Liberty Global Ltd (LBTYK) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And thank you for standing by. Welcome to Liberty Global's second quarter 2005 investor call. This conference call and the associated Webcast is the property of Liberty Global, Inc., and any redistribution, retransmission, or rebroadcast of this call or Webcast in any form without the express, written consent of Liberty Global is strictly prohibited. [OPERATOR INSTRUCTIONS.]

As a reminder, this conference call is being recorded on this date, August 11th, 2005. I would like to now turn the conference call over to Mike Fries, President and CEO of Liberty Global. Please go ahead, sir.

Thank you, Operator, and welcome, everybody, to our first earnings call as Liberty Global. We have a fairly large group online with us today, so let me just make a few brief introductions. In addition to myself, obviously, we have Charlie Bracken and Bernie Dvorak, our co-CFOs; Rick Westerman, our Senior Vice President of Investor Relations and Communications; Gene Musselman, who's President of our UPC Division; Miranda Curtis and Graham Hollis, who are President and EVP, respectively, of Liberty Global Japan and oversee our Japanese investments; Dave Leonard, President of Liberty Global Latin America; Tony Werner is on from Europe, SVP and our CTO; Shane O'Neill, who's our Chief Strategy Officer and also runs chellomedia; and Liz Markowski, our Senior Vice President and General Counsel.

The agenda today is listed on the slides. Hopefully you'll have a chance to follow along on Page 3. And in the spirit of continued simplification, I think we've tightened our prepared remarks a bit. I'll spend just a couple minutes reviewing the Liberty Global platform, I'll quickly cover some highlights from the quarter, and, then, I'll let Charlie and Rick review the numbers and the 2005 guidance for you. And, then, we'll get to your questions. Before I do that, though, however, I'll let the Operator read you our Safe Harbor statement.

Thank you, sir. Page 2 of Liberty Global's presentation details the Company's Safe Harbor statement regarding forward-looking statements. In this presentation, we are giving guidance for 2005 and are making other forward-looking statements. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from what we have said. These risks are described in the 10-Q that we filed today with the SEC, and we encourage all participants to read that document.

I would like to now turn the call back over to Mr. Mike Fries. Please go ahead, sir.

Okay. Thanks. I'm on Page 4 of the presentation if you're following along, and we thought it might be beneficial to recap for you, on one page, the significant broadband distribution platform we've now consolidated under Liberty Global. We are the largest MSO outside the U.S., and the third largest in the world on the basis of RGUs. The numbers at the bottom half of this page flesh out that story a bit. We've lined up our three core operating business -- UPC in Europe, J-COM in Japan, and VTR in Chile -- consolidated all three of these, of course. And these operations combined, along with some smaller systems in Latin America, currently reach 23.5 million homes, approximately 75% of which, or roughly 18 million are upgraded to Two Way, and with the balance scheduled to be rebuilt -- and I'll talk in a minute about the importance of that point.

At June 30, we provided services to nearly 11.5 million total customers, with each household taking, on average, a 1.3 services from us. And, remember, we're not double-counting digital subs like the U.S. guys, so that number might appear a little lower than it otherwise would. Now these numbers vary by market, of course -- the J-COM, at 1.7 RGUs per customer; and Chile, at 1.5 RGUs per customer -- well above most U.S. operators. You notice that Europe is slightly lower in the aggregate, which as much as anything, reflects the fact that we started with a very mature legacy video business there, nearly 60% penetration. But we have demonstrated in Europe, in markets like Austria, that we can achieve a 1.6 RGUs per customer, so our expectations for the rest of Europe are high.

If you look at the product break down on this page, we have over 1.4 digital subscribers today, representing roughly 14% of our video customers, and that number is expected to increase significantly in the next few years. I'll update you on some of those initiatives. We currently have 4.2 million voice and data customers, representing, in the aggregate, penetration of around 13% and 14%, respectively. And, of course, these numbers also vary by market, as well, and they range from the mid- to high-20s in many countries, to single digits in places where we've only recently launched advanced services. We do believe, however, that most markets will top out at comparable levels, and that makes us bullish about the longer-term growth picture here.

Another punch line from this slide is that these large individual operations have created for us a distribution platform of, we believe, unprecedented global scale. And over time, we should be able to realize meaningful operating, strategic, and capital efficiencies. We've already done that to some extent.

Turning to Slide 5. The other key point, I think, to make is that, while we operate in different regions of the world, our assets, our opportunities, and our risks are really more alike than different. And these similarities, in particular, are what make our version of the broadband story, we believe, a bit more interesting and exciting. The key value drivers fall into three buckets. The first is, obviously, our strong organic growth. Our 2005 guidance, you'll see, is to add 1.1 to 1.2 million net new RGUs on an organic basis, so that excludes acquisitions. And while much of that growth is derived from up-selling and cross selling services, an important component comes from what I call Greenfield network expansion, essentially upgrading the remaining 25% of our network, or roughly 5.5 million homes, and marketing new services like voice and data into these untapped or virgin territories.

Across our platform we're focused squarely on product innovation. We've talked a lot about that in the past. And while voice and data services have added 2 million RGUs in the last two-and-a-half years, going forward, digital video might very well be the single largest contributor to our growth, especially when you consider that in Europe, over 90% of our TV customers still only receive around 30 analog channels. In our view, that's significant opportunity.

Each of our operations in Europe, Japan, and Chile benefit from what we believe are very attractive economics, with data gross margins, for example, north of 95% and video and voice profitability, in most cases, best in class. We're also benefiting, in each market, from declining CPE costs and very favorable build out costs, given the high densities in places like Japan and lower labor costs in places like Chile and Central and Eastern Europe.

And, then, lastly, each of our markets have experienced a solid cash flow margin improvement. You can see that on this slide, over the last two-and-a-half years, as the chart indicates, from the mid-20s to the mid-30s in almost every market. And while we're not providing any formal guidance here about cash flow over the long-term, we do believe that as we reach our targeted levels of penetration, as we exploit the scale benefits that I spoke of, both within regions and between regions, and as we complete our key product initiatives, 40% operating capital margins should be achievable.

The third bucket consists of strategic growth opportunities, you'll see that on Slide 6. And we've talked a lot about these within each market, but they really are the same across the footprint, and, I think, have the opportunity to meaningfully create shareholder value for us. The ownership of content assets in our core markets is, obviously, one of those opportunities. I'll update you in a few minutes on that -- on those initiatives, but suffice it to say here, that we already have a pretty big stake in the programming business, with operating or ownership interest in approximately 50 channels, reaching over 200 million subscribers.

On the technology front, we're well positioned to exploit wireless and mobile technologies. We started acquiring WiMax spectrum at very, very low prices where it makes sense. We're testing wireless broadband equipment. We recently announced an MVNO mobile deal in Holland, and you should look to see that happen in potentially other markets.

And, then, lastly, but I think most importantly, we have the opportunity to expand our footprint through consolidation, which is happening across all three operating territories. You can see in the chart, what we've done in Europe over the last 12 months, and where we've been extremely disciplined, in our view. Excluding our minority interest in Telenet in Belgium, we've closed or announced deals representing 2.8 million RGUs and roughly $1.8 billion, each of these transactions priced attractively, with indicative cash flow multiples at the time in the 6.5 to 8.5 range before synergies, which in many cases brought that multiple down significantly.

Flipping forward a couple of slides to Q2 highlights, I'll just touch on some top-line issues and, then, let Rick and Charlie take you the rest. I'm on Page 8 now. The engine of our operating performance has always been, and continues to be, our profitable subscriber growth. And we had another record quarter, with over 260,000 RGUs added in the three months ended June, and 470,000 year-to-date, again each on an organic basis, so excluding acquisitions. You'll see, compared to 2004, that's really a step change in subscriber growth, driven largely by Europe, where net adds increased nearly three-fold compared to the same period last year.

Revenue and operating cash flow were up 35% and 25%, respectively, on a pro forma basis, assuming we consolidated J-COM in 2004. Charlie will walk you through the details, but you will see that operating cash flow for the quarter was impacted by higher sales volume and related customer acquisition costs, as well as one-off items, such as rebranding J-COM in Japan after their IPO.

You're going to find a ton of information on our subscribers by region and by product in the press release, so I'll just hit some highlights here. Digital continues to dominate our video growth strategy. In Holland, we are on track to roll out our digital for all project in the fourth quarter to over 2 million homes. Again, this is migrating our analog customer base to digital across the footprint. We've talked a lot about this initiative in the past and its importance to our Dutch business, and I can tell you we feel very good about the readiness of our technology, our operating platform, and the customer proposition. J-COM added over 100,000 digital customers in the second quarter and over 170,000 year-to-date, and now sits at roughly 23, 24% penetration, with HDTV functionality really driving demand in that market.

We continue to see robust growth in our voice services, particularly out of Europe, where we've launched Voice over IP or digital phone. We're now generating approximately 7 to 8,000 digital phone sales every week in Europe, and we've added over 150,000 customers since our launch late last year. And I think, importantly, we're finding that approximately 60% of our VoIP sales lead to Triple Play customers, and that's really what we're trying to achieve here, and that's really critical in markets like Holland, where we're finding Internet churn, for example, drops in nearly -- drops by half in homes that have Triple Play services. Current plan is to have over 7 million VoIP-ready homes by year end in Europe, up from 4.5 million today. J-COM has also launched VoIP services in Sapporo that complement their switch telephony product, which continues to perform well. This is the third quarter in a row that the group has added over 100,000 data subscribers, which is evidence that the product leadership strategy is working.

In Europe, we continue to see speed increases and prices stabilize. We now lead the market in speeds in our classic service in eight out of ten countries, and we're on par in the remainder. And the same thing is happening in Japan, where ARPUs have been relatively stable, over the medium term here, but we've now -- but we're now trialing 100-megabit services, for example. So this is a race we're pretty confident we can win in the long run against copper networks, and you'll see us continue to push the pace here.

Turning to my last slide, on Slide 9, our strategic initiatives, I spoke about the success we've had on the M&A front in Europe. In terms of more recent events, we are on track to close the announced deals in Ireland and Romania, which will add approximately 1.25 million RGUs and around $100 million of operating cash flow before synergies. And as you'd imagine the pipeline's pretty full. Probably just as important, in markets like France and Chile, where we've already closed acquisitions that consolidated existing operations, our integration efforts are right on plan, and synergies should be higher than originally estimated in both cases. And, lastly, we remain optimistic, but patient, about further consolidation of the Japanese market, with J-COM already five times larger than the next operator, is in an ideal position to realize financial operating and strategic benefits from further consolidation of that market.

On the content front, our existing assets, like JPC in Japan, continue to outperform relative to budget and reinforce the strategic benefits of owning programming. In Europe, we just received regulatory approval for our Canal Plus acquisition, which is going to give us the key movies and sports rights in that market to support that digital migration. And on the technology front, I've never felt better about our road map than I do today, particularly under Tony Werner, our CTO's, leadership -- whether it's ACTV digital boxes that we're rolling out in Japan or DVRs, which will be available in Europe and Japan in the fourth quarter or our SIP-based VoIP services in Europe or wireless and mobile solutions, DOCSIS 3.0 -- we are either right on or ahead of the curve with each of these developments, and that certainly gives me a lot of comfort.

We've talked a lot about Liberty Global's balance sheet and liquidity position. You'll see the numbers in a second. Suffice it to say, we feel good about our net debt position and our access to both existing liquidity and new capital. And, lastly, we did announce a stock dividend on Monday of this week. We think it 's the right long-term decision for shareholders, and will, in particular, provide a good currency should we decide at some point to use stock in our acquisition plans. I can tell you we have no such plan today, but we do think it's useful to have that flexibility going forward.

So, overall, I feel very good about our operating results, our strategic direction, the management team, the support we get from our Chairman, John Malone, and the Board. And I think we're making all the right moves, both to keep this business growing rapidly and, perhaps, most importantly, to enhance the value of the Company for shareholders. So, with that, let me turn it over to Charlie who's going to walk you through the results. Charlie?

Thanks a lot. I'm on Page 11 for those following along. As Mike said, we had one of our strongest ever quarters in terms of subscriber growth, in which we added about 260,000 RGUs, and that's a very significant improvement against last year, around 61% on a pro forma basis if you include the J-COM net gain. I think, as Mike said, it's worth repeating that we use a single-count methodology, where a digital RGU is not double counted, i.e., an analog subscriber isn't two RGUs because it's analog and digital, which is somewhat different to some of the U.S. operators. And under that methodology we had a total of 14.9 million RGUs at June 30th. Now these numbers exclude NTL Ireland, which as I'll explain in a minute, from a financial point of view, we consolidate due to certain U.S. GAAP rules, but from a subscriber point of view, these figures exclude it. In terms of the regions, we 10.3 million RGUs in Europe, 3.1 million in Japan, 1.3 million in Chile, and 190,000 in the other areas, principally Puerto Rico.

Let me just give you a couple of highlights. Our broadband Internet subscribers continue to accelerate and were up 68%, to 137,000 in Q2, driven by the continued success of our tiering strategy. And we're now very nearly at 2.5 million broadband RGUs. The other great success story was telephony, where we increased 81%, to 112,000 in the quarter, and this is driven primarily by the success of our VoIP rollouts in Europe, including the recent launch in France, where we're marketing to over 1.2 million ready-for-service homes. Our total VoIP footprint including the Netherlands, Hungary now stands at over 4 million homes passed. And that number will continue to climb as we roll out the service in at least three additional markets this year.

Now, finally, you'll see our video subscribers, in aggregate, increased nearly 20,000. That consisted of three factors. One was 133,000 gain in digital RGUs, but it was offset by a loss of 120,000 in the analog RGUs, the balance being the DTH subscribers. And, really, the story here is a lot of our analog customers are upgrading into digital over some period of time. And, therefore, in the aggregate, we're still seeing growth in the video business, and we expect that to accelerate with our digital for all strategy going forward. So, overall, we're very pleased with the subscriber numbers this quarter.

Turning to the financials on Page 12, this slide details the summary financials for the quarter, and these are just as we report them. We haven't put any pro forma calculations in this slide. And as you can see, there's some pretty spectacular numbers here. Revenue for growth in Q2 increased 120%, to $1.28 billion, and operating cash flow increased 118% to $428 million.

Now we're going to break down both of those metrics in more detail in just a second, but let me just give you some of the highlights. Cash flow margin was 33.6%, down about 30 basis points from last year, but we are consolidating, for example, in NTL Ireland, a company with a lower margin and a muster of some other acquisitions. And our capital expenditures for Q2 came in at a bit over $340 million. I should mention that we include in this all the capital lease additions during the period, which is principally driven by J-COM, where we typically lease our digital set-top boxes, and we think that adding in these leases provides a truer picture of our overall spend, which is at 27% of sales in Q2.

Now, you'll notice that that number is quite a bit up on last year's second quarter, around 200% on an absolute basis. And this increase is principally related to a higher spending on customer premise equipment to support the significant increase in subscriber activity that we're generating this year compared to last. And, hopefully, you saw that on the previous page. And because of this large number of customers, as a key factor in why our free cash flow for the period was actually negative $62 million, versus a positive last year and a positive in Q1. So, overall, for the year-to-date we're at negative $38 million. But I should point out that, for those following the UnitedGlobalCom, we did pay out a one-time cash flow of $75 million associated with the termination and settlement of a Dutch programming contract in the first half year. So year-to-date we are, actually, on a pro forma basis, positive, and we would expect that to continue in Q3.

Turning to Page 13, in terms of the revenue, what we try to do here is break this down into more detail, and in particular, strip out the impact of currency and also give you some divisional numbers. So revenue at UPC Broadband in Europe increased 40% on a reported basis, to $676 million for the quarter. And in the column on the far right, we strip out the impacts of foreign currency movements but we leave in the effect of acquisitions. And as you can see because we've been more acquisitive in Western Europe, we're up 46% year-on-year and Central and Eastern Europe is up 27%, which is slightly ahead of that region's very high organic growth rate.

Moving on to Japan, J-COM's revenue increased 13% on a pro forma basis, to $413 million, that's as if we consolidated in last year's Q2. And FX-adjusted growth is very similar, since they've only made one, small acquisition called Chofu. Chile continues to perform very well. VTR is up 57% on a reported basis and 45%, stripping out the currency effects, to nearly $109 million in sales for the quarter. Their results do include the impact of the Metropolis acquisition, which we completed in April. So, finally, you'll see that total Company revenues were up 35% on a pro forma basis and 30% if you strip out currency effect.

Turning to the OCF on Page 14, you'll see broadband was up 33% on a reported basis, to $245 million in cash flow, and that figure becomes 26% growth, still very strong, if you exclude currency. In Japan J-COM's cash flow results were basically flat year-on-year, those, obviously, are pro forma, since we didn't consolidate in 2004, and that's really due to higher marketing expenses, some additional headcount for sales people that aren't yet fully productive, and certain one-time costs associated with the successful rebranding of J-COM post-IPO. In Chile, VTR's operating cash flow was up 47% on a reported basis and 36% after backing out currency effects, so, again, a very solid quarter.

So, overall, Liberty Global's pro forma cash flow growth was 25% in the second quarter compared to 2004, and adjusting for currencies, the FX-adjusted growth rate was 24%. We continue to believe that we'll be able to grow LGI's cash flow at least 20% going forward, annually, primarily driven by organic growth on our existing assets, but, obviously, supplemented through some acquisition-related growth. And we think that puts us at the top of our peer group.

If you turn to Page 15, just to go through the leverage, total debt was $6.5 billion at June 30th, and consolidated cash and equivalents were $1.9 billion. So the net debt for that period was $4.6 billion, an increase of nearly $1 billion from March 31st of this year. Now the primary reason for the increase was the reduction of our cash balances of $1.2 billion, and that's principally due to the approximately $700 million of cash used in the LMI, UGC merger combination, together with the cash we spent on the NTL Ireland acquisition, which is reflected in this balance sheet, and the buy-out of our minority partner in France. So, at June 30th, our net leverage was 2.7 times debt to EBITDA, up from 2 at March 31st. And on a gross basis, our leverage was at 3.8, slightly below our long-term target range of 4 to 5 times.

Now in addition to our cash balances, we continue to have a lot of liquidity, both from a revolver that we have in Japan and in Europe -- and Europe. The total revolver capacity we could draw today is $825 million. We could draw some additional funds in Europe, where we could need them for acquisitions. We also have some liquid investments. Now those have a June 30th value of about $1.1 billion, and these investments include the stock we own in publicly-traded companies, such as SBS, News Corp, Austar, as well as our ABC Family Preferred.

Summing up our cash revolver capacity and these other investments, our total liquidity was $3.8 billion at June 30th, and I should point out that since then, we did do a subordinated bond in Europe to raise the further EUR500 million, so that number should be increased by over $600 million, when taking account our current liquidity.

With that, I'll turn it over to Rick.

Thanks, Charlie. On Slide 16, we've laid out Liberty Global guidance targets for the full year 2005, beginning with subscribers and excluding the impact of acquisitions at closing, we expect to add between 1.1 and 1.2 million consolidated RGUs on an organic basis for the full year. And since we've already added roughly 470,000 for the six months, that means we're looking for another 600,000 to 700,000 through the balance of the year. Adding in approximately 1.7 million RGUs that we've already acquired or we expect to acquire in the second half, our ending RGU count at December 31st, 2005 should be in the 16.7 to 16.8 million range, and this does assume that we complete both the Romanian and Irish acquisitions that we announced during the second quarter before the end of the year.

In terms of financial metrics, we're forecasting total revenue of 5.1 to $5.2 billion for fiscal 2005, and that forecast assumes average foreign exchange rates of $1.25 per euro, 109 yen per dollar, and 580 Chilean pesos per dollar for the full year. And, then, also using those same FX rates, obviously, we're projecting 1.8 to $1.9 billion of operating cash flow for the full year. And I guess one caution would be with respect to our subscriber growth, if we do exceed the organic RGU growth targets that I just mentioned, we would expect operating cash flow to come in lower, due to the incremental marketing and subscriber acquisition costs associated with any volume increase.

And, then, finally, we're expecting full year 2005 CapEx, including capital lease additions, to come in at 25% of sales. Happy to take any questions in the Q&A session, but most of our CapEx will be spent on adding new RGUs, i.e., customer premise equipment and scalable infrastructure, as well as upgrading our cable plan, primarily in Central and Eastern Europe.

And then just to sum up our remarks, I think we feel really good about our second quarter performance and the momentum that we're carrying into the second half of the year. I personally think we're poised for a big second half in terms of RGU growth, and we've laid out what we think are the key guidance metrics to help investors understand where we're headed over the next six months. Also pleased to announce, and I'll wrap up our prepared remarks here, that we're going to have our first investor conference held in New York City on September 28th, so we hope to see you all there.

And with that, I'd like to turn it back to the Operator for questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS.] Our first question will come from Ted Henderson with Stifel Nicolaus.

Thank you, Operator. Just drilling down a little bit deeper on Netherlands, specifically, with margin declines, year-over-year it looked like revenue was up about $23 million, U.S., and operating cash flow was just modestly down. And I just wondered if you could comment on that? I know that in general it's marketing, advertising, commission expenses, and increases in labor, as you break out in the release. But seemed a little drastic there, and I was wondering if you could comment specifically on the Netherlands' decline.

Well, I think -- I'll take a first crack at it and let Gene and/or Charlie provide more detail. But in addition to the things you've mentioned, Ted, we are also preparing ourselves for this digital rollout. And, remember, the digital rollout has taken a fair amount of time and energy, not just on the technology side, but on the operating infrastructure side, ensuring that we are ready to, essentially, put 2 million devices out there in the field. And so we always anticipated, when we approved that project, when we evaluated and analyzed that project, that at the outset it would certainly impact some of our costs, but over the long haul, obviously, we felt very positive about the return on capital and the benefits. So, I don't know if Charlie or Gene want to add anything to that?

I would just add -- tag onto that by saying that it's really associated with the launch of the new services. As Mike said, we're in the process of rolling out the digital for all, and that requires a fairly significant ramp up in terms of personnel and marketing and other costs. In addition to that, you're aware of the VoIP rollout and the success that we've had there, and, of course, we've had costs associated with acquiring those subscribers. And, additionally, we're just in the process of launching an MVNO of -- on the back of the Orange (ph). and we've launched ADSL off footprint in two of our large markets this year, particularly in the Rotterdam area. So these new service launches are, for the near term, driving the costs up, but as we mature in these services, these costs should fall back into line.

Yes, Ted, this is what you want us to be doing. I mean, this is the sort of thing we need to be doing, is investing in new products and, essentially, ensuring that over the next two to three years money markets longer, we've got built-in growth, so --

Right. I couldn't agree more with that. I just -- just with regard to the digital rollout, for the longest time, Europe video has just been kind of treated as the RPUs are lousy compared to the U.S. But, obviously, this is going to be a litmus test in the Netherlands to try to drive RPUs up. It should be --

It has several -- it has several objectives. I mean, just review them quickly for, maybe, callers who haven't heard this more clearly in the past. The objectives of the digital rollout are many-fold, certainly, one is to drive new service revenue in the digital tiers. And we do think that that's achievable and eminently more achievable when there's a box in everybody's TV set, than when you have to convince them to buy the box or subscribe to the service. So we do think that having a device in the home is a fantastic way to facilitate the take-up of new services like digital, and also, though, importantly, a gateway for alternative -- for additional products, like voice and data, since there'll be a cable modem in every box, and in certain instances, we're still evaluating potentially a VoIP modem in every box.

So in our view, it has multiple purposes, and it is the right way to get Europe -- sort of shift the paradigm in Europe on the digital landscape, and, fortunately, because it's such a large project with such meaningful scale, we're able to get box costs and other technology and operating costs down -- and programming costs, for that matter -- down to the point where it all works. So it's sort of -- it's sort of that virtuous circle that happens when you decide to do something with meaningful scale.

And we should expect to see this kind of domino through the rest of the markets in Europe, this digital rollout?

Not necessarily. I think we will look at it on a market-by-market basis. I do think, though, over a three- to five-year time frame, when you consider the statistic I gave you that over 90% of our customers are still getting 30 channels on an analog system, that, clearly, we have a meaningful opportunity here, far more meaningful than we had over the last five years to bring digital to these homes, and you can expect we will be aggressive about doing that. But I can't tell you that we'll do it in the same way in every market.

Thank you very much.

Yes.

Our next question will come from Paul Kagan with Kagan Capital Management.

Hi. Mike, the Company's philosophy is acquisitions, and you've been executing it fine in Europe. What's the forecast forward in Japan?

Yes, well that -- I'll let Miranda and Graham address that. I think what I said, though, is the opportunity we think is substantial, but it is a different market and one that requires considerable patience. But, Miranda, you want to answer that?

Sure. Paul, hi. There are -- there are a number of issues about consolidations. J-COM is already five times larger than the next player in the market. The rest of the market is pretty fragmented. You've got maybe four mid-sized player and then several hundred mom-and-pop operations. I think we've been very encouraged by the success of the J-COM IPO earlier this year, which, I think, does focus people's attention to the first time the potential value of their cable assets. And the other factor that kicks in is the very rapid pace of digitalization in Japan, which is beginning to lead the smaller cable operators to really worry about the cost and technology issues associated with trying to compete against FCTH (ph), satellite, and the other providers. And we think that there's a tremendous opportunity to consolidate a significant part of the rest of the market.

That said, you can't go in waving a checkbook. These are shareholders would are not necessarily just swayed by a cash payout. They want to see that there are going to be benefits to their community and they're not necessarily professional business people. So it's quite a long and slow process.

The key tool we think we have in driving that process is the headend on the ground, the national backbone, which is now in place linking our four digital headends and also runs through most of major urban areas. And we're rolling out a program this fall of using that infrastructure to offer smaller guys access for -- and provision of, say, Voice over IP, VOD, High-Definition Digital terrestrial service, which turns out to be the killer application in Japan. And we think that may be an elegant route to acquisition, whereby we could provide service in return for equity or cash. And management is very focused on that. So you're not going to see a stream of big flagship deals. You're going to see a very steady process of roll-up of the market, and we think the Company is extremely well positioned to execute that strategy.

Can we see something within a year, or is it going to take longer? I mean, like, the beginnings of it?

Oh, as I said, I think the program is rolling out now. We're certainly in discussion with -- J-COM is certainly in discussion -- after that key shareholders in some of the major assets. I think you'll start to see consolidation underway within 12 months, but not necessarily before current year end.

Okay. Thank you.

Thanks, Bob.

Thank you. Our next question will come from Andrew Gundlach with Artemis Advisors.

Hello?

Yes, hi.

Hey, good morning. Congratulations on the good numbers.

Thanks.

Two quick questions, actually. The -- Rick, you mentioned the 600 to 700,000 RGU adds for the balance of the year applied in your 1.1 to 1.2 million guidance. How would that break out between broadband and telephony, and, I guess, TV is quite small? And how would that break out Europe, Japan, Chile?

Unfortunately, we're not prepared to provide that kind of granularity on either a product basis or a subsidiary basis, so --

But can -- ?

But I can say this. We don't expect wildly different results out of one or another product or region. So not to say that you can extrapolate from the first six months, but I don't think you'll see wild movements in either -- any of these products or markets. So you can look at it, perhaps, on that basis.

So really led by broadband and telephony?

Yes.

Okay. The second thing is -- as Charlie said, for those of us that remember the old UCOMA -- you used to say that you can grow EBITDA at least 10%. I forget if that was exact language, but it was similar. Based on what you're showing here, doesn't that look a little low?

I think what we used to say with the 10% number was we think we can rechieve double-digit revenue growth of at least 10%. And, obviously, we've exceeded that organically, on a reported basis, any way you want to look at it. I think the operating cash flow number, we've always felt 20% should be achievable, and on the basis that we've described it today, and so we're hopeful that that's really something we think we can do. As Charlie said, largely organic, but at times that will be supplemented by acquisitions we make that are, we think, accretive and smart acquisitions.

I think one of the key point is the scale economics that we have in our model. If we grow our revenues 10% and, simplistically, we're usually able to grow our costs at less than that. When you have product launches like mass market digital and VoIP, sometimes it grows in line with revenues. But at a 10,000-foot level, we continue to get margin expansion because of that operating leverage. And we still think there's room for improvement to drive us towards the low 40s in terms of the OCF margins.

And last question is, some of your privately held competitors in Europe, I guess, are looking at the IPO markets. And from what I understand, the multiples that they're being told by the bankers are quite a bit above where you're trading. And I'm just curious how that changes your strategy and how you -- how you view that phenomenon?

Well, I tell you, we will be desperately seeking their I -- their road show calendar, and we'll be the meeting right in front of them. Because you're right. The expectations that are being developed in that -- among those couple or three issuers are, we think, pretty robust. They're talking about very meaningful multiples, well above where we trade today on an '05 or '06 basis, so we'll see whether that occurs or not. Our view is, to some extent, rising tides float all boats. And so, if the market does see the value in those single-market opportunities, they'll certainly see the value in the platform that we've just walked you through. So let's see what happens.

From the point of view of its impact on our M&A opportunities, I don't know that's going to have any impact because we won't chase deals. We've told you that in the past. There are no must-have transactions. We will be disciplined. We will, certainly, however, be opportunistic. And if the IPO process is generating, among those owners, an interest in liquidity or exits, we'll be opportunistic. We'll have conversations where they make sense, and we'll see what we can get done.

I would add, however, that an IPO, in and of itself, does not shut the door on anything, because, clearly, if that -- if any of these assets were to go public, we could buy stock like anybody else. We could -- so there's lots of opportunities and options there. We don't believe that an IPO shuts the door. In fact, it might even open the door to additional ways of seeking greater growth through acquisition.

Does it push you more into the -- into the lane of content acquisitions?

Content, as I mentioned in my remarks, is really a strategic piece of the puzzle that's growing in importance, partially, because we're finding that with greater scale we can achieve greater opportunity with programmers and suppliers and with channels that launch across a larger footprint, but also because we're finding that, as these markets -- Europe and Japan in particular -- continue to be relatively competitive, the importance of programming as a differentiator is key. So I think, to the extent that you can add scale, you will always have an easier time buying sports rights, negotiating with studios. And so, clearly, we -- that is a factor in the equation.

Thanks for your comments.

Yes. See you in New York. Okay.

Our next question comes from Matthew Harrigan with Janco Partners.

A couple questions. First of all, I know you've got an amazing breadth of operations, but you didn't talk at all about JPC, which I know isn't consolidated. Secondly, I think Rick has said before that the incremental SAC at United was about -- the expense SAC was about 85 to EUR115, so that would give us some indicator how to ratchet down the EBITDA number if you do beat your guidance numbers. Would that number also apply across the board in Japan as well? I suspect it might be a little bit higher there. And, then, lastly, are you using a SIP approach in Hungary on the voice side, or is everything riding on your own network as it is in the Netherlands?

Well, let's start with the third question, and then I'll let -- I guess, Miranda and Graham can answer the JPC question, or you. And we'll get to SAC third. On the -- so, Gene, do you or Tony want to address the SIP question?

Tony, are you there? If he isn't, I will take it. In -- in the Netherlands, as you may know, there, we are using a packet approach. It's a hybrid solution leveraging off of our DMS switch. And we're in the process of migrating to a full SIP solution using, in this case, a Nortel softswitch. And we expect to have that accomplished sometime between the end of the year and into the first quarter. In Hungary, we're also using a hybrid solution at the present time. But, again, we will be migrating to a SIP solution there, using a Siemens softswitch. And in Poland, where we'll be launching, we will be using a full SIP solution. And in Austria, again, it's a -- it's a hot -- it's a hybrid, now moving to a full SIP.

Hybrid primarily where we have existing switch telephony infrastructure, that's, I think, the main point.

Sure.

Do you want to address the JPC question, Graham?

Sure. I can address the -- on the JPC revenues for the six months. It's about 8 billion yen in operating cash flow. And operating income will be about 7 billion yen. And those numbers are about 80% up on last year, primarily driven by a pretty fantastic first half in Shop Channel.

Which continued to exceed everybody's expectations financially. So as I said in my remarks, my opinion of JPC is really a model for what we'd like to achieve in other markets, and just a fantastic business. And then the SAC question. Charlie or Rick, do you want to address that?

Shall I kick this off?

Yes.

I mean, I think, Rick was absolutely right with the 85 to 115 in Europe. I think it's fair to say in the first half of the year, we've been at the top end of that range, and that's partly because we've been doing a higher mix of valuated services, particularly with the VoIP and Internet acceleration. And I think it is probably true to say that we probably will see it at or above that level going forward just because the market is getting more competitive, although, the balance of that is our churn is down a little bit, which is -- which is very encouraging with the bundling strategy.

And in Japan is approximately in the same neighborhood?

Graham, do you have any figures on that?

Subscriber acquisition cost, the way they define it in Japan, it runs about -- again, this is in yen -- about 20,000 yen per RGU add.

So that would be $200. Would that be -- is that all inclusive or is that just what's expense -- I would assume that's just what's expensed. Right?

Yes. That's the marketing -- that's sales and marketing costs that are expensed.

Beautiful. Thanks for your answers.

Okay, Matt.

Next we'll hear from Alan Gould from Natexis.

Thank you. Got two questions. First, Mike, at UGC, you originally said you'd have about 5.5 million VoIP homes at mid year versus 4.5 million and now. Has there been a delay? And, Miranda, at J-COM guidance has been at 15% year-to-year revenue growth. First half was 11%. What accounts for the acceleration in the second half?

Well, your VoIP question, you're right. We did originally say 5.5 million. I think what we found was two things. One, we -- we were -- we were underestimated our sales activity, that's part one. And, therefore, we felt that it was important to walk a bit before we ran, and to rush the roll out systems was overcome by the success we were having on the footprint we'd already activated. And so we will exceed our internal expectations around VoIP sales and net adds on a smaller footprint. So, to me, that's good news. Because you're actually hooking up more customers than you thought and you're spending less capital. Having said that, we do, as I mentioned, expect to be in 7, 7.5 million homes by the end of this year. And so I -- really, it just came down to some, I believe, really smart phasing of our CapEx and also making sure that we were getting all the kinks out, if you will, because this is a brand new product, a brand new technology and we wanted to make sure, if we had the luxury of taking a little more time to roll out, that we actually took advantage of that, and that's the reason.

Okay.

And, then, Miranda, you want to handle the J-COM question?

Sure, Mike. Revenue in J-COM is just very slightly behind target for the first half. But we're looking at a transition phase where J-COM is rolling out much more quickly than we had expected, the digital product, that's the extra 1,000 yen CATV product. As Mike mentioned in his introductory comments, we've gone from 0 to something like 23% in less than 18 months, and that's a product that's turning out to be enormously stable. Churn is sitting around 8% annualized. So that transition to high definition is going extremely well.

We've not yet seen major pressure on Internet pricing. There's a lot of noise and competition in the market, but so far, we've managed to retain our prices. And on the voice side, again, we're not seeing huge competition on the -- pressure on the pricing. As a paces of digital, digitalization continues to accelerate through the end of the year, we're reasonably confident that J-COM will achieve its revenue targets. Graham, do you want to add anything?

Yes, I think -- and I think the other thing that Graham was mentioning here is you put -- Japan has put in place a fairly robust sales infrastructure that really won't kick in until the third quarter. And I think, like all operations, our fourth quarter is the best, so -- do you want something to that Graham?

No, I'd just echo Mike's comments.

And is NTT doing anything in IPTV yet, or just spending capital at this point in time?

They're making a lot of noise about ITV, but they're not able to deliver, what turns out to be the key product, which is high-definition digital -- relay of digital terrestrial signal. That's been the real success story for J-COM. And Cable in Japan is the only platform that's able to deliver that at this point. Satellite cannot, SKY Perfect cannot deliver the product on its core platform because it doesn't have the high-definition transponders and boxes out in the market. And the IP broadband operators are not permitted to relay digital terrestrial by a combination of broadcast and government opposition. There is a certain amount of debate about whether that's going to change. But we're not going to see NTT and other IPTV operators rolling out, certainly, the competitive high-def product for at least two years. So J-COM has a very solid window in which to consolidate its division and to complete the digital transition.

Thank you.

And next with Shumay Capital, we have Matt Crakes.

Can you guys hear me?

Yes, I hear you fine.

Yes, real quick, guys, I just want to understand about the stock dividend. Why create another category of stock at all? And why do -- why do the dividend?

Well, I think our view was it -- all the reasons that anybody does a stock dividend in the past, I mean, it -- we believe that trading in the 20s may make better sense, and more -- a little more liquidity. And we felt that the opportunity to create a new currency, a non-voting currency would facilitate, perhaps, making acquisitions. And from our point of view, made good long-term sense. So, did you have a specific reaction to it or -- ?

Well, just, you're just making the capital structure more convoluted and, historically, that hasn't been very advantageous to shareholders, I would argue, and just makes things more confusing, overall.

Well, hopefully the --

So you're telling me the main reason you did it was for -- to be for acquisitions?

We felt that was going to be, down the road, a potentially very, very useful tool.

Okay. And, then, so the big difference between that share and the other shares is the fact that it's just non-voting, that's it?

That's it, yes, exactly.

Okay. Thanks, guys.

Thank you. And we do have time for one more question. That will come from Miguel Soldago with Noonday Asset Management.

Yes. Thank you. A couple of questions on Japan. The first would be on the conversion of the terrestrial retransmission pool. I believe you have about 3.1 million households that you provide this basic service to right now. If you could talk about, of your 27,000 new video subs this quarter, or so, how many of those came from terrestrial retransmission conversions up-sale? And where do you see that going forward? And, then, a second question on Japan would be any thoughts on adding more leverage to the balance sheet of J-COM?

Graham, or Japan -- or Miranda?

I'll take the first question, perhaps, and Graham can take the second on leverage. Essentially, what you -- what we're seeing at the moment in J-COM is the rollout of a new program supported by the new high-end, very-high-speed data product, the high-definition digital terrestrial service, and VoIP, which allows us to go back to the 3 million or so MDU households in our franchise which are already connected but not pay TV customers. And they've launched a new program called J-COM In The Room, which has been in operation for about eight, ten weeks now, to really accelerate that transition process. We're not in a position to break down subscriber acquisition numbers for the past quarter on that basis, but I can tell you that they have more than quadrupled their rate of conversion in the last couple of months. So we're very optimistic that that's going to give us a new means of accessing those households. The point, I think, we -- that we've made before about these compensation homes is that these are not necessarily low-rent households. They have the same demographic profile as our poor customers, and we think by going in with new products we're going to be in a very strong position to compete. So we're pretty optimistic about the new J-COM In The Room program.

Graham, do you want to take the leverage question?

I don't.

Yes, on the leverage question, the -- if you annualize the first half EBITDA, the debt to EBITDA gross runs a little under 3, net nearer to 2. To the extent we have acquisitions, we spoke about that earlier, there is absolutely no reason why we can't increase the leverage. In fact, in Japan, I would say to stay investment grade, if J-COM wants to stay investment grade in Japan, it could go to and increase its leverage to about 4-to-1. So --

Which is consistent with our more -- our broader target of 4 to 5 on a gross basis, so --

Okay. Thank you.

Yes. Is that the last question, Operator?

Yes, sir, that was the last question.

Okay. Well, listen. Thanks, everybody. I know I speak for the entire management team on the call here when I say that we are really, really excited about this business. And I appreciate your patience at the outset, letting us tell you the, sort of, basic story again, but I thought it was helpful to set the frame work a little bit. And we look forward to seeing you all in September in New York City. Thanks, very much.

Thank you. Ladies and gentlemen, this concludes Liberty Global's second quarter 2005 investor call. As a reminder, a replay of the call will be available and the presentation slides will be posted in the Investor Relations section of Liberty Global's website, and that will be at www.lgi.com. Again, we'd like to thank everybody for their participation. Have a nice day.