didn't know if you thought the bid asks were in a normal, reasonable place here. And then second, just on Germany, can you remind us on the programming costs carriage fee, I guess for you guys, carriage revenues on the broadcasting front? There has been some, I think, court activity in Germany about whether the broadcasters will continue to pay you guys to carry them on your systems. And I'm just curious if you could update us on where that stands and how think about that, and whether it's even material to the business.

Yes, on the second point, in Germany, the public broadcasters have historically paid relatively small fees to cable operators because we carry those channels to the vast majority of customers in Germany. And have, therefore, reduced their costs and made life much easier for them. They have recently decided that maybe they don't want to do that anymore. Of course, it's much more complicated than that. Let me say three things. One, the total revenue to our German operation from public broadcast carriage fees is less than 1.5%; it's a small piece of our revenue, and in our opinion, I think it's 20, 25 million euro. It's not material or are even meaningful.

Secondly, the rules are clear. There's no must-carry in Germany, but if there's a contract, we will carry, and with no contract, they won't be carried. That is the fight that KDG is taking to the broadcasters publicly, and I think, has very strong legal grounds to take that fight. Of course, it's a bigger issue for KDG because they're slightly larger. The third point is that these broadcasters have very ambitious objectives in HD, and a new channel. I think there's as many as 10 HD channels that they have launched, none of which are carried on cable. None of when which will be carried on cable unless there's an arrangement of some sort. So I think it's interesting headlines, and perhaps, a bit of drama here or there. I don't see it as material to us and I see it sorting itself out, hopefully, without a lot of public Kabuki dances going on, but we'll see.

In terms of the acquisition pipeline, it hasn't had to be too specific about anything, but as you point out, we're always evaluating market opportunities. Firstly, in our core markets where we can get bigger. We do deals regularly, and back in the second quarter, we closed deals in Holland and Switzerland on small acquisitions and continue to grow our footprint there. We'll always look at those in-market deals, some big, some small. There are some transactions in markets like Poland that are rumored to be or publicly disclosed to be up for sale, and of course, we look at those things. But I will tell you that we're going to stay very disciplined. The bigger assets, and you would know what those are, remain where they are, and there is a price, certainly a multiple discrepancy between our stock and those stocks. And whether or not we will ever be able to achieve something, there is a big question mark.

But we're paid to continually evaluate opportunity, and scale is a critical piece of the puzzle for us. And so if something comes about looks interesting, we will absolutely take a look at it and see if we can't make it happen. In the meantime, it's not distracting to us, and I don't think there is anything imminent, I guess, might be one way to say it. But if we can't foretell that, or we can't talk about it in any more detail than that.

Got it. Thanks a lot, Mike.

I think that's it, guys. So appreciate your attendance on the call. We feel really good about the quarter; in fact, the first half of the year, as you have obviously heard today. And we look forward to reporting on the third quarter, and cranking it out in the second half of the year. So appreciate you being on the call, and have a great summer.

Ladies and gentlemen, this concludes Liberty Global's Q2 2012 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.lgi.com. There, you can also find a copy of today's presentation materials.