Liberty Global Ltd (LBTYK) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's first quarter 2006 investor call. This conference, the call, and the associated webcast are properties of Liberty Global Incorporated, 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]. I would now like to turn the conference call over to Mr. Mike Fries, President and CEO of Liberty Global.

Certainly appreciate you joining us so early and apologize for the last minute change in the time of the call, but I will say anyone concerned that LGI and Moody Media aren't two companies can relax now, because we actually noticed that we had originally scheduled our call right in the middle of their investor day today and we thought given the crossover in shareholders, we should move ours up.

Let me introduce who is on with us. As always, Bernie Dvorak and Charlie Bracken, our two co-CFOs; Gene Musselman who heads our UPC division in Europe; Miranda Curtis and Graham Hollis, who oversee Japan; and from Corporate, Liz Markowski who is our General Counsel,; Tony Werner, our CTO; and of course, Rick Westerman. I'll turn it back to the operator for a brief Safe Harbor Statement.

Thank you, sir. Page 2 of Liberty Global's presentation details the Company's Safe Harbor Statement regarding forward-looking statements. Liberty Global's presentation today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including Liberty Global's guidance for 2006, expectations with respect to the pending sales of UPC Sweden and UPC France, insights and expectations regarding competition and other information and statements that are not historical facts. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expresses or implied by these statements.

These risks and uncertainties include the factors detailed in Liberty Global's press release dated May 10th, 2006, and the filings with the Securities and Exchange Commission, including Liberty Global's most recently filed form 10-K and form 10-Q. These forward-looking statements speak only as of the date of this presentation. Liberty Global expressly disclaims any obligation or undertaking to disseminate or any updates or revisions to any guidance or other forward-looking statements contained herein to reflect any change in Liberty Global's expectations within regard thereto or any change in events, conditions, or circumstances on which any statement is based. Please refer to the appendix at the end of the Webcast, as well as Liberty Global's press release dated May 10, 2006, and SEC filings for definitions of operating cash flow, OCF, free cash flow, revenue-generating units, RGU, and Average Revenue Per Unit ARPU, as well as GAAP reconciliations. I would now like to turn the call back over to Mr. Mike Fries. Please continue, sir.

Thanks, operator. We're going to jump right into it and I'm on the fourth slide of our presentation, entitled Key Takeaways. I think there's five key points we'd like you to come away with this morning's call. First of all, if you follow the broader cable sector, I think you'll know that the industry has reached what appears to be a very positive inflection point, where the key story is exceptional unit growth. And our RGU numbers this quarter are right up there with the best of them. We exceeded analyst expectations and, quite frankly, our own internal budgets.

Second, we talked a lot about competition on our last call, we don't intend to do that today. I'll simply say the numbers generally don't lie here. We've seen virtually no impact from other IPTV launches or other DSL initiatives in our core markets and our results clearly support that observation. Third, we have been and remain focused on balancing our operations. Many have asked us why we are exiting certain markets, are we just cashing in, so to speak, and the answer is no. Like the old system swaps of the U.S., we're simply allocating resources from one geography to another that we feel better fits our growth profile. If we can do well, that's great and I think a pretty good illustration of our ability to execute and create value.

And fourth, our balance sheet continues to be geared to drive equity returns. That's both at the operating and corporate level. As you know, our debt is nationally hedged and our cost of capital is pretty low and largely fixed. Just as importantly, we've maintained maximum flexibility to raise additional funds and upstream that cash to the parent for uses like repurchasing stock. This is a great model for us, we believe, for value creation in the longer term. Lastly, we're tracking at or ahead of our 2006 guidance on every single measure, subs, revenue, OCF, and CapEx. So our view is shaping up to be a pretty solid year for us.

If you turn to slide 5, Q1 highlights, I'll just hit a couple here. As I mentioned, we have record subscriber growth in the quarter, nearly 440,000 net ads. I'll break that down for you in a second, by product and by region, but the story is positive right across the board. Just as an anecdote, if you add our digital growth to our RGU figure, the way, for example, Comcast does, we would have reported 680,000 net ads, which compares pretty favorably based on our relative footprint size.

Revenue for the quarter is $1.6 billion, an increase of 38% year-over-year, Charlie is going to walk you through our rebase figures, but the punchline is that it's double digit growth on a same-store basis. OCF for the quarter was $572 million, that's up 35% from the prior year. Margins are also up nicely even from the fourth quarter. We'll walk you through the rebase figures in a second, with or without Holland, but you can do the math pretty easily if you just annualize our first quarter, and compare it to our year-end guidance, which actually has Sweden in it, and in the first quarter, we did not include Sweden. We think we're ahead of pace.

The balance sheet continues to be in great shape with leverage right in the middle of our 4 to 5 target range. We're constantly improving our credit liquidity position. Charlie will walk you through that. Not only that, the pro forma for the asset sales we've announced, our consolidated cash position would be over $3 billion. Lastly, we have made good progress with the stock buyback program. We've spent the original $200 million we authorized and are about halfway through our recently announced $250 million program. And as you would expect, we remain focused on our equity, and track investment, especially at the levels here.

Slide 6 is a quick update by product. There's some pretty positive trends that are developing. Starting with broadband data, which simply just continues to accelerate. The growth drivers remain the same for us, stronger marketing, launch of VoIP bundles, and of course, speed increases. While our speeds are as high in the 100 meg in Japan and 20 Meg in Europe, if you look at our weighted average speeds, our weighted average speed by tier is about 17 Meg in Japan and 5.4 Meg in Europe. And we'll trying to keep monitoring that so you can get a sense of how broadly our speeds are increasing. And if you're tracking it, you'll notice that the pace of data net ads has actually increased the last five quarters. This is nothing new for us.

VoIP remains our most valuable player, if you will, growing strongly on its own, but also strengthening other products like data. We continue to see between 50 and 60% of our VoIP sales creating triple play customers. And of course, we're still marketing new build territories, so there's plenty of upside here yet to be exploited. Digital is quietly becoming what I would call a big success story for 2006. It's also helping us add basic video customers and grow the revenue line. As I said at the outset, the competitive situation we believe remains stable and largely unchanged. IP-TV and DVD services having little or no discernible impact on our video base as of yet and it would appear that certain DSL resellers are starting to struggle or at least look for consolidation opportunities.

Strategically, I'll touch on a few of the initiatives. We did make good progress in the quarter on a number of fronts. I talked about the rebalancing already. We think our regional content efforts are paying off here. Jupiter TV and the Shop channel in Japan, for example, generated over $45 million of operating cash flow in the quarter and that's up 40% year-over-year in local currency. So that platform continues to be a dominant platform in the market. Our premium sports and movie services in Holland are starting to create a buzz, and some momentum around that rollout and with HD launching this summer, that will continue. You may have noticed we announced an MGM joint venture in Central and Eastern Europe, and that, we think demonstrates our ability to leverage our distribution of platform into attractive channel opportunities.

And then lastly, on the technology front, I think the main story here is our ability to achieve global scale benefits today over a billion of our CapEx is managed centrally. So most of that is through -- and most of that through master agreements, which are generating,, we estimate over $50 million of CapEx savings this year and we're also seeing nice declines across products, for example, a 20% decline on our average GPU we expect this year.

Slide 7, they say a picture is worth a thousand words. It shows our 437,000 net ads in the quarter compared to the same period in '05 and '04 where we added 196,000 and 144,000 respectively. We're proud of the increase last year of 36%, but it certainly pales in the comparison to the increase this year. 124%, quarter over quarter. I'll provide some detail on that in a second. But by any measure, it was a blowout quarter for us and provides an excellent start to achieving our full-year guidance of 1.6 million net ads.

Slide 8 drives that point home a bit further. It shows the normal seasonal drop off in net adds from Q4, which is by far our strongest quarter, into Q1. Last year, we saw a pretty typical decline of about 44% in net adds from Q4 '04 to Q1 '05. And on the right, you'll see that this year the dropoff was only 10%. That's almost unprecedented for us and broadly a function of the five or six key things happening here. First, a spillover effect from our traditional Q4 sales push. We're also seeing the impact of new service launches, like VoIP and continued innovation in our broadband product. The growth in video subs off the back of our digital rollout, that's a positive story. We're also harvesting our 2A footprint in Central and Eastern Europe, like we said we would. And then lastly, we do have an increased footprint here with some of the acquisitions, that's about 30% of the result, so we're obviously getting a kick from that.

Turn to slide 9, which is a breakdown of our RGUs by product, beginning with internet on the top right. We added $200,000 data subs, up 76% from the prior year, we now sit at 3.35 million subscribers worldwide and are starting to reach scale on a number of markets, especially in western Europe, markets like Austria and Switzerland which were 35 and 25% penetrated respectively. Started to move the needle in central Europe. Last 12 months, we added 1.5 million 2A homes there and doubled our data subs, so that's starting to have a positive impact on our numbers.

The other good news in data, we're seeing prices stabilize at the same time we're seeing CPE costs and churn decline, so the economics of the data product for us continue to be the best of anything we're selling. At 174,000 telephony RGUs in the quarter, that's more than double the prior year result. Obviously, VoIP continued to be a key driver for us at 85% of our net adds year-over-year, and we currently have 11.5 million VoIP homes ready for service. We'll be adding to that number to the tune of about 4 million between now and the end of the year, additional VoIP homes ready for service.

And the VoIP economics are also getting better. We estimate about an 80% reduction in the VoIP access hardware, for example, over the last 24 months. Videos are the best part of this growth story. We added 63,000 subs versus a loss of 2000 last year. Digital is really driving those overall gains in video subs in just about every market. About 250,000 digital subs were added to the video footprint, that's a threefold increase over Q1, and excludes DTH. Japan is now at 40% penetration, that market continues to perform. I think most of our growth came out of Holland, where our digital for all project is picking up steam. At this stage, over a quarter of a million boxes have made it through the door, if you will, and nearly 40% of those were actually requested by customers, or what we call pulled-in. The good news is that 60% of those folks, or those pull customers who call and ask for a box, actually go on to order higher tiered services from us. I think it's also worth noting, and Charlie will dig into it, that the product is scaling faster than we expected it would on the OpEx side. So we're pleased with progress there.

Slide 10 gives you some regional highlights. While all the regions are growing nicely, it's pretty clear from this slide that Europe is driving the vast majority of our improvement year-over-year, with nearly 300,000 net adds versus 100,000 last year. VoIP and data continue to be the primary source of that growth, but we also added 40,000 video subs there in Europe. And again, Central and Eastern Europe, we added 113,000 RGUs versus just 40,000 a year ago. That's kicking in a pretty significant increase for us. In Japan, you'll see the chart shows we picked up the pace a bit, 70,000 RGUs of about 19%s nd that's across all three products. Continued to be our best bundling operation, over 1.7 services per home, and customer ARPU is now at $72 a month.

And we just launched an ATPBR box. The digital platform is starting to pick up steam there as well. We've delivered over 14 million baud streams, for example, in the first quarter. So we should watch that space as we move forward. Chile is starting to realize the benefits of the merger that we did last summer. Nearly 60,000 net adds, that's double last year. And that's really coming from our ability to cross sell, or upsell customers in the acquired territories, which are largely in Santiago. Two other facts on Chile worth noting, though. Telephony penetration is now at 30%. Our highest penetration, pretty much anywhere in the world. And our Chilean operation has about 70% broadband data share on its foot print, so if BTR is a formidable telecom player, what we think is Latin America's most stable and attractive market.

Quick update on slide 11 on our recent asset sales. Sales normally did close in January, you know that. We're just waiting for regulatory approval to close Sweden. We expect that to happen in the second half of the year. We're hard at work signing up definitive documents for the sale of our French operation, which we hope to sign off by end of the second quarter. And with closing subject to regulatory approval, we're hopeful of that completion occurring before year-end. Three deals together here represent a blended average sales price of about 10.8 times trailing operating cash flow. Obviously, a nice premium to our own valuations at the time and today. That will generate about $2.5 billion of gross proceeds with virtually no tax outflow from these transactions and after debt repayment, should net about $1.5 billion of cash at the corporate level.

Key question for a lot of people is what do we do next? I'll try to address this as well as a few other strategic issues on my last slide, slide 12. First of all, I think you should expect that we will continue looking for opportunities to rebalance our operations in core regions. At this stage, there's no obvious candidates for divestiture, but there are some interesting opportunities for further consolidation, particularly in Europe and Japan. There's a lot of speculation on the Benelux region, I'll say we owe it to our shareholders evaluate these types of opportunities and will only commit to deals that we believe will improve the long-term value of our company. And as you can imagine, we'll weigh each and every investment opportunity against the alternative of buying our own stock, which we remain committed to.

Our approach to digital rollouts, like Holland, is going to be measured. We're certainly -- we're pleased with the results in Holland, but we have no current plans to duplicate this approach anywhere else. While we're not guided by it, we are clearly sensitive to the short-term impact these projects have on operating cash flow and CapEx. Again, any future decisions are going to be based solely on the ability of the product to create long-term value for us. And I think you can expect if we find some of those, that will be the only reason we would pursue them. After some starts and stops, I think our content business around the world is beginning to reach critical mass. We have two channels, extreme sports and reality that are global in distribution today. Our dutch movies and sports channels are really premium drivers. JupiterTV in Japan continues to grow beyond expectation. I think we're in a position now to look at opportunities that can reshape our content portfolio. I guess I'm saying, it's starting to look a lot more like the early days of Liberty and TCI for us, so stay tuned to that.

B2B has become an odd topic lately, and it's become a substantial business for us with run rate revenue today over $250 million annually. Most of that is coming out of five European markets, where we estimate around 135,000 businesses on our active footprint. We think this opportunity is largely untapped, and as we sit here today, we're refinding our pan-European B2B strategy and product group. Lastly, there's virtually no new developments on the technology or the product front that I don't feel confident we're either researching, trialing, or rolling out. We're well down the path on the quad play, we're right in the middle of global WiMax RFPs, we're trialing DOCSIS 3.0 and we hope to launch our first fixed-to-mobile trial technology with Nokia later this year. The engine is humming pretty smoothly here, as we expected it would. And fortunately, a lot of that momentum has carried over to the second quarter, but we couldn't be happier with our first quarter results.

I'll now turn it over to Charlie.

Mike's already run through the gross statistics for the quarter, so if you turn to page 14, I'll give you a snapshot of where we stand as of March 31st. These statistics exclude Norway and Sweden, but they do include France, because we haven't signed a binding agreement, which doesn't qualify for discontinued operations accounting. So as that period, we had over 13.6 million subscribers, 93% of those were cable, 6% DTH. 2.4 million voice subscriber, that's about a 13%penetration. Over 30% of those subscribers are actually VoIP. That's after less than 18 months after our first launch in Hungary. A really spectacular growth in that product. And finally, 3.3 million were high-speed data subs, giving us around a 16% blended penetration.

[inaudible] were 19.3 million, which is the same as the December 31st figure, but the Q1 adds were actually offset by the proposal. Customer relationships were 14.6 billion as of March 31st, and we had around 1.3 RGUs per customer. In terms of the other bundling statistics, as of March 31st, we had over 2.1 double play and 1.3 million triple play customers, those are 38% and 79% respectively from Q1 '05. So in total, 24% of our customers are currently taking bundles and we're very focused on driving this metric higher towards the levels we're achieving in Japan and Chile, where 50 and 40% of our customers are bundled respectively. If you would turn to page 15 in the consolidated financial results, revenue was up 38% to 1.63 billion and if you exclude foreign exchange movement, that increase was in fact, 47%.

OCF was up 35% to 572 million, and again, excluding foreign exchange was up 45%. I will show you our growth off of rebase 2005 results in a second. But they're not on this page, but let me draw your attention to the OCF margins in the quarter, which was 35%. This is a 270 basis point improvement from Q4 of last year. And it's driven primarily by margin expansion of both UPC broadband and J:COM. The margin increase was also due to the increased scaling and efficiencies in market of Hungary, Austria and Switzerland. We remain optimistic about the opportunities for us to drive our global scale economic platform.

On page 16, I've got a slide which shows revenue broken out by division. And also with the rebased growth figures compared to Q1 2005 results. By rebased, we mean adjusting Q1 '05 for our 2005 and 2006 acquisitions. Those that weren't fully included in Q1. So basically table com, being included on a pro forma basis. And we're also adjusting to eliminate anydifferences due to foreign exchange movements. So UPC broadband in Europe was up 342% to $867 million of revenue in the quarter, which is an increase of 11% on a rebase basis. In terms of highlights between the western and eastern Europe, 9% revenue growth in western Europe, 19% growth in central and eastern Europe. Japan was 8% up on a reported basis to $437 million, up 13% in terms of rebase growth. And Chile had a fantastic quarter, up 57% and 16% on a rebase basis to $133 million. So total LGI revenue was up 38% on a reported basis to $1.63 billion, and on a rebased basis was up 11%, which is consistent with our full-year guidance target for revenue growth.

On page 17, we break it out for OCF. In Europe, you see broadband increase OCF 37% to $326 million and that equates to around 9% growth such as the rebased Q1 '05 numbers. Essential leasing it was based on was 26%, but western Europe was only up 2% year-over-year, and that's almost entirely due to digital project in the Netherland, where we incurred approximately $10 million of customer care and network and marketing costs in the projects during Q1 of this year, and we actually had very little costs in Q1 of last year as the digital program really accelerated in Q2. If you exclude the Netherlands, western European OCF gross was impacted 13%. I should also point out that OCF in the Netherlands increased 4% sequentially. The OCF margin improved slightly due to better scaling and lower costs on the digital launch.

In Japan, J:COM increased 8% on a rebase basis to $172 million, and higher operating costs outpaced 13% fee-based revenue growth. One was additional labor and other costs related to sales activities and start-up costs for new customer. And other one was higher programming and other direct costs related to the growth in services including high def TV and video on demand. In Chile, VTR was up 27% on rebase basis to $46 million per quarter. So total LGI was up 35% on a reported basis and 13% on the rebase Q1 '05. And if you exclude the Netherlands, rebase OCF growth would have been 19% in Q1. So a very robust performance outside of Holland.

To sum up, OCF pacing is very well based on the last quarter annualized, With a run rating about $2.28 billion against the full year guidance of $2.4 billion, which includes Sweden. The balance sheet on page 18, total debt as of March 31st, was $10.4 billion, that's up roughly $300 million from the December 31st balance, and the debt increase is primarily due to debt associated with the monetization of our ADP family preferred stock.

Cash was $1.9 billion, up approximately $700 million from the end of last year, due to mainly net proceeds from the sale of Norway, which was $323 million, and the monetization of the ADP preferred that I mentioned early on of $339 million. It also includes the sale of our business in Mexico. So the gross and net leverage on a reported basis was 4.6 times and 3.7 times based on last quarter annualized. It's an opportunity here, but we've also shown you it pro forma for the pending sale of Sweden which changes those leverage statistics to 4.5 times growth and 3.5 times net.

Now on page 19, we've set out the regional debt with you, again with the key leverage statistic by funding as of March 31st. Let me start with broadband, we've got under $5 billion of debt outstanding with an average interest rate of approximately 6.5%. 98% of that is fixed in terms of interest rates, but only 70% of it is matched on currency, and that's primarily due to the difference in the central and eastern European currency, which by large we haven't hedged. Although we are benefiting from the conversion of those economies into the EU and historically have done very well on that. I should also mention we've refinanced $3.9 million of the UPC credit facility, taking advantage of the very strong credit market. And as a result of that, we've reduced our average credit margin by 46 basis points to around 214 basis points. And we've been able to extend our maturity for a further one and a half years. So essentially, we have no amortizations scheduled before 2013.

Cableco in Switzerland including the credit facility in a fixed rate notes and also picked had about $2.1 billion in debt, as an average interest rate of around 7%, and that is completely hedged on interest rates and currency risks. In J:COM, credit facility had about $1.05 billion outstanding, interest rates are very low in Japan, actually under 1% and we're just around 50% hedged on interest rates, although we're in the process of raising that number to over 70%, and getting 100% matched in terms of currency, and finally, BPR had $333 million due on its credit facility at an average rate around 7% and is 80% hedged on its interest. So the total LGI debt, excluding the capital inefficience is $10.1 billion and has an average interest rate of 5.8%, with over 80% fixed on interest rates and 85% hedged with the underlying currency.

I should point out, we've deliberately put in place a capital structure that allow us to upstream cash to the parents. And by keeping the leverage of 4 to 5 time, continue to raise cash to buy back stock over the long-term. We've also got a capital structure that had a lot of liquidity built in in terms of revolvers, for example, the 1 billion revolver in Europe, which is largely undrawn. And with this leverage, it really contributes to us being able to realize our targeted levered equity return in excess of 20%.

If you turn to page 20, free cash flow and CapEx, we entered a very good result on free cash flow, even though we're not prioritizing a free cash flow yield, although we do look to have positive free cash flow in our funding pools. Cash flow from operations was up 65% on a reported basis to $462 million, and that was due to favorable working capital movement, which includes annual prepayments of subscriptions in Switzerland and Austria, as well as the impact of acquisitions and internal growth, slightly offset by some tax payment.

CapEx was $335 million in the quarter, or 21% of sales. It was up 40% from our spending of Q1 '05, and that's largely linked to the increase in volume of subscribers, and therefore higher TV purchases. We then subtract capital lease additions, which don't represent a current use of cash, which we think is a conservative calculation of free cash flow. Free cash flow before discontinued operations was $102 million of Q1, and then the free cash flow generated in Sweden prior to the disposal of the business, so we've given it to you separately for visibility, but we think it's right to include that in free cash flow, because that's cash we have in the bank. And on that basis, our free cash flow for Q1 was $107 million, which is up over 280% from the same time last year.

Let me turn to page 21, UPC to BV. We remain committed to the BV bondholders and bank providers, and we did issue a press release today, which hopefully everyone could access. Some of the highlights in this presentation and take any questions if the Q&A you might have for the credit group. But you can see on the slide for Q1, the BV was up 23% in revenue to $572 million euros now, and that was driven primarily by acquisition subscriber increases and was up 9% on a rebase basis.

OCF was up 15% to $214 million euros and was depressed due to the higher cost of the Netherlands in our digital conversion project. It was up about 5% on a rebase basis, but if you take out the Netherlands, the number would have been 17%. The OCF margin in Q1 was 37.4%, down around 160 basis points for Q1 '05, and that was due principally to higher marketing and subscriber acquisition costs,which we think is a good investment and consistent with the higher volume growth you saw earlier in the presentation. And capital expenditures were up 30% to 129 million euro, again driven largely by higher purchases of the CTU.

On page 22, you've got the holdings balance sheet at March 31st, total debt was around just under 4.1 billion euros euro, primarily consisting of the 3.3 billion euros of bank debt, and a calculation, can this is the senior debt to annualize EBITDA, as defined, was 3.73 times and using the total debt number, that was times within the 4 to 5 times covenant levels we have in those agreements.

Turn it over to Mike to wrap up.

Thanks, Charlie. I think in our view, we have strong Q1 results across the board. And I think importantly, a very solid start to our fiscal year '06 guidance targets. And by far from our point of view, the most important leading indicator of feature growth is our RGU growth itself, and these numbers, we think, were very, very strong. And we look forward at this point to taking any questions you might have. Operator?

Thank you. [OPERATOR INSTRUCTIONS] We'll go to Jeff Wlodarczak with Wachovia Securities.

I'll limit myself to two. If we could focus on CapEx for a second, at 21, 22% of revenue, that was below our expectation. Is that timing, should I expect that to ramp as a percent of revenue through the balance of the year? And Mike, if you could spend some more time on the business market. Clearly, that's a very large market opportunity. If you figured out how large a target market is, and it's $250 million, but when would you expect that to ramp, thanks?

I think the short answer on the CapEx, Charlie, chime in if you would like, is historically, our first quarter has been slightly lower than our full-year guidance. Typically, it's a function of getting ramped up in network projects and rebuild and things of that nature, so I think conservatively, we would expect to catch up through the end of the year to something more along the lines of our guidance, but where we can quote unquote bank the CapEx savings, you can rest assured we're looking to do that, but we're not prepared to change our guidance at this point.

On the business market, it's about a quarter of a billion of revenue for us today, that's mostly out of Europe. There's about 135,000 businesses, we estimate, on footprint in the markets where we've rolled this product out. Where we sit today is -- we're going to try to, number one, centralize how we're approaching the business to business market. Try to learn from those particular countries where we've excelled, like Switzerland, Austria, and Holland, and look very aggressively at the rest of Europe to see where we might be able to exploit opportunities that look similar. I might let Gene Musselman provide any other color on that. Gene?

The only thing I would add, is we've just taken look at our first quarter performance and extrapolated with respect to what we think will end year-end. At this point, we're forecasting that all the countries that have B2B businesses will meet or exceed their revenue and operating cash flow with the exception, perhaps, of Sweden or Switzerland that may come in slightly lower revenue, but anticipated to hit its operating cash flow. As you know, up until the acquisitions that we made last year, there wasn't much of a B2B business or there wasn't actually, within the distribution company. And now we have almost a half dozen countries that have a B2B business.

We're in the process now of putting together a small, albeit professional, B2B team that will be responsible for developing the pan-European program and standards. And with respect to your question, more directly, I think it will take another six months or more for these two get the infrastructure in place, switch out the legacy building systems, and put our position into -- put ourselves into a position to really start building the business. So targets this year and start ramping up in 2007.

Thanks.

Operator?

Our next question, Vijay Jayant with Lehman Brothers.

I have a couple of questions. Your RGU net add is higher than we expected and against margins didn't hit as much and you CapEx was similar to timing. Can you walk us through, very simply, every RGU net add is $X of marketing/CapEx. Is it possible to generalize. That's my first question. The second is on [Kasema] any interest there, are you allowed to own, any talk on what the pricing of that asset is in Holland?

I'll take the second question first and let others start scratching their pages for the first question. But on Kasema, as it's been publicly disclosed, the seller -- or the owner is looking to sell the asset. Since it's right in our backyard, as I mentioned in my remarks, we're going and should take a look at that opportunity. I have nothing to add of a specific nature today as to whether we would be successful or highly interested, pricing will be the key factor for us, making sure that if we were to be competitive in any auction process, we could justify pricing based on long-term growth and integration synergies, things of that nature. And it's too soon to have any view on that. We don't have any information on the asset.

Regulatory issues will be a factor. So I don't think I can tell you today whether it will be approved or not approved if we were successful. I can tell you we have been pounding on the table for some time with every regulator who will listen, arguing that our industry should be allowed to consolidate everywhere within country. And this market is certainly no different and I suspect it would be a very different discussion this time around than perhaps it was when Liberty Media was looking at the asset a couple of years ago. But we'll have to see, it's really too soon to tell.

On the RGU net adds adds, well, we did provide a particular amount of detail on our last call. We had a sly or two identifying payback period and return profile of our core products. What I'll tell you is, the trend is positive, so if you are excited by what we said last time, which was paybacks in the eight to ten month range on data, those trends are improving, because we're finding several things happening. Number one, online sales are becoming a bigger part of our business than traditional sales channels, and we find that online sales are anywhere from 50 plus percent cheaper to complete an a traditional sale through direct, door to door, or other avenues. Secondly, as I mentioned, our CPE costs continue to decline. I mentioned a 20 plus percent number the average CPE costs year-over-year, Q4, '05 to Q4 '06. That's rolling through the core products. And thirdly, we're finding that churn is stabilizing in these businesses at the same time that RPUs are stabilize. It's all from our point good news. Offline, I'd be happy to walk you through the specific economics.

If you want, I could give you more specific.

Sure, Gene.

Cost per RPU, sales by our traditional sales channels, that would be first thing door to door retail, etc. is running on an aggregated basis by about 135 Euros. That differs from product to product, to give you an example, our market cost per gross adds on analogs a around 58 Euros. on the other hand BTH and internet are running in the range of 125 to 30. a couple other statistics that might be helpful for you, we've built about 22,000 homes so far this year, new built and the cost per home is running about 360 Euros there. And we've updated so far this year 263,000 homes. That's about about $48 per upgrade. So very reasonable there.

And those numbers are consistent with what we've said in the past. When we showed you paybacks and NTVs and rates of return by product, we layer in not just the cost of identification that Gene is identifying, but obviously the installation cost, the CPE cost, the ongoing network and OpEx. We look at profitability of customers on a fully loaded basis, and as I indicated we think the trend is positive.

The other thing is, in Q1, standing in Q4. We do get some positive wind in the Q1 numbers because of that. So you may, but in general, lower churn, bundling, lower CPE prices continue to improve.

There you go.

Thanks very much.

Sure.

Our next question, David Kestenbaum, with Morgan Joseph.

Can you talk about -- you said you shipped 250,000 boxes, is that correct?

I said that about 250,000 boxes have made it through the door. We've shipped more than that. We're generally getting about 80% of the boxes we've shipped into the home.

So out of that 250, how many have signed up?

Well, when the box makes it into the home, we're really just waiting for an install, and we take into consideration that once the box is in the home, we're considering that customer and accepted RGU and our six-month window for free service starts clicking.

Maybe I can give you a little bit more definitive number. So far, the customers at the door accepting the box is about 290,000. This is through week 17, if I recall, and the total number of subs that would represent net of churn is 253,000.

Okay, thanks.

Yep.

You, in the past, have kind of, actually on the call you indicated some of the DSL operators are struggling. In the past, you've laid off and let KPN purchase them. Do you expect to get more aggressive on that front?

I don't think we can be specific at this stage. We did acquire DSL operator in Austria called iNode which fit our business model in Austria quite well. The logic behind that acquisition was basically an extension of our footprint of about a million plus homes, most of which would never be cabled and a good brand and B2B product. And we feel that those factors overlaid nicely with our relatively mature cable business focused mostly in Vienna.

We have looked in the past -- let me say this, we have looked in the past at certain DSL operators in Holland. I will never say never, but we are not actively looking at acquiring any DSL operators in that market. We're making good progress against them in our footprint, and not all of them, but certain of them are starting to get indigestion in Holland where they've made big commitments to content and have clearly underperformed in delivering any sort of video or sports product. But at this stage, we're not looking at any DSL operators at all.

Can you talk about the competitive environment in Japan? Someone says it's getting more competitive in that market and wondering what it's like to you.

Do you want to take that?

Yes.

Yes, go ahead.

The competitive environment, certainly on the video side, J:COM hasn't seen much in the way of competition from the telcos yet. And as the slide we had on the telephone adds, telephone subscriber adds in Japan go to strength to strength. And on the internet side, it's holding its own on that. So yeah, there is competition, but we feel well-placed, as Mike said.

So your pricing is still stable?

Yeah.

Thanks.

Our next question, David Joyce, with Miller Tabak.

Thank you. A conceptual question, I don't know if you think about it this way, but what sort of penetration levels of your new digital video and subs would you be comfortable with before you start launching in other markets?

Well, what you're asking, I guess, is what do we need to see out of Holland before we would consider a digital for all rollout in other markets?

Yes.

Yeah, because on the VoIP side, we have rolled out just about every market in Europe and whatever has not been rolled out will be rolled out this year. VoIP is a business we're aggressively expanding into every way we have a two-way footprint and doing so cost efficiently and successfully. So I think that's a separate question. On the digital side, I'm not sure, it's really too soon to say what we would need to see out of Holland to look at a similar model elsewhere. We're squarely focused on achieving the kind of results that Gene's identified. We have big ambitions between now and year-end to get a boat load more of digital boxes into the home. We have to see how the conversion works, how people -- how we can upsell the product into higher tiers. So we have a number of things to examine and evaluate before we get serious in looking at any other market. But penetration, higher tiered services is one of them, uptake after the free period is the second one, how efficiently we're able to get the logistics and the OpEx scaled quickly would be a third one. We've got the CapEx/CPE end of it we think pretty well nailed, but it's the core metrics of penetration, revenue, and OpEx that we're still evaluating.

If I could just add, Mike, be aware that we have digital in five of the markets, Ireland and France and Switzerland and Austria and Sweden. There we would love to extend the digital rollout, whether it was a D48 strategy or something different so there's -- we look for growth in these markets as well.

Sure. We have digital, that's right. That's a fair point. We certainly are marketing digital in a number of countries today. But those are more traditional pull models.

Correct.

We're providing the service to those who want. it.

And in the netherland, KPN recently launched IP-TV. What are you seeing in terms of their product range, how it stacks up against your offerings.

Want me to answer that, Mike?

Sure, go ahead.

I'll give you a quick rundown on a comparison between the two. We launched our product last October and KPN really, at this point, what I would call is they've made an announcement they're rolling the product out, in my opinion and those that I've spoken to as recently as today, even, we don't expect to see much from KPN other than a soft launch probably until October of this year. I think they're basically conducting a field test at this point, preparing themselves for commercial employment, as I said, more towards the fourth quarter. As you know, we're using a distribution strategy of both push and pull.

Currently, KPN is limited to levering the product they're planning, internet and their unbundled local loop subscribers. Standard price for us for the basic panel is $17.99, which includes somewhere between 42 and 48 channels, and the standard price for a similar package with KPN is $19.95. And then we have an extra channel pack that goes up to 70-plus channels, between 70 and 80 for $19.99. So you can see from that standpoint that we're very competitive and, or you could look at conversely and say what they're coming to market with is nothing more than kind of a product.

We are, as you know, providing the box free. On the other hand, subscribers at KPN will have to pay $149.95, plus an activation fee of $29.95. We're doing a self-installation. At the beginning, at least, they are requiring full installation. On the other hand, they are waiving the installation fee for some undefined period and we don't know what that is at the present time. We're both offering promotional packages, us, six months, the basic package free. And them, their package, I think, is free until October. And in that package, also, is included 20 free movies that they determine. The subscriber can't select them at the present time.

Second box, as you know, with ADSL, they can only put two boxes per home on a single ADSL modem, so if you want multiple boxes under their scenario,you'll have to subscribe to another ADSL line. With respect to boxes, we have a standard box and we will be rolling out a DVR in July. They are actually entering the market with a DVR product, but we anticipate that by fall when they will roll out commercially, that they will have a second box and the standard set top box like we're offering as well. And we're both positioning ourselves to offer HDTV. We'll actually be into the market with a HDTV product early June in time for the World Cup, and at this point, I don't believe that they will be there. And one last thing you might be interested in, they're targeting 10,000 subscribers by the end of -- somewhere in the October time frame, so that kind of aligns with what I said -- they're n a soft launch, still working through what I would probably call teething issues as you launch a sophisticated project.

And we're putting on, Gene, something in the order of 8 to 10,000 every week.

We're running about 9500.

That's squarely in the 8 to 10 range.

I'm sorry, apologize.

Okay.

You're right.

That's great, thanks. Nice quarter.

Yes.

Our next question, Matthew Harrigan with Janco Partners.

Two questions. Could you give us an update on the VOD, intellectual property issues in Europe and how that develops over time and how you see that business developing a little more granularity. And secondly, I apologize if this is an ignorant question, because I don't have the full release in front of me, but it looks like you had a big positive move on the corporate expense line and I was curious as to what that was, if that was noncash stock compensation or what. Because I just wanted an explanation of that item.

Well, while they come up with the second answer, I'll take a crack at the first one, Matt. We don't see any -- if you're talking about network PVR issues, I think it's largely undefined territory in Europe as it appears to be still in the U.S. When it comes to VOD, we've rolled VOD out successfully in Japan. I mentioned the 14 million streams. A big chunk of those are previews and free VOD, but an increasing numbers are T-VOD or transaction services.

We will launch VOD in Holland this summer, so we're gearing up for our own VOD services in the Dutch market as that digital subscriber base expands and we are finding it reasonably easy to get the product that we need focused on as much free product as we can get, but squarely having over premium movies and factors driving the service. We're learning and watching from the Comcast experience and what we're doing in Japan. But if your I.T. question relates to the network PVR issue, it's still relatively soft territory in that market as well. And on the corporate expense side, Bernie or Rick, do you have any comments on that?

Yeah. Rick, if you've got it nailed, are you looking at the segment data, or where exactly are you looking? I don't have the release in front of me, but I think you have a $40 million positive swing.

Yeah, we'd be happy to walk you through it offline, but it's basically the inclusion of Ostar, the KTV provider in Australia in our corporate and other line.

I wasn't sure if it was broken out -- okay, that's it. Thank you, great quarter.

Thanks, Matt. Operator, we have time for one more there are any online.

Great, our final question will come from Ben Swinburne with Morgan Stanley.

Thanks, good morning, guys. Thanks for letting me ask a question. I had a couple. One was on the phone business in Europe. I was wondering if you could talk about, now that you've got VoIP sales in a lot of markets, you're moving customers over, and if not, sort of what is the thought process there over time. Is there any reason to do that at all. Second, on the digital for all, costs came down quite a bit a sequentially, any more color as to what drove that. Was it better install costs per gross adds, lower fixed marketing spends, and the last one was on the broadband products, other than in Japan, are you seeing any markets where customers are starting to pay up for speeds?

Well, let me work backwards. What you'll find and we can certainly give you more detail offline, but what you'll find is our broadband speeds, the extreme tiers in Europe, for example, of 10, 15, and 20 megabits are not inexpensive products. So we are finding that when people do subscribe to those, they're in the 50 to 70 euro range and Gene, correct my if I'm wrong, make next call we'll give you a little more granularity with how people are stacking up to speeds. I tried to give it to you a nutshell with the weighted average speed in Europe and Japan too. We are finding that people are attracted to the higher tiered services or we wouldn't be launching them. On the phone biz in Europe, the vast majority of those VoIP customers were new customers. Certainly, there is some switching going on from to VoIP. We are not actively marketing TDM and we're seeing pretty normal churn in the TDM products. I think it's less of a switch and more of a new sale to VoIP and slow churn on the TDM product. Gene, do you have anything to add to that?

Just two things. With respect to the first question on speed, as I think I mentioned on the last call, one of our objectives this year is to get into the market value-added services. This is one of the ways we can start to differentiate ourselves. And one of the products we just recently launched was called upload booster, which means it simply allows a data subscriber to increase their upload speeds and that's for an incremental five euros per month. And we just rolled that out in Slovak, Czech, and I think it was maybe Sweden. And we have plans now to roll that out in other markets as well. There and there's a number of different value-added services we'll be rolling out between now and the end of the year in order the drive that incremental ARPU.

With respect to the tandem situation. We do have some tandem customers moving over, we're not actively pursuing that. On the other hand, in markets where we're running out of switch capacity, we are moving from a hybrid type of technology that we've been using in the past, using the DMS100 and tandem with a soft switch to an environment and that will take place both in the Netherlands and Austria this year.

Costs, did you want to comment on, that why we're seeing the business scale a little faster than we thought it would?

Well, I think -- the good news is we haven't seen the the higher costs of operations that we anticipated. One example is that I think we had pledged about 2.8 calls to the call center per new digital subscriber. And I think we're actually seeing that in the range of about 0.8. So that simply means that we have nod hat to staff up in order to handle the extra call volumes. And we're seeing that across the other operating areas as well.

Great, thank you.

Okay, Ben, thanks.

And gentlemen --

I guess we're finished. I appreciate your getting on the call with us so early in the morning if you're in the states and look forward to talking to you in the second quarter, and operator, I think we're all set.

Thank you. Ladies and gentlemen, this concludes the Liberty Global first quarter 2006 investor conference call. As a reminder, a recall of the call will be available in the investor relations section of Liberty Global's Web site www.LGI.com. There is also a copy of today's presentation materials on the Web site as well. That does conclude today's teleconference, we do thank you for your participation and ask that you do please disconnect your phone line at this time.