Liberty Global Ltd (LBTYK) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the UnitedGlobalCom and UGC Europe third-quarter 2003 conference call. This conference call and associated web cast is the property of UnitedGlobalCom, Inc. and UGC Europe, Inc. Any redistribution, retransmission or rebroadcast of this call or web cast in any form without the express written consent of UnitedGlobalCom, Inc. and or UGC Europe, Inc. 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, November 13, 2003. I would now like to turn the conference call over Mike Fries, President and Chief Operating Officer for UnitedGlobalCom. Please go ahead sir.

Welcome everyone. Joining me today, as usual, are Gene Schneider, Rick Westerman, and in Europe, Charlie Bracken. The structure of the call will be familiar to you. I'm going to walk through some highlights as well as discuss some recent events, Rick will present UGC or UnitedGlobalCom's consolidated financial results and then Charlie and I will jump into UGC Europe and provide a little more detail on our European operations.

As usual we prepared some slides that you can find on either on our website or the UGC Europe website and we certainly encourage you to access those slides now since we will try to follow those materials and while you do that I think Rick is going to give you some help here. Rick.

On page two of the slides we've got the forward-looking statement language for our presentation which includes our acknowledgment that the Safe Harbor provision doesn't apply to any of the discussion of the tender offer. We'd also like to highlight the fact we've included all of the necessary reconciliations to comply with Reg. G and these can be found at the end of both our press release and our PowerPoint presentations.

These can also be found presentation -- the presentations, as Mike just mentioned, can be found our websites for UGC, that's www.UnitedGlobal.com and for UGC Europe that is UGCEurope.com. We also have included definitions for the operating statistics in our subscriber tables. We've also included some supplemental financial information that we thought investors might find helpful.

Before we go any further I would like Gene to make a few comments.

Thanks Mike. I'm just going to make a couple remarks here and then turn it back to Mike (technical difficulty).

Operator? Rick, can you hear me? Gene, are you there?

This is the operator.

We just had some music for a moment. Gene is you still there? Rick is you on?

There is a test of the fire alarm system here. I don't know if that --.

Gene, are you still there?

Gene has disconnected from the conference.

Well I will carry on with his comments. I think he was going to say that we are certainly pleased with the results and we are going to walk through some of those numbers in just a moment. I think the second point he was going to make was that we are certainly happy to have the restructuring of our European subsidiaries complete in September. That is no doubt a very meaningful milestone for the company, and as I'm going to touch on later, you will see that our consolidated leverage is approaching five times on a quarterly run rate basis. So that is certainly a good result.

Lastly he was going to touch upon the exchange offer underway and while I'm going to get into some detail, I think Gene was going to essentially lay out what he thought the benefits, not the least of which, is the simplification of our corporate and capital structure as well as the fact that we will have essentially one relatively large liquid public stock instead of two small ones. If you add all those three things up, the continued strong financial performance, the significant reduction in our overall leverage and the simplification of our company and capital structure, I think it is pretty clear we are on the right track.

Mike, I'm back. Sorry about that but I got cut off.

That is okay, Gene. I just summarized your remarks. I wasn't sure if you were going to get back on.

Okay.

Unless you want to add anything.

Probably not, if you summarized them.

I'm going to move now to slide four of the presentation entitled, What's New. First on the list is obviously our strong third-quarter results which I'll review in just a moment. We also completed, September 3, the restructuring which I just referenced, and on October 6 we launched an exchange offer for the approximately 32, 33 percent of UGC we don't own and I will talk about that in just a moment as well.

In late August we announced that the founders of UGC had agreed to sell their shares to Liberty which would result in Liberty assuming control of UnitedGlobalCom. This transaction is on track to close and we now estimate the timing to be in early January. Lastly, on this slide you'll note the restatement of our financials related to UPC Germany. I'm not sure if Rick or Charlie are going to speak to this in any greater detail, but in essence we decided to reflect a one-off gain of approximately 150 million from the disposal of our portion in Germany.

There is no impact to our cash flows. It is purely an accounting adjustment. Essentially we had understated our earnings in the prior period. You'll see those have been filed tomorrow. Let me jump right into the third-quarter highlights. I'm on page 5 now of this presentation. On the financial front we reported revenue of 475 million for the three months ended September. That's an increase of 90 million or 23 percent in the same period last year.

It is important to note that about 70 percent of that gain was attributable to favorable currency movements in the euro and Chilean peso and the balance obviously attributable to RGU gains and an increase in our RPUs of about 7 to 10 percent in local currencies. We are now generating about EUR14 per RGU in Europe and nearly EUR22 per cable customer in Western Europe. EBITDA for the three months was 171 million, nearly doubled the result for the same period last year. About only 23 percent of this increase is attributable to foreign exchange movements.

In fact, in local currency terms EBITDA was up year on year close to 70 percent. Sequentially the third quarter represented an EBITDA increase of about 15 percent or 22 million from the second quarter of this year, nearly all of which is associated with organic improvements in the business. Lastly, our consolidated EBITDA margins, including the pair -- both pairs I should say, there is now about 36 percent, up from 22 percent a year ago.

This is on par with Comcast and Cox, but as we said before we believe there is significantly more operating leverage in our business and we expect continued improvement in these numbers quarter to quarter. Turning to page 6, the operating side. You'll note that we have returned to more normalized growth in subscribers in the third-quarter, largely related to having completed the one-off nonpaid disconnect initiatives in Holland which we been talking about pretty much all year.

We ended the quarter with a total of 9 million RGUs representing a 300,000 increase from last year and a net gain of about 79,000 in the third quarter. The good news is that trends seemed to have continued through the fourth quarter and we have added nearly 40,000 RGU's in the first month alone, split about two-thirds in Europe and a third in Chile. As you can imagine 70 percent of these net adds year to date consist of voice and data customers and in particular we have added about 180,000 data subs through the nine months and 42,000 in the third-quarter alone.

Page 7 highlights, slides and highlights CAPEX which total 95 million and I will let Rick and Charlie touch on that. I would point out through that we were free cash flow positive after interest in capital expenditures during the quarter and also through the first nine months of the year. That is a big achievement for us. Lastly, I draw your attention to the leverage chart on this slide which shows that consolidated debt to EBITDA on a run rate basis is about 5.3 times.

This is down over 50 percent from the beginning of the year on a pro forma basis and that's entirely on the back of organic EBITDA growth. Obviously Europe is slightly higher, Chile sits at about 1.2 times, but on any measure our leverage is approaching very respectable levels, not quite Cox and Comcast but certainly a notch above other peers in the U.S. (indiscernible) our quarterly trends, and we can't seem to shake it but we are obviously proud of the nearly $250 million improvement in quarterly EBITDA over the last ten quarters, from -71 million to positive 171.

I have talked in the past about the drivers for that and won't repeat them here. The CAPEX chart though shows the opposite trend, a decline in CAPEX from one billion eight to about 300 million normalized on an annual basis and that has been one big contributor to the free cash flow picture I referenced. I'm going to jump now to the two transactions on slide 9, beginning on slide 9, that I referenced at the outset beginning with the European balance sheet restructuring.

As most of you would know, we did complete this deal on September 3rd. Today we own a little over two-thirds of the successor to UPC or UGC Europe, Inc. Approximately 50 million shares were issued on NASDAQ, so the balance of approximately 16.6 million shares are held in the public's hands. The stock which closed yesterday at a little over 71 has certainly traded well from its initial restructuring value of 38.50. We turn to page 10. Not long after we relisted, UGC launched an exchange offer for the 33 percent of the company held by the public.

As you can imagine, shortly after that offer was launched UGC entered into negotiations with the independent committee of the UGC Europe board as well as certain large shareholders of UGC Europe and as a result of those discussions UGC announced yesterday revised terms for the exchange offer consisting primarily to three main changes. Number one, the exchange ratio was increased from 9 to 10.3 shares of UCOMA for every one share of UGC Europe. Secondly, UGC agreed to add an unwaivable condition that it achieve at least a 90 percent ownership position before completing the transaction.

That was an option essentially to complete with less than 90 percent prior. Third, UGC and Liberty reached an agreement limiting Liberty's preemptive rights in this and in future transactions. The revised offer will expire on December 18th. I would certainly encourage each of you to read both the press release from UGC, which does probably a better job than I just did describing the revised offer terms as well as the press release that the special committee of the board of UGC Europe distributed yesterday, where they indicate that they are supportive of the revised offer.

But understandably in anticipation of several filings that we will be making over the next couple days, they are reserving their right to provide a definitive position at that point. I think we have summarized upfront some of the benefits of the transactions. I won't repeat them again here. As an aside, one additional benefit from management's point of view, will be shorter quarterly conference calls. With that I will turn it over to Rick.

Thanks Mike. I'm on slide 11 covering our revenues. Sales for the quarter were 475 million. That represents a 23 percent increase over the reported results from last year's third-quarter and a two percent sequential increase from Q2 on an ongoing basis, and backing out UPC Germany from the third-quarter of last year, revenue is up 25 percent year over year. And of the 90 million reported increase, approximately 54 million of that or 60 percent, was related to foreign currency movements, most importantly the appreciation of the euro versus the dollar.

That 60 percent figure compares to 87 percent of our revenue growth in this year's second quarter coming from FX. The 70 percent figure that Mike referenced a few minutes ago may have been for a different period. The average euro/dollar exchange rate for the second quarter was approximately 1.13, which compares to 0.98 for the third-quarter of last year, or about 15 percent depreciation of the dollar versus the euro between the periods.

Moving onto slide 12, adjusted EBITDA for the quarter was 171 million. That represents a 102 percent improvement year over year and a 15 percent sequential improvement based on ongoing operations. Again, currency movements were a significant factor driving the gains but not nearly to the extent that they drove the revenue increase. Specifically, and as Mike mentioned, of the 87 million reported year-over-year increase, 23 percent or approximately 20 million was due to FX changes while 77 percent or 67 million was the true underlying improvement from our operations.

Moving to free cash flow, which we define as cash flow from operations from our cash flow statement less capital expenditures, in the third-quarter we generated positive free cash flow of 4 million. That's a $109 million improvement from last year's third-quarter. The increase was due to a 159 million increase in cash flow from operations offset by 50 million of higher CAPEX in this year's third-quarter compared to last year's third-quarter. On a normalized basis, however, CAPEX was roughly flat because in last year's third-quarter we had roughly a $40 million drawdown of inventory which is not considered CAPEX under U.S. GAAP.

On slide 14, we also thought it was worth highlighting our nine-month results on free cash flow. Year to date we generated 46 million, which is a $587 million turnaround from the -541 that we reported for the first nine months of 2002. To round out the cash picture, we ended the quarter with 351 million of consolidated cash and equivalents on our balance sheet. The breakdown of that cash balance by subsidiary which includes restricted cash and is translated into U.S. dollars, is as follows.

At UGC corporate we had 82 million, in Europe we had 240 million and in Chile we had 29 million. Total restricted cash was 37 million at September 30, so available cash for the group was 314 million at the end of the quarter. In addition, UGC Europe currently has significant availability under its credit facility. Finally, I will just point out that Chile had another terrific quarter reporting EBITDA growth -- or EBITDA of 19 million. We've got some details of that on slide 15. But now I'll turn it back over to Mike to jump into Europe.

Thanks, Rick. We are going to carry on through that same presentation into the UGC Europe portion of the presentation. It should be slide 21 if you are following along in the PowerPoint. We won't make the same disclosure comments that we made upfront. I will, however, before we jump into the presentation, take a moment to recognize the resignation of John Riordan who decided to leave us and spend more time with his family.

John has played, as most of you know, an important role in our European businesses and has agreed to continue advising us on regulatory political matters which we are certainly thankful of. He was most recently CEO of our UPC broadband division, the cable operation, which will continue to be managed by Gene Musselman who is currently President and Chief Operating Officer of that division.

Before Charlie jumps into the numbers, and I'm on slide 23, I thought it might be useful to step back for a minute and just to take stock of our some of key operating initiatives over the last 18 to 24 months and try to identify some of the things we are squarely focused on today and as we move into 2004. If you look back we identified four key objectives on the operating front. First, we obviously intended to rationalize our cost base and namely headcount in non-strategic businesses.

Secondly, we looked to standardize our operating and network platforms which would mean consolidation of knocks and things of that nature. Thirdly, we sought to improve gross margins particularly in telephony and analog and digital television. Lastly, we intended obviously to grow our RGU base. I think on a scorecard of our achievements, I would have to say we've done extremely well in the first three initiatives and we've met expectations on EBITDA and cash most importantly.

But I think we have underperformed on revenue and in particular on subscriber growth. As we look out over 2004 and beyond, I think a couple of things are clear. There is always room for improvement on the cost side of our business. We run a pretty lean ship in Europe and our cost and headcount on any metric compare favorably to our U.S. or UK peers as do our gross margins. Our key opportunity at this point is on the top line, our revenue growth, and that is where our attention is focused. Turn to slide 24.

Obviously at the heart of this challenge lie our products and the strategies we are developing around those products. On the data front our main goal is to maintain or increase market share in what is an increasingly competitive environment for us in Europe and we are doing this primarily through tiering of data products by speed and price. On the voice side, our goal is to reinvigorate that product through bundling and also to look at expanding the footprint through new technologies.

On the video side, our strategy continues to be rate increases where appropriate on the analog and improvement of the digital offering. Lastly, we are starting to do a much better job across Europe of bundling all of these products together. We've done a reasonably good job in certain markets and less so in others. We've achieved some early wins on all of these, I think it is fair to say, but we don't really expect to hit our stride until next year on the data front.

We have launched tiered data products in Holland, France and Austria and we have increased speeds in Scandinavia and Belgian and as you'd expect in every instant we've experienced boosts to our sales. On the voice front, we have launched the bundles in Holland which are having an impact in Voice over IP, trials in underway in Rotterdam and we are examining other products like NetFone or Vonage, you'll hear more about that as we get into the new year. On the video front we have executed rate increases in the key markets.

I think as we have said in the past, nearly 50 million of our EBITDA growth, 50 million euro of our EBITDA growth in '03 is attributable to rate increases alone. We have made progress on our digital packages, we rolled out a new package in Holland and we have made some key content acquisitions. All in all, sales and net adds are starting pick up as we have indicated, over 42,000 net RGU adds in the third-quarter and over 28,000 in the fourth quarter through November seventh.

Other key initiatives that we're focused on, clearly include expanding our DTH base in Eastern Europe, our ETTH (ph) business in Eastern Europe, continuing to progress our digital plans across Western Europe, and where appropriate focusing on cost reduction and scale economics. I think lastly, it is fair to say, we are looking at some market expansion opportunities, particularly where we can find infill, or opportunities that rationalize our existing operations.

That is a quick look at some of the things we are focused on as we prepare to roll into 2004 and we look forward to keeping you abreast of our own internal score cards and external cards on a quarter to quarter basis as we implement those. Charlie.

Thanks, Mike. I know as Mike said, there is a great opportunity for us to grow the top line and all our strategic work and fundamental analysis suggest there is tremendous demand and opportunity, where the consumer has to spend for us. Really the opportunity for us is the cost in capital (technical difficulty) after that. On page 25 you can see some of the key metrics and how we've been doing. Thirteen percent increase in new service subscribers in the last 12 months, with RPU per RGU increasing 7 percent to nearly 14 euros.

On a customer type equivalent in Western Europe we are up to 22 euros a customer, and in Eastern Europe we are driving it up towards 9. Within each of those two areas there is significant consumer spending available if we can get the right products in the right bundles. We do feel it's not a problem of getting money from the consumer, it's a question of getting the right product portfolio and driving the sales. Let me just turn to the cost side of the business. We have been very focused on striving scale economics and I think there is more opportunity for us to drive that.

We do have very high operating leverage, perhaps higher than some of the U.S. comparables. In Q3, our group EBITDA margin is now up to 37 percent and I think we still see a challenge to put a four in front of that over time. We continue to see strong operational leverage in our business and an ability to scale our cost rates further. Going to UGCE numbers, very similar story to one that GlobalCom mentioned about the currency. All of our figures are in euros as you might be aware.

If you look at the core (indiscernible) business it is growing around 10 percent year on year which is the double-digit growth we aspire to but perhaps certainly opportunities to push that up a little bit, if we can. Product continues to have a tough time with (indiscernible) in Europe and has seen a decline, but also has been very focused on rationalizing a portfolio and getting out of nonprofitable areas or less probable areas. (indiscernible) gross margin which is the business gross margin, up through 60 percent which means that each customer (indiscernible) is inherently profitable.

The media business dominated by the split on our data product continues to grow very very well, so a good year on year growth. The group as a whole saw growth around 8 percent, and given that we had underlying businesses that we got rid of or got out of. We are still in the double digit top line growth area. On the EBITDA side, because of the focus we've had on cash flow and cost discipline on page 28, you can see that in Q3 we managed to raise our EBITDA to 138 million euros which puts us considerably through the 500 million run rate target that we set ourselves three years ago.

The key cable distribution businesses continue to perform very well particularly with scale economics. But both (indiscernible) and media are now both free cash flow and operating cash flow positive. You can see a strong contribution in the quarter from the media businesses again driven off the scale it gets out of the data business. In terms of CAPEX, on page 29, we've been managing to control our CAPEX pretty efficiently. We have been running at about EUR70 million of CAPEX in Q3, 60 in Q2 and 43 in Q1.

As a whole we now reforecasting 275 for the year which is a combination of lower volume, meaning lower spend on CPE but also continuing discipline on some of our capital projects. You may see some of that spill over into next year and increase the CAPEX a little bit next year. In terms of the investment areas these are the NCTA categories. We are investing in future growth so our CAPEX does include quite a bit of investment in upgrade and new builds and you can see here the line item broken out, as well as into the IT platform which we think is critical for improving the quality of our products and our customer service.

If you turn to the balance sheet, we have been very focused on managing the working capital side of the balance sheet to make sure there isn't a hidden funding cost. I'm delighted to say we have seen some good success there. If you look at other current assets you can see that at year end they are down from 297 to 171 million and that is really from much more efficient cash flow collection, particularly on the receivable side of the business as well as the benefit of controls we been putting in on prepayment and the like.

You can also see if you look at the payables and the liabilities that our trade credit is holding pretty steady. As we came out of Chapter 11 we now see an opportunity to perhaps improve our terms of trade. You can see EBITDA adapting for the seasonal (indiscernible). We get much more credit at year end than we do in the middle of the year. It's pretty flat between year end and September. You can also see the prepayments and deposits are pretty flat reflecting our focus on NPB positive customers.

If you turn to the debt dead side of the business, you can see that the group debt performance of the Polish restructuring is around 3 billion, just shy of. We have been free cash flow positive at the UnitedGlobalCom Europe level year-to-date and of course in this quarter which is very pleasing. I think as we go out to the full year we remain comfortable with our guidance on debt as being below 3.1 billion at year end pro forma for the Polish transaction.

In terms of the other outlook issues on page 32, we continue to target 500 million of EBITDA for the full year. That excludes some of the one-off costs that will are going to be associated with the tender offer which (indiscernible) about 500. When we first gave you guidance for the year we identified some key variables. One of the key variables was the European MovieCo Partners court case which has a 25 million swing on our reported EBITDA.

We have budgeted to benefit to the tune of 12 million of that and have not received the benefit of that as it turns out. So it looks like the 500 million is a pretty reasonable result on our basis particularly given the shortfall in subscribers and also the shortfall in product telecom revenue. That is it for me.

We are ready for questions operator.

(OPERATOR INSTRUCTIONS). Luca Ippolito with Chesapeake Partners.

Congratulations on the quarter and congratulations on agreeing to the transaction. Two questions. You mentioned you're coming back to a normalized subscriber growth in Europe. Where would you put Europe in terms of economic recovery versus the U.S.? In other words assuming they are behind, how far behind and how much benefit do you think you will be getting from that? And then separately, when is the UGC Europe transaction expected to close?

On the second question, the exchange offer expires on December 18th and I believe the transaction would close very shortly thereafter. Obviously not simultaneously with that expiration but within days most likely of that expiration date, so mid late to December. On the economic question, the good thing about operating in 11 countries across Europe is you have a fair amount of diversity in your economic situation, if you will. While the economies of Western Europe might be going in one direction, the economies of Eastern Europe might be doing something different.

It's not always easy for us to generalize about Europe as a whole because we do operate in so many different markets. Having said that, and Charlie feel free to chime in, I don't think as we look over our business performance over the last 12 months or over the next 12 months, that the economy per se is going to have a huge impact. Our products and services are pretty basic staples to most people, whether that be an Internet connection or cable television connection and historically we haven't seen huge swings or volatility in connections associated with the economy as a whole. I don't know if you want to provide any more color on that Charlie.

(indiscernible) if you go to Western Europe, because the spend on this product is actually so far below the price on this (indiscernible) consumer wealth is much higher they're actually paying. We've seen virtually no movement. For example, we have raised prices in Holland pretty substantially in Q3. We saw no discernible churn at all in our cable television product. I think directly at Mike's point, it is much more a utility cash flow profile in those products.

I think in Eastern Europe we have been lucky that Eastern Europe is going through a miniboom as it comes into the EU next year and our markets are really benefiting from that. That has been the area in the past where we've seen the most sensitivity to economic conditions, but even in those countries we still saw strong underlying growth. Historically, it has been quite defensive against macro factors.

Thanks.

(OPERATOR INSTRUCTIONS). Andy Baker.

Congratulations on a great quarter. Two quick questions. First I was wondering if you can give any thoughts on what's happening to programming costs throughout Europe and I guess as well as in Latin American? And second, as you talk about growing your margins out towards this 40 percent level or 40 percent plus level, can you see some indication of how you balance profitability and growth as you look to subscriber growth? What are the areas in which you think you can actually make an impact? Is it through further bundling, is it increased marketing or how do you expect to get the subscriber numbers to the growth levels you would like?

On the gross margin point, our gross margins are pretty good across our products. On the analog video side it's in the mid 80's for the most part and our true see-through gross margin on data is in the mid-90's and on voice it would be closer to the mid to high 60's. On the programming costs specifically in our business we have had made a concerted effort over the last 12 to 18 months to try to limit increases in programming costs across our analog business for a couple of reasons.

One, as you know we have relatively low ARPU's in that analog product, so driving as much out of that on the gross margin line is critical. And number two, we have aspirations as we have articulated to get into a digital environment with our TV customers so that we can get $20 or $30 out of the home instead of $10 or $12. As such, we have been reluctant to increase the program line up in our analog base.

What you are finding is we are taking regular rate increases varying in each market of course, but we are not necessarily adding an equivalent amount of programming costs to that analog base which means we are getting better gross margins. On the digital front, our gross margins have historically been skewed due to MITM (ph) guaranteed type arrangements with people like the MovieCo partnership. As we have normalized those programming arrangements our digital gross margins have also started to look more healthy and I think that is a trend we want to continue.

Of course, digital revenue and EBITDA and contribution isn't significant to the overall picture. So it's not having a big impact. For the profitability versus the growth, it's kind of a very open ended question but I'll try to address how I see it. We have, over the last 12 to 18 months as I said earlier, have done a fantastic job of cutting costs and creating a very lean and efficient operating structure. Whether you look at headcount or SG&A or any of the metrics that are critical to sort of comparing yourself, if you will, to both the past and other operators, we run a very lean shop.

It begs the question, are we too lean? The nice thing about being lean is that you've got far more of your revenue dropped into your EBITDA line and I think you'll find one of the things that distinguishes us from a U.S. player or even a UK player is (technical difficulty) our ability to ensure that more revenue is going to drop to our bottom line. We run more efficiently on the OPEX line and we have got good gross margins.

If we grow revenues 10 percent you are going to see a disproportionate benefit in the EBITDA line and that's the trend and we want to continue demonstrating to people over time. That is why we think we will get to margins in the mid-40s or plus type range over a reasonable period of time. Obviously to do that you can only cut so much and I think we don't expect the vast majority of our future EBITDA growth to come from operating cost reductions.

If anything they might be operating cost stability, but not huge operating cost reductions. That needs to come from two main sources, rate increases which have historically been a very significant component of our growth across our product lines and particular our analog product line for which we have pretty good pricing power, if you will, with 6.5 plus million analog video customers, you can get pretty meaningful revenue growth just from raising rates from relatively low levels.

Secondly, from units where if you look back over our history we've had good years where we've done 400,000 plus on the net gain side. I don't think -- over the last couple of years we have had challenges associated with a number of factors whether they be one-off billing system implementations or a restructuring of the balance sheet that were somewhat disruptive or other elements. You can look at the last two years, the last 24 months or so, and you can -- there are pretty good reasons for why we've achieved what we achieved in those periods of time, not that there weren't accomplishments in and of themselves.

As we look out we think we can get back to a more healthy growth, in particular in the data product with the competitive environment evolving as it is and us staying abreast of that competitive environment. We think our data adds will show the benefit of that overtime as we get more aggressive on tiering and pricing and we provide more products to what is by any estimation a booming market.

The European data market, especially for broadband, is as healthy or perhaps healthier than the U.S. market, extremely robust, lots of good research on that. We are smack dab in the middle of that. On the analog TV side, more modest growth but good healthy margins and rate increases. Digital over time will be an increasing large part of our business over the next five years but not as significant over the next two years.

Voice is a business as you look over the last two years, we sort of lost our way on a little bit for lots of reasons, not the least of which is as we were conserving cash it's an MPV positive product but not our most highly MPV positive product. As we look out in the voice sphere we've got one million untapped lines in our switches and lots of good organic growth or we've got footprint and a fantastic opportunity where today we don't have footprint. Of our 10 million homes only 3.5 million are voice ready. We've got huge upside in Eastern Europe and other parts of Western Europe to provide what might be more cost effective voice products like SIP-based voice products and voice (indiscernible) voice products which are squarely in our sites. Long winded answer but --.

One quick follow-up. Are you prepared to give any guidance for CAPEX for 2004 or if nothing else at least directionally versus this year?

I don't think we are providing any guidance on any numbers, but I think we have said historically that we see the kind of run rate normalized CAPEX for this year being something we anticipate maintaining, largely maintaining over time.

Thank you very much.

Matthew Harrigan with Janco Partners.

A couple of questions. First of all, you have said at an investor conference in Boston in July that your gross adds for the Netherlands were up 45 percent for that period. I'm curious if there's some sort of current affect or something else that may be dampened down the growth rate for Q3 on data? What is your sense in terms of the market share of adds relative to DSL, where you have more robust competition in the Netherlands?

Secondly, with Liberty reportedly looking at Suez's cable operations in France, would you be amenable to taking an interest in a large French MSO if it resulted in folding in your assets there or are you thoroughly committed to keeping the French assets in-house? And then lastly, can you talk about digital in the context of a bundling strategy?

Sure, on the first point I think that presentation in Boston was September, Matt. What I said was the introduction of a like product in Holland, namely a product in the 30 plus type range on ARPU and 500 type K speed down had added about 40 to 45 percent to our weekly sales and that we've seen a big boost in the weekly sales, as you would expect when you lower pricing and start opening up a broader market to your data service. Those are the numbers I was referring to.

We have seen that trend continue. The good news about introduction of light services in Holland is that we've had relative stability in our classic product. Clearly today our light subs are a relatively small proportion of our overall subs. So our ARPU's have been largely unaffected, but where we have launched it we've seen immediate increases in sales, immediate increases in net gain with little to no deterioration in our classic or our core product sales and net gain.

That is a good thing. We see that has largely been continuing through the third and fourth quarter. In terms of the French transaction, really I think it's premature to speak about that transaction. We have a good dialogue with Liberty, and I think it is fair to say that we are looking at things together, just out of the ordinary course you would expect that. If something emerges there that is meaningful or looks like it is disposable then we will certainly let people know. At this point I don't think there is much more to say.

On digital bundling, I think certainly digital is going to become an increasingly important part of our bundled product. If you look at places like Norway and Sweden where our penetration of the digital service is at its highest level, we've had good success in both bundling and selling in that product. The nice thing about it is we are going to have hopefully some margin flexibility but more importantly an ability to upsell services through that box over time including data services, since our digital boxes will normally come with an external modem or an internal modem.

And so we think we've got some flexibility if we can be creative about how we bundle the digital service. We have done virtually none of it today. I think it's all upside from the point of view can we improve our position with bundling and digital. The key is getting the service itself and the product itself to a position where it's more compelling to customers.

It's improving every day in Holland, or every week. We continue to improve both the MPV and the margins around the product as well as the consumer appreciation of the product, but we've got a ways to go. I think you will find that digital for us while an important strategic goal is one that is not going to have a huge impact on our '04 numbers but more meaningful as move into '05 and '06.

Thanks, Mike.

Dennis Leibowitz with CSFB.

You emphasized in your outlook the flexibility you have on rate increases and I was wondering if you could give some sense of what kind of an average rate increase you might see next year? Secondly, I'm sure I'm calculating this wrong, but adding up the three quarters and looking at the EUR500 million for the year, it would seem that you would exceed that unless the fourth quarter was down. Maybe I'm getting my translations wrong, but I wonder if you would answer that too?

Want me to do it, Mike?

Sure, I'll take a crack -- why don't you start with the EBITDA one Charlie.

The answer is you're right, for the following (indiscernible) it looks like we are going to be flat Q3 to Q4. One of the big things about Q4 is we spend a lot of money on subscriber acquisition costs. It is the big selling season. Q3 has been relatively (indiscernible) because July and August pretty much dead in Europe. So that is really the big factor there. Clearly the benefit comes in Q1 because you add historically about a 35 or 40 percent of our net adds in Q4.

I think there were some one time release of accruals as well weren't there in the third quarter, Charlie?

Not really, not meaningful.

On the rate increase it really does vary across (indiscernible), but as Charlie indicated, we took a relatively significant rate increase in Holland across a million of our 2.3 million customers this year in the range of 30 percent. On average though in that market more typically it would take increases in the 3 to 5 percent, 3 to 4 percent range. We may in Holland look at trying to harmonize our rates across the remainder of our 1.3 million customers, we'll keep people abreast if that is something we do attempt to do.

I think you will find that on average you are growing sort of on a normalized basis you are going to take 3, 4, 5, 6 percent rate increases and in certain instances, sat in Holland or in Eastern Europe in certain markets, you'll be taking even larger rate increases, double-digit rate increases. I think it's hard to give you a general figure though I did indicate about 50 million in EBITDA over '03 approximately, associated with rate increases. If you assume a mid 80's analog or mid 80's type gross margin you can figure what that percentage was.

Just to add some perspective, this year our core business we increased, as Mike said, three plus percent and that was worth effectively 35 million of EBITDA. You would assume something similar was possible going forward. The rate increases we did in July 1 in Holland added about 15 million to this year's EBITDA. That would obviously annualize to an incremental 15 million next year. That is before you, as Mike says, review any other step changes in rates.

I think it is safe to say Dennis that we for a long time we tiptoed around the rate increase situation, and more recently we had been more aggressive beginning in Eastern Europe and now moving into Western Europe, and we have successfully implemented that initiative with little to no impact so far.

Thanks.

David Gladstone with Morgan Stanley.

Good afternoon. Good set of numbers. A couple of questions. Can you comment on your complement on your upgrade strategy over the next year or so? You've got around, within distribution, about two-thirds of the homes upgraded for two way. Obviously that still leaves significant room to both rollout to the upgraded homes but also potentially to upgrade the rest. And also tie that in with your strategy to remain free cash flow positive or not going forward. Obviously great (indiscernible) generating free cash flow over the course -- can we assume that going forward it will remain like that?

On the upgrade point today we sit, of our 10 million homes in Europe roughly 5.5 million are what we would call upgraded, meaning data and/or digital ready. Only about 3.5 million would be voice ready. We believe that's a pretty nice base to harvest in the sense that there is a lots of organic growth right there in front of us given where our penetration level sits in most of those core markets. If you look at that and if you slice and dice that though we are ere largely 100 percent or nearly 100 percent rebuilt in Holland and in Austria which would be obviously our two core markets in Western Europe.

We are obviously very focused on marketing our triple play products across that footprint. We would be relatively only about 25 percent rebuilt in Eastern Europe. The question around Eastern Europe is a good one. Where we have launched data in Eastern Europe we've achieved pretty good penetration out of the date, seven, eight percent type numbers out the gate. We think that over time as the Eastern European economies continue to evolve that as the data product gets more sophisticated, as our margins improve, that we probably will and can be more aggressive in terms of launching the double-play and perhaps over time a voice over IP based triple play service in Eastern Europe.

The good news there though is that we don't think you've got to do a massive upfront rebuild, you can cherry pick where you rebuild and that's largely what we've done thus far. I think you will see, I don't want to use the measured, but you'll use a revenue appropriate strategy associated with upgrade and rebuild in those markets. I don't think you're going to see huge impacts and we certainly don't expect to see any negative impacts on our free cash flow from that sort of activity. You want to add anything to that, Charlie?

(indiscernible) free cash flow, look we recognize that we have to -- we've got some debt to pay off. So we are going to run the business as best we can to make sure we generate (indiscernible) cash flow.

Thanks.

David Joyce with Guzman & Company.

A couple of questions on telephony. Is that almost all or all circuit switched at this point, and what is the plans for moving over to VoIP? Secondly, are there any programming contracts of importance that would be expiring that you might have some issues with? I wouldn't expect anything ala ESPN and Cox, but just was wondering what the status might be there?

On the programming contract front, certainly not in our analog base. We have regular -- we're constantly renewing and managing our programming on the analog basic, which is usually our 25 to 35 channel type package. The content relationships in the premium services obviously evolve over time, not the least of which is our relationship with the movie copartnership in Holland which provides us with movie channels and movie product in that market. So I think on the digital front, there will be a lot of activity, both acquiring new content, renegotiating existing content, but again that is activity that is driven toward a longer-term strategy in the digital environment. On the analog front, I would say there is virtually no major issues there.

Almost -- not almost, 100 percent of our voice business today, both in Chile and Europe is circuit switched. Cable telephony service, although we have a small sort of plain old telephone or POP service in Hungary which is also circuit switched. I would say that our view of voice over IP is evolving of late. We were taking an approach very similar to the U.S. guys who had launched circuit switched. We are trialing today several technology solutions for a hybrid voice over IP network in Holland, whereby we would use our own circuit switch, but IP the IP layer for distribution of traffic. That strategy continues.

I think what we've -- at least what I've realized is that there may be other alternatives to the traditional cable based or RBOC spec'ed voice over IP product, which is becoming or seems to have historically been very difficult to get to launch phase for all sorts of understandable reasons when your product spec is seven feet tall. What you find with people like Vonage and others is that there may be more creative, maybe not the right term, but more early to market solutions in a place like Eastern Europe, for example, where you can get a voice product across your data network that is darn close to 5.9, perhaps self-provisioned, and may not have every feature that a class 5 switch has, but darn near every feature and anything a customer would want.

The question around that is less of a technology question, in my opinion. It's more of what is the right economic relationship, how much is my network, how much is theirs, who does the back office. So I think we are actually, as we sit today, and I'm squarely focused on trying to drive down deep into these alternative telephony solutions quickly, because more footprint means more customers and if we can take advantage of our IP network, our bandwidth costs, installed CPE in the form of an existing modem, but we're going to do that. I think there will hopefully some stuff to talk about in the new year or into '04 on our strategy on that front.

Granted the future is going to be on the digital platform. How much of your marketing currently is still to try to drive analog subs?

Very little is on analog, it's when your bundling obviously is hard to (indiscernible) the services. But our analog spends (indiscernible) of 2, 3, and 4 percent of sales. All our marketing is predominantly focused on new services.

But analog sells itself. If you had exposure to the last ten weeks, 15 weeks in Holland, you'd find that we are blowing through -- we're having huge analog sales results. That is largely based on the one-off disconnects that we are doing in the first half of the year, but analog largely sells itself. We are fairly well penetrated across Europe, close to 65 percent. We're in the 90's in Holland.

We've got some opportunities. We are not as highly penetrated on the analog in Austria as we'd like to be and that's a party good margin product. As Charlie said, it's not number one focused but it is a pretty high MPV product, it's a pretty low cost of sale and there's virtually no CPE. So it is something we don't lose site of.

Very good. Nice quarter.

Time for one more question, operator.

Your final question comes from Ted Henderson with Stifel Nicolaus & Co.

Moving into the fourth quarter which is historically kind of the strongest selling season there, can you share without giving guidance any trends, because units were just a tad light in the third quarter and are you seeing some strength going into the fourth quarter here in the first month and a half?

I would say, that we -- how do I answer this without giving you any guidance. I think it has gone reasonably well, it's gone pretty well in the fourth quarter Ted. We are doing the sort of net gain that we nearly budgeted to do in most cases and in some cases slightly below budget, but we are having -- it certainly compared to the first, second-quarter very good. I can't compare it to the fourth quarter of last year yet. We are just not far enough along. But we will let people know as soon as we can. Generally speaking though we are feeling pretty good about it.

Your comment on strength of the data market, how strong the market is in Europe and obviously that seems to extend into eastern Europe as the previous comments indicate. Is there an opportunity challenge though with regard to competition in Eastern Europe in that as you, if you slowly selectively upgrade markets, is someone beating you to the punch over there? Is there a sense of urgency to start moving? I assume that the EUR6.5 billion for upgrade and new build in the quarter were almost exclusively spent in Western Europe, or are you already selectively upgrading Eastern Europe markets for data?

I think we are selectively upgrading Eastern Europe markets for data. I wouldn't want to break it down for you as to how much here, how much there. I will say that the competition we're likely to experience in Eastern Europe relative to Western Europe on the DSL front, I don't think it is going to be as robust. The networks that we're competing against aren't as upgraded, the availability and reach of their IP and their DSL systems isn't as extensive.

I think we are in a good position in Eastern Europe to grab marketshare like we did in Austria and Holland. (technical difficulty). We went to 70 percent market share. We did as well or better than U.S. guidance, and understandably the DSL operator got competitive. We are not going to lose that opportunity I guess is the right way to say it.

Thank you very much, Mike.

Thanks for joining us. We try to keep this to an hour and it looks like we just did. We look forward to talking to you in the new year. Bye-bye now.

Ladies and gentlemen, this concludes the UnitedGlobalCom and UGC Europe third quarter 2003 earnings release conference call. If you would like to listen to a replay of today's conference call, please dial either 1-800-642-1687 or 706-645-9291, followed by the pass code 329-6947. Once again if you'd like to listen to a replay of today's conference call please dial either 1-800-642-1687 or 706-645-9291 followed by the pass code 329-6947. You may also access a replay of today's conference call by visiting the UnitedGlobalCom or UPC Europe corporate websites at www.unitedglobal.com or www.UGCEurope.com. Thank you for participating. You may now disconnect.