Liberty Global Ltd (LBTYK) 2006 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 2006 investor call. This conference call and the associated webcast are 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. At this time, all participants are in a listen-only mode. Following today's formal presentation, instructions will be given for a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder this conference call is being recorded on this date, August 10, 2006.

I would now like to turn the conference call over to Mr. Mike Fries, President and CEO of Liberty Global. Please go ahead, sir.

Thank you, and welcome everybody. I thought we would start on time since it takes quite a while to get through all the logistics here.

Let me first introduce who we have on the call today. As usual, Charlie Bracken and Bernie Dvorak, our Co-CFOs. We have Gene Musselman actually here in Denver with us, who runs our UPC Broadband group. Rick Westerman, of course, from IR. Graham Hollis and Miranda Curtis, who obviously oversee our Japanese business. Tony Werner, our CTO; Mauricio Ramos, who looks after Latin America and Liz Markowski.

And I think we're going to turn it right back to you, operator, for a quick Safe Harbor, hopefully quick.

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 include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the Company's anticipated launch of modified Dutch auction tender offers, anticipated acquisition of Karneval, guidance for 2006, insights and expectations regarding competition in the Company's markets, the impact of M&A activity on operations and financial performance and other information and statements that are not historical facts. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these statements. These risks and uncertainties include the factors detailed in Liberty Global's press release dated August 9th, 2006 and its filings with the Securities and Exchange Commission, including Liberty Global's most 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 any updates or revisions to any guidance or any other forward-looking statement contained herein to reflect any change in Liberty Global's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Please refer to the appendix at the end of the webcast as well as Liberty Global's press release dated August 9th, 2006 and SEC filings for definitions of operating cash flow, OCF, free cash flow, revenue generating units, RGUs, and average revenue per unit, ARPU, as well as GAAP reconciliations. I would now like to turn the call back to Mr. Mike Fries.

Thank you. We as usual are working off of a slide presentation that is accessible on our website and as we normally do, I will give some quick highlights, Charlie is going to walk through the financial results in a little bit more detail and then we are going to get right to your questions.

So I'm on Slide 4 of our presentation, which summarizes what I think are the five key takeaways that you would like to come away from this call with.

First and foremost, as we have said in the press release, we had another record quarter of subscriber growth and I'm not sure how many times we'll have to use the word record before people start realizing that for us, anyhow, this is more than a trend. We will walk through our revenue and operating cash flow numbers. But needless to say, they reflect the growth in our customer base and also our ability to leverage that scale that we are developing.

I will talk about M&A a bit more at the end but we think we're making all the right moves as we rebalance our footprint. And from a guidance standpoint, we had a great first half and we're right on track for the full year and Charlie will walk through that in a bit more detail at the end as well.

And then finally, I'm sure most of you have seen that we announced the $1 billion self tenders today. I think they speak for themselves or the transaction speaks for itself. Our stock is cheap and we are buyers at these levels.

Slide 5 gives you a bit more detail on the quarter. Our net adds were over 360,000 and, of course, that is not double counting digital PD customers, as they do here in the U.S. If you did add in digital, our net adds would be nearly 680,000, which just for comparative purposes, is about 15% less than Comcast, even though they have a footprint of homes [passed], it's about 70% bigger.

Revenue for the three months was 1.6 billion and operating cash flow was 568 million. Those are obviously significant increases year over year on a reported basis, but I think the real punch line here is that our rebates or same-store operating cash flow growth for the quarter was 17%. And if you exclude Holland, which we often do for illustrative purposes, operating cash flow growth was 23%. Just let that sink in for a second.

Charlie will walk through the balance sheet but our leverage remains in our target range of 4 to 5 times. Our consolidated cash position was nearly 3 billion following the sale of France and we continue to shrink our equity. Of course, in the second quarter alone, we purchased $600 million worth of our stock before the recently announced tender.

Moving to Slide 6, I'm just gong to keep putting this chart up until people are sick of seeing it. It shows net adds for the quarter compared to the prior two years. And you can see that the 363,000 net adds in the quarter compares to just under 230,000 last year and 153,000 the year before.

Now clearly, some of this growth is attributable to growth coming out of new markets, like Switzerland and Romania, but even if you strip those out, we had a nice pickup across all our products and regions. In particularly, Europe, where we added 144,000 RGUs and that is up 60% over last year.

Japan added another 100,000 RGUs, so a good quarter out of Japan. And Chile has found what I call a new gear with over 90,000 net adds in the quarter; that is double last year's results, and driven largely by bundling. Today in Chile, 27% of all customers are triple play and the average customer buy is 1.7 products per home. So that market continues to perform well.

So for the group, we added 735,000 subs through the six months and that puts us in great shape for our year-end guidance of 1.4 million. That 1.4 million figure is adjusted for the sale of Sweden and France. And, of course, as you most of you would know, our fourth quarter is our strongest quarter. So we feel great about the full year.

Slide 7 provides a bit more detail on our products. Starting at the top with broadband Internet, which continues to be our strongest product in terms of volume and gross margin -- we added 174,000 subscribers in the quarter; that is up 44% from last year. And when you look closely at the numbers, which we provide in the press release, you'll see that penetration across Europe has now exceeded 20% and that is driven partly by the growth we're seeing in Central and Eastern Europe, which is really picking up steam on the data product. You'll also note that over 20% of our net adds came out of Chile, where VTR has a 73% market share of broadband in its footprint.

The key driver, Internet continues to be our competitive advantage on speed along with the uplift we're getting from VoIP. In telephony, we ha dour sixth straight quarter of record net adds with 156,000, which is nearly all driven by our VoIP roll outs. We added three markets in Europe but now have a total of 10 million homes across our footprint ready for service.

It's also interesting to me to point out that over 60% of our voice net adds in the quarter came out of our three largest and most mature telephony markets, Japan, Holland and Chile, which historically were switch TDM markets and have seen a surge in growth, really around VoIP, as much as anything.

Our digital television services are starting to pick up steam, which I think importantly is driving ARPUs in Europe in the video sub growth in Japan, Chile and Australia. In total, we added or converted 329,000 digital TV homes in the second quarter and that is up 170% compared to last year and up pretty meaningfully from the first quarter as well.

And today, digital penetration across the footprint is about 15%, with really two markets leading the charge, Japan, which is now 44% penetration and world-class in our view, and the Netherlands, which brings me to Slide 8.

We know that many of you are interested in Holland and our "digital-for-all" project. The punch line from our perspective is that the project is still largely on track. We added 137,000 digital homes in second quarter, bringing total digital subs in that market to 350,000 at June 30. That means in six months, we have taken digital penetration from 4% to 16% in our largest video market.

I'm not going to bore you with all the numbers, but a few key statistics I think are useful here to spend and they support our confidence in the project. First of all, on the logistical side, the roll out is working well. We're shipping 25 to 30,000 boxes every week with about 75% plus of those making it through the door. The platform is stable; our call volumes are less than we anticipated. Despite being described as a "forced migration," over 45% of our subs actually called us and asked us for a digital box. And not surprisingly, these pool customers, as we call them, are much more likely to subscribe to additional services, which is driving ARPU across the digital sub base. So to-date, approximately 50% of all digital subs are taking either an extra channel pack or a premium service, film service, movie service, and as a result, we're generating an incremental EUR4 of ARPU per digital subscriber and importantly, that is before the EUR2 base digital, a rate increase would occur when the promotional period ends. So while we're not quite at the tipping point here, we think we're making great headway with what has been described as Europe's toughest TV consumer. And with the launch of HD-PVRs and VODs just around the corner, we're pretty confident that the demand and the excitement around digital in Holland is going to continue to pick up speed.

We talk a lot about our global scale, and we just want to spend a minute on Slide 9, giving you some concrete examples of how we're leveraging that scale. One of the first things we did a year ago when we put all the businesses together was to consolidate our capital spend under a few selected vendors where we have negotiated global purchasing agreements. So today, our five largest vendors represent around 25% of our spend and that compares to over 32 vendors, I believe, a year ago. We have also centralized procurement, so today, about a billion of our capital spend is under the direct control of our global procurement department. And this adds up to real savings from our point of view, approximately 50 million this year alone, we're anticipating realizing from these activities and initiatives.

We are also on migrating our VoIP and high-speed data networks across our footprint to common platforms, so for example, we now purchase most of e-MTAs from three vendors, ARRIS, S.A. and Motorola, and that's allowed us to drive down the unit prices of those devices about 20% this year. It's also worth pointing out that over 70% of our modems are high-speed data and VoIP capable. So for an incremental $25, we are actually putting voice capability in the modem and giving ourselves a great opportunity to cross-sell and upsell the data service and vice versa.

And then finally, we are also driving our digital TV services to common platforms. So for example, in Switzerland, we are planning to start deploying the same boxes that we're using in Holland and that's going to lower the switch box cost by 40% and we'll do the same thing in Ireland and Latin America and Australia.

So global scale for us, it's not just a bullet point on a slide, and Tony and Gene and their teams are doing a fantastic job and we're starting to realize those benefits.

So slide 10, this is my final slide as I state here, really, the bottom line from my perspective. First of all, like many of our peers in the cable sector, we are delivering operationally. We are hitting the numbers, in many cases, exceeding the numbers. And I think that is one reason why the cloud of uncertainty that seems to have hung over the cable business for so long appears to be lifting finally.

And secondly, I think we're playing our cards pretty well on the M&A front. We are taking advantage of private market values by exiting sub scale or less desirable countries, like Norway and Sweden and France, at what we believe are great prices and we are acquiring operations in our faster growing regions, like [to be able] we just announced in the Czech Republic, which will consolidate our number one position in that country. And we believe we are being disciplined in more mature markets.

So just a footnote on the recent deals in the Netherlands. We did look at both of those transactions and obviously we couldn't get there at the end of the day but Smart Money thinks Western European cash flow is worth 12 times. And just as a curiosity, for us and perhaps for you, if you put a 12 multiple on our Western European cash flow, that's nearly $10 per share relative to where the stock trades today, which leads me to my last point.

We are buyers of our stock at these levels. The $1 billion tender that we just announced will take our cumulative repurchases to 2.5 billion in the last 14 months or so, including the LGI combination. And that makes all the sense in the world to us. We have great assets that deliver best-in-class growth. We structured our business to drive cash flow upstairs to the parent every year and we're going to use that cash to continue expanding our footprint and shrinking our equity. So very pleased from our end.

With that, I'm going to turn it over to Charlie, who will then take you to Slide 12. Charlie? The.

Thanks a lot. I'm on Slide 12 if you're following along. We've just given you an overview here of the RGU statistics. Mike has already taken you through the growth stats for the quarter, so what I wanted to do here was just give you a sound bite on where we are at June 30 in terms of numbers.

Now all these statistics exclude France and Sweden, which are therefore sold and accounted for as discontinued operations. And at June 30, we had 12.3 million video subscribers, which includes 2.5 million digital and [DKA] subs. And our cable operations as a whole have around 65% penetration, which is broadly (inaudible) the United States but we would argue much greater ARPU upside given that we are at a much lower level from the U.S. On the voice side, we have around 2.4 million subscribers, giving us a 14% blended penetration. But again, quite a bit variation between markets. Markets like Chile have over 30% penetration and we think there's very good upside, particularly in the Netherlands, Switzerland and Japan, as well as in central and eastern Europe.

In terms of the data side, we have 3.2 million high-speed data subscribers, giving us an 18% blended penetration, but some of the markets have a high of 38%, for example in Austria, 27% in Switzerland and 20% in the Netherlands, where in fact the overall market has reached 60%. Now if you play those out across our other markets, that implies tremendous upside yet across Europe as a whole.

So total RGUs are around 17.8 million, up nearly 400,000 from Q1, including about 30,000 acquired subs. Total customer relationships are 13 million at June 30th and we're approaching around 1.4 RGUs or revenue generating units per customer.

In terms of the other bundling statistics, at June 30th, we had 2 million double-play customers and 1.4 million triple play customers, up 38 and 72%, respectively, from Q2 of '05.

So in total, over 25% of our customers are now 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 go to Page 13, we'll just give you an overview of the consolidated Q2 financial results, revenue was up 46% to $1.59 billion and OCF up 54% to $568 million. Now both of these increases are largely driven by our acquisitions, including Cablecom in Switzerland and Austar in Romania, and the consolidation of Austar's results in Australia. But I will show you the growth of our rebased 2005 results in a minute.

What's not explicitly on this slide but an important point is our OCF margin, which in the quarter, was 35.8%. That's 170 basis points improvement from Q2 of last year and that's driven primarily by margin expansion in central and eastern Europe, which was up 2.3% or 230 basis points, year-over-year.

Margins in Japan and Chile were also up in the quarter, consistent with the scale economics argument. But western Europe was down slightly due to the "digital-for-all" roll out in the Netherlands.

Going to Slide 14 on the revenue side, this slide shows the revenue broken out by division and also gives you the rebased growth figures compared to Q2 2005. By rebased, we mean adjusting Q2 '05 to include acquisitions that were not fully included in last year's Q2 and also adjusting to eliminate any differences due to FX movements. So really is a same-store metric.

Now on that metric, UPC Broadband in Europe was up 62% on a reported basis to 794 million of revenue in the quarter and on that rebased growth, was around 11% year on year. That broke down 10% in western Europe and 16% in central and eastern Europe. Japan was up 10% on a reported basis to $456 million and up slightly higher, 11% in terms of rebasing. And Chile had another fabulous quarter up 29% on a reported basis and 17% on a rebased basis to 141 million.

The total LGI revenue was up 46% on a reported basis to 1.59 billion but on a rebased basis up 11% and that's consistent with our goal of generating double-digit revenue growth.

Slide 15 analyzes the OCF. Now in Europe, UPC Broadband increased its OCF 71% to 313 million. And that equates to strong growth of 18% on a rebased basis. Breaking that out between western and eastern Europe. Western Europe was up 13% due in large part to the strong growth at Cablecom with OCF growth there up over 30% year on year. But central and eastern Europe continue to grow very strongly with rebased growth of 23%.

If you take out the Netherlands, which is having some short-term impact from the "digital-for-all" project, Western European rebased OCF growth would in fact have been 25%. In Japan, J:COM increased its OCF 20% on a rebased basis to 178 million, so a very good quarter there. And in Chile, VTR was up 24% on a rebased basis to $48 million for the quarter.

While LGI as a whole was up 54% on a reported basis and up 17% on a rebased basis. And if you exclude NL or Netherlands, rebased OCF growth would have been around 23% for Q2. So a very strong performance both with and without the Netherlands.

On Slide 16, we just give you a quick snapshot on the balance sheet. Total debt at June 30th was around 10.8 billion. That's up roughly 400 million from March 31st and that's largely due to the foreign exchange translation impact of the debt, which is largely all in Euros or yen or non-dollar currencies.

Cash was 1.66 billion at June 30th but since then, we have closed the sale of UPC France. And after June 30th, you can see that we have got pro forma cash of almost $2.9 billion. Now we have earmarked 1.4 billion of this for stock repurchases ad the Czech acquisition that we've announced. So our pro forma cash balance for those two events will be closer to 1.5 billion, which still gives us a lot of liquidity.

On a reported basis, our gross leverage was 4.8 times debt to OCF and net was around 4 times. And that drops to 4.6 and 3.3, respectively, if you adjust for the sale of France.

The leverage is right in the middle of our 4 to 5 times target range. And since the end of the quarter, we've also been completing a number of refinancings and we've been working on terming out our debt across the world and improving maturities and we've also been concentrating on fixing our interest rates. So we think we're very well protected against any rise in global interest rates and we also think that we're very well protected against any credit crunch that comes in the market. And it goes without saying that we continue to imagine our debt with a functional currency so we don't run a currency mismatch.

On Page 17, we analyze free cash flow. Our free cash flow in Q2 was negative $83 million but year to date, we're still positive at 24. Now as many of you know, we're not prioritizing free cash flow generation, given that we have very significant amount of high return growth opportunities at the moment. But we do strive to be free cash flow positive on a consolidated basis and in fact at each of the (technical difficulty) and we remain on track to do that.

CapEx in the quarter was $408 million or around 26% of sales. And if you add in the capital lease additions in Japan of $30 million, which don't represent a current use of cash but we do include to be conservative, total CapEx was around 28% of sales. And that's slightly higher than our guidance for CapEx, which would come in around 27% of sales, but year-to-date, we're at 24 and we still remain on track to hit our guidance number for CapEx. And it's worth reemphasizing again that all our CapEx is providing these high returns and higher OCF growth. So we are investing for success and not investing for defensive purposes.

On Page 18, we try to give you an update on guidance and the key is we are adjusting our guidance to reflect all the M&A activity and the key activity is the sale of the French and the Swedish cable operations. So all we've done is taken the initial guidance, shown you the adjustments for those two assets and give you an updated guidance. So in RGUs, we're going from an original guidance of 1.6 million to [affect] the roughly 200,000 adds that we planned in France and Sweden and reduced it to 1.4 million net adds. That looks pretty conservative given that we've added 735,000 in the first half of the year and typically Q4 is our strongest quarter.

On the revenue side, we go from $6.8 billion to $6.2 billion and OCF goes from 2.4 billion to 2.2 billion and CapEx remains consistent at 27% of sales. Now I should mention that to be conservative and also to make this simple, we have left the exchange rate unchanged. However, since we gave guidance, the dollar has weakened considerably against the euro, which is one of the key drivers of our reported rates. So it looks like we got some very significant upside in currency terms when the full year plays out. I should say as we look at our reforecast, we think we are pacing at or ahead of all these adjusted guidance targets.

Let me just give a couple of slides on our debt divisions. In particular, I want to talk to our bond and bank debt holders in Europe at the UPC Holding B.V.

So on Page 19, we've given some key statistics there and you can see for Q2, the BV was up 23% in revenue to EUR478 million and that was driven primarily by acquisitions and subscriber growth. Revenue growth in Europe was 10% on a rebased basis. So still consistent with the double-digit top line.

OCF was up 23% to EUR182 million and on a rebased basis, OCF was up 12% compared to a year ago. And that was driven by very strong results as usual in central and eastern Europe but depressed a little bit by the Dutch "digital-for-all" project, which clearly is a bigger proportion of Europe than it is at the whole. But despite the cost of the Netherlands, we're still slightly ahead on our OCF margin at around 38% and total OCF for the B,V. on a rebased basis would have been 26% up, excluding the results from the Netherlands.

In terms of the leverage of holdings of the European group on Page 20, we have given you the balance sheet as of June 30. And total debt at that point was just over EUR4 billion, which comprised a bank debt of around EUR3.2 billion and bonds of EUR800 million. And we have given you the covenant calculations according to the facility definition. So senior debt to adjusted EBTDA was 3.6 times and total debt to an annualized EBITDA was 4.6. And just to remind everybody, the covenant is 4 on a senior basis and 5 on a senior plus subordinated basis. So we clearly have significant headroom and indeed the ability to upstream cash to the parent, if we wanted to.

So let me go to the conclusions. I think, as Mike said, we feel very good about our Q2 results and the momentum that we're carrying into the second half of the year. We've been opportunistic and prudent about rebalancing the footprint and we're very focused on creating value for our stakeholders. And we think that one of the best ways to do that is to buy back our stock at the current price levels.

With that, operator, I think we're ready for questions.

(OPERATOR INSTRUCTIONS). David Joyce, Miller Tabak & Co.

I was wondering what the pecking order might be for next markets in which you would do something similar to the D4A?

You know, we get that question every quarter, David, and at this stage, our answer remains the same. We haven't really concluded where we will do that and in which markets. We're going through our budgeting process now and through the rest of the summer and fall, we will be evaluating opportunities. But I think it's safe to say that Holland is unique and what we are mostly focused on is deriving scale benefits outside of Holland from what we are doing in Holland. So the notion -- for example, the idea that we can reduce the box costs in Switzerland by 40% by switching to the same platform as we're using in Holland, makes a tremendous amount of sense. We don't see today the need to go to a push "forced migration model" in Switzerland. So I think the answer is there are no other countries at this point in time identified as be-for-all markets. But we will take advantage of all the benefits that Holland is delivering from a scale perspective elsewhere as we roll out digital services.

Could you just clarify the incremental ARPU of EUR4 before the EUR2 uplift that was on your slide regarding the Netherlands?

Yes, I mean, do you mean 4 versus the 2?

Right.

Remember when we roll out digital in these markets, we are giving folks six months free and after the six-month promotional period, the base price for retaining the digital box and the extra 10 to 12 channels of digital programming and all the functionality of the box is EUR2. We haven't really charged anybody yet for those EUR2 because it's just now that people are rolling through the six-month trial period. So the EUR4 does not include any of the uplift from the EUR2.

Mike, it's worth pointing out also that we have upside ahead of us on PVR, video on demand and high-def, which aren't in the current digital offer.

Right. Does that make sense, David?

Yes. And just the final question, a little bigger picture, do you see any increases in competition from DTT in any of the markets?

Do you want to respond to that, Gene? We have got Gene here; let him respond in Europe in particular.

Well there has been announced roll outs, four roll outs, and most of them are markets at this point. Czech, for example, has run into some issues and in that particular country, there is a delay in the roll out there. In other markets, we are seeing roll outs for example, the Netherlands rolled out more than a year ago with [Digitana]. And they have approximately 100,000 plus subscribers at the present time. And I would anticipate that across most of our markets, you will see some activity this year and throughout 2007. Our packages are very competitive and we feel that we are in a reasonable shape to compete against that particular technology.

I would say on Japan, it's the same thing; there's no increase in competition there.

On the contrary, I think [Digi-T] has a key competitive advantage for cable and will remain so for at least another year.

Okay, thank you.

Jeff Wlodarczak, Wachovia.

I'll limit myself to two questions. On the Karneval acquisition, what's the post synergy operating cash or multiple? How quickly will you get there? How much CapEx do you need to put into those systems? And then, Mike, as you mentioned in the Netherlands, the sale of assets somewhere north of 12 times cash flow well above where you're trading at, would you ever entertain the idea of selling the Netherlands system, or is that something you are not willing to consider? Thanks.

Well, we are fond of saying we never say never, but as we sit here today, we're very pleased with the business in Holland and it is our largest market and a big contributor to the bank group funding and so I don't anticipate at this stage receiving overtures or perhaps responding favorably to overtures to sell that business. I do think it's worth repeating that if Ascent and Cablecom, which are great assets in their own right, are worth 12, there is a pretty sizable premium that would be applied to our asset, for all the reasons that I think anybody on the call would be aware of.

We have invested considerably in the network; we are state-of-the-art; we're VoIP enabled; we are digitally -- we're moving towards digital very, very rapidly. So we see it as a nice multiple to benchmark the rest of our western European cash flow on and we welcome you to do that.

On Karneval, I think what we put in the press release is 9.8 times 2007 OCF and the synergies in the 2007 year are very small because we do not anticipate owning this business until year end or early next year. So if you're comparing it to Cablecom, which we closed at the end of last year, we said that was a 10.4 multiple on forward cash flow, this is 9.8. And what I can tell is operating cash flow growth in 2007 has a 3 in front of it. So the business is indicative of the region and the sort of growth rates we are achieving in central and eastern Europe and well worth 9.8 times 2007.

The synergy numbers beyond 2007 obviously start to increase but we're not going to give any forecast beyond what we have already provided. And the CapEx, it looks to be not dissimilar from what we've done in other central and eastern European markets. The business is largely rebuilt. So there won't be considerable upgrade CapEx spend; there will be some marginal integration CapEx, as you would expect. But we don't see it being for the out of the ordinary, relative to the rest of the region.

Matthew Harrigan, Janco Partners.

Two questions. Can you update us on the speed price mix for data across the various markets? Obviously, the markets are very different dynamics, big dichotomy between say the Netherlands and Japan.

And then secondly, I know HD in Europe is very nascent. Philip made some noise around the World Cup. I know the numbers for the panel manufactures are very -- [NCE] companies are rather disappointing. It's been a big driver in Japan. Is that something that really factors in, in a two or three year timeline on digital as part of a pull strategy or do you think it's even further out than that?

Do you want to speak to the speed pricing? Gene is going to address the data point.

You're asking what the range of speed and pricing is across our markets? Is that the question?

Exactly, I mean how much of it is fancy 10 Mb plus speeds versus the light speeds that you introduced in the Netherlands about two years ago?

Well as you know, we have a full range of products across our markets. Up to seven different tiers, I think at the present time. The lowest package that we offer is a starter package followed by all the way up to the higher speed, the 26 [meg] and we've been testing speeds right now in some of our similar markets of 50 meg or more.

The pricing ranges from about $14.95 for the low-end package up to I think around $49.95 or $59.95 for the extreme package and there's every flavor in between. The best-selling package is really the light package, which is the third tier that we offer.

But interestingly enough, we still sell a lot of (technical difficulty) product. If I had to rank in terms of the take-up for those products, it would be our second and third tier products followed by [classie]. And the sales still are very, very robust and I would anticipate that they would continue to be so for the foreseeable future.

Our weighted average speed across our footprint, Tony, you may have an updated number here. We calculate about 3.5 meg weighted average across all of our broadband subs in all markets. And I suspect in Europe, we're going to find that's probably right on because we are a little slower in Latin America; we are a little faster in Japan, where 80% of the customers are taking our 30 meg product, more or less. So I think we are finding that the speeds are ratcheting up not down, but prices are stabilizing.

Yes, and I think an important point is while we are offering higher peak information rates to be competitive and it attracts customers, actual overall consumption is maintaining relatively flat. So while our speeds are growing going up a bit, our economics are almost unchanged as we offer these higher speeds.

And then on HDTV?

On HD, Matt, Europe is -- obviously you know about Japan. It's a killer app; it's a major driver; all of the boxes essentially are enabled. In Europe, it hasn't really reached a point where broadcasters are supporting HD. That's what's got to happen first. Without the content, the box is a wasted asset. So as soon as broadcasters start to embrace HD in their individual markets, I think it will then -- the flood gates will open. And that's what we are waiting for. We're positioning ourselves to take advantage of that but HD loses a lot of it's impact if it doesn't have programming behind it.

So would you say like Philips and Sony get more traction around the Beijing Olympics and that might be the next big transition point or do you think it could be even more extended than that?

I would say, I'm going to let Gene react to it as well, I think by 2008, it will be considerably different than it is today. I think within the next six to nine months, you're going to see a number of broadcasters embrace HD and then thematic programmers and satellite programmers behind them. Obviously in the UK, it has already occurred. That's a very mature digital pay TV market. It hasn't happened in any meaningful way outside of the UK yet but I think it's on its way.

Congratulations on the quarter.

Thanks.

Mike is right. In the Netherlands, as you may know, we'll be rolling out HD later this fall. But overall, the percentage penetration of HD TV sets in the Netherlands is relatively small at this point, although if you take a look at some of Philips projections, they are expected to increase dramatically even by year-end and certainly by the end of 2007.

One of the drivers of course is programming and at the present time, we only have three channels that are in high-definition. We have Film 1 and Sport 1, our own channels. And in addition to that, I think it's Discovery and perhaps National Geo. So that doesn't quite make -- it's a relatively small offering, which doesn't offer a heck of a lot of value. But I would anticipate over the course of the next 12 months, that you'll see a significant change in the marketplace.

Vijay Jayant, Lehman Brothers.

I'm going to ask two questions, please. First, just to make it easier for us, could you just rebase 2005 numbers pro forma so that we have some perspective on what you are assuming your growth rate is going to be on revenue and EBITDA?

And second, in Holland, I understand that the boxes basically have a modem and starting in the second half of the year actually would have an MTA for voice. And the deployment of voice will probably be marketed with this conversion. Any color on what broadband penetration has lifted from this if that's being marketed at all, or is this purely being trying to get the digital lift and is the voice roll out on track? Thanks.

Yes, in terms of your first question on the rebased, the rebased exercise actually changes every quarter because you have different acquisitions that weren't in the prior-year period. So since it's a little bit of a rolling exercise, we are just saying it's consistent with our double-digit revenue growth target and our mid teens operating cash flow growth target. So that is obviously what we are driving toward and those are the types of numbers that we put up today.

Gene, do you want to address e-MTAs in the digital box?

We're in the process right now of conducting an operational field trial which is (technical difficulty) embedded e-MTA in the D4A box. We think that will be very successful to test and we anticipate probably incorporating the e-MTA in the box going forward.

The whole purpose of that is upsell and cross-sell. So number one, in answer to your question, yes, we should be able to increase penetration as a result of that and also, we ought to be able to lower cost of acquisition because it's a more effective upsell and cross-sell.

I think we have seen an uplift -- looking historically, there has definitely been an uplift in broadband data activity in home, primarily as a result of the VoIP offering. But I think we have also found that digital customers who enjoy the digital product are also more likely to become triple play customers. So it feeds on itself and we'll try to break some of that out in more detail for you in the next quarter.

Thanks so much. Congratulations.

David Kestenbaum, Morgan Joseph.

A real solid quarter. Can you talk a little bit about the competitive dynamics, how much they've changed now in the Netherlands now with a few private equity owners actually owning now a bigger cable operation than you when you combine them all. And then on the D4A, I guess have you been talking to those private equity shops and do you think they will join along and do a similar service and can you leverage purchasing decisions together possibly? And then do you think there will be any regulatory objection to that deal?

Listen, I think the net outcome for us as a result of those two deals is positive from an industry point of view. Now, we will now have two primary operators focused on the regulatory framework, on changing the perception of cable, on driving our products relative to telco products. So I don't see anything but positive developments coming out of further consolidation of this marketplace. How they will run it, what their individual -- what their business plan looks like, how aggressive they will be on digital, I don't know because we don't have access to that information. But it's nice to know we can call one person who is likely to have perhaps a slightly more progressive and dynamic view of their business opportunities than the prior owners. That has got to be a good thing for us. Obviously, we don't compete with them directly so there won't be any impact on the competitive dynamics, as you say, but there should definitely be a benefit from an industry point of view in terms of elevating cable and its position and posture in the marketplace to both consumers, regulators and vendors or programming and technology. So that seems like a positive. We haven't had any discussions with them about D4A or digital platforms, which you can bet we will, [hosay]. So there will certainly be conversations of those types and it's just a matter of time.

Do you see any regulatory challenges to the two deals?

Our sense of it is that it is likely to be approved, that the market ought to be consolidated and that because it is such a competitive market from the point view of broadband data and now increasingly voice, the regulators feel like they achieved quite a bit. and I don't see them finding a problem with this combination. It certainly wasn't the messaging we were getting as we were looking at the asset. So I don't know why these guys would get a different message.

Okay. Can you tell me what the D4A impact was on the OCF line in the Netherlands this quarter? Do you have that number?

We haven't broken that number out specifically in any quarter in terms of, that I can recall, where we're showing specifically what the D4A costs or revenues are relative to all of Holland. We have had said historically we thought it would have the impact of creating a flat year-over-year operating cash flow result for 2006. I think we continue to maintain that, in local currency, and we're hopeful that as we go through the second half of the year, as the revenue line starts to pick up, we will be able to provide a little more transparency of the total picture. But nothing I think today and I don't think we've provided any detail in the past.

And we will also be coming up against comparisons in the second half of the year, where we had in 2005, significant costs associated with the project before we got rolling. So we will be coming up against those comparisons. And as Mike pointed out, at the same time, we should get a pick up on the revenue line.

Fred [Cuie], Credit Suisse.

Hi there, just a couple of questions. Just on your total number of customer relationships in Europe, they seem to have fallen in most markets and in aggregate they've fallen also. Is that a worrying trend at all? Clearly, you are focusing -- my interpretation of that is that you are focusing much more on the cross-sell as opposed to getting new customers on board. Maybe you could talk around that?

And the second question would be -- my calculations after the French disposal, you are still going to have about EUR1 billion in the UPC system. Is that going to be upstream to pay for your stock tender or is that still going to be left in place in order to look for the new acquisition opportunities? Thanks.

Let me answer the second question first. As you know, as long as we remain below 5 times on a consolidated basis of EBITDA, we have the ability to upstream cash and we certainly reserve the right to do that. As Mika has said, we remain -- we look opportunistically at acquisitions, which might be one use of that cash, but we might just as easily use that cash to repurchase stock, which we still think is very undervalued. So I think as you look at the credit group, you should assume that that cash is being upstreamed although some of it may get recycled back into the equity for acquisitions. I think, did you want to answer the first question, Rick, or have another crack at that?

Yes, I mean I think you are right in this particular quarter, but if you analyze it and I don't know whether you can decipher this from all of the information we provide -- this is Mike by the way -- you will find that most of those customer losses are coming out of the very low end, very price sensitive marketplace. So these are customers typically on the video side who might be spending EUR5, EUR6 or perhaps even less in some markets where they are Lifeline customers. And so we do anticipate that over time, we're going to lose some of those customers to alternative technologies or perhaps in some cases [DTT] or whatever. But our core products and services, meaning voice, data and digital, continue to grow and I don't think we're going to see a continuation of the numbers you saw in this quarter relative to total customers.

Frank Knowles, New Street Research.

Two questions. One is on the last couple of quarters, you've mentioned content as an area where you wanted to focus and we haven't heard anything about that this quarter. I just wonder if that is still an area of focus for you, whether that is somewhere you might want to redeploy some of your excess cash?

And the second question is very specifically on Austria. I just wondered how you felt things were going in Austria. We haven't heard anything about how the Inode acquisition has worked out. Haven't seen really much acceleration on the telephony adds, even though I gather you have already launched the VoIP products. So just an update on Austria would be helpful.

Let me just add one thing to the prior question. As a whole, we added 63,000 customers in the quarter, if you look at it organically. I know our subscriber charts are getting more complex as we buy or sell assets. But if you look to the I think Page 22 of the press release, we added 63,000 total customers, slight loss in Europe but reasonably large gains in Japan and Chile and Australia on a total customer basis. And again, the losses in Europe would be attributable in certain markets to the lower end customer base that aren't providing much in the way of gross margin anyway.

In terms of the content question and then I will let Gene describe Inode, our content strategy remains the same. We continue to look at content opportunities that specifically drive our digital or video initiatives. And so if you look at Holland or central and eastern Europe or Japan, you'll find that the investments we're making in programming are typically having a direct result or benefit to our video business. We will continue to do that.

That means that other than perhaps our Zone Vision investment and channels, Reality and Extreme, going to be focused on specific market opportunities rather than broader regional or global channel opportunities. So it may not (technical difficulty) as sexy or as big or as impactful as you might think they should be, but we think it's smart to put our money in the markets where we have a significant investment in the distribution platform and we're going to continue to do that. On the Austrian Inode acquisition, do you want to --?

I can simply say that the revenue and operating cash flow ending June was consistent (technical difficulty) business plan; in fact we finished ahead of plan. CapEx spend was actually under and (technical difficulty) again we're pretty much on track. It's been a relatively easy integration (technical difficulty) to the Austrian organization. This ticks off our first nationwide campaign and we think that Inode is going to give a boost (technical difficulty) in Austria, where we had a stagnating business. And (technical difficulty) we're looking for good results coming out of the Inode acquisition. And as I said, it's been a relatively simple roll out.

So sorry, you think that you're pretty happy then this will restart growth and so it will cease to be a stagnating operation in the second half?

Yes, we have already seen signs of that.

Ben Swinburne, Morgan Stanley.

I wanted to dive in a little more into the western European markets. It looked like Cablecom had a very strong quarter, both revenue growth and also margins, looked like they expanded. You guys, I think, moved the overhead numbers around again this quarter. But if I adjusted, looks like margins went up nicely in Switzerland but in the Netherlands and in Austria, looks like margins ticked down. And you cited in the Q for Netherlands and Austria, I think revenue growth in the kind of 2 to 3% range if we ex out Inode year-over-year on an organic FX rebased basis, citing video revenues in the Netherlands being down and voice revenues in Austria being down.

Mike, I am wondering what you think -- first if you guys give us a little color on the margin trends in those three countries. And then as you look out maybe over a three-year period, what should we think about the organic top-line growth opportunities are in Austria, Netherlands and Switzerland? Because it seems like with multiples where they are, particularly in the Netherlands, if it's a mid single digit growth business, with sort of flat maybe slightly expanding margins at 12 times, I'm not as smart as the Smart Money, but that seems like a great trade for you guys given where your stock is at. Thanks.

Good question, or good series of questions, Ben. Let me start with the big one. We obviously aren't going to give people forecasts for our western European revenue or cash flow over the next several years but I will say this, it is not single digit. It is double-digit. And it is double-digit because we see continued penetration of voice and data, in particular, in markets where we are just getting rolling on the VoIP side. We see our video business transforming itself from a mature, low-revenue analog business to a more vibrant revenue growing digital business. And so I do believe that over the next three years in any of the western European markets we operate in, you will see a double-digit revenue growth line. Now that may or may not explain the 12 multiple because it's all about cash flows and you have to make your own assumptions about that. But clearly, we think margins in all of our markets, in all of our operations are going to continue to pick up.

Our business has been scaling over the last 24 months each quarter. It will continue to scale over the next 24 months in each quarter. You should see, other than small aberrations that may occur, you should see continued margin improvement in these businesses. Each of the products that we're selling are high gross margin products. Data is nearly 100%. Voice is, depending on the marketplace, mid 60s to mid 70s and even digital added into analog for total video margins are pretty high. So we are bullish on western Europe as a whole and quite frankly, would have paid pretty high prices for those businesses, just not as high as ultimately they went for. So we think western European cash flow and western European operations are great asset to own.

In terms of the individual markets, Cablecom had simply been a stellar performer. It has done everything we have asked it to do since we bought it and more. I'll let Gene talk to you specifically about some of the drivers of growth there but 30% operating cash flow growth year over year certainly should give investors comfort, who nine months ago thought we were making a big mistake. So why don't I let Gene provide a little more color on Cablecom.

First of all, just to add what Mike said, at the end of the second quarter, we registered better than a 10% I think it was 10.7% year-on-year revenue growth coming out of western Europe. 37% or 38% year-on-year growth coming out of Cablecom itself.

The Netherlands, even though it was negative year on year (technical difficulty) roll out it was more than 6 million better than budget.

Speaking more specifically to Switzerland, Switzerland ended the second quarter almost 5 million better in OCF. And I think the primary drivers of that is number one, CATV rate increase, which was significant. And I would suggest that there is still room for continuing to move those rates, looking forward to 2007.

And also we have been able to realize a lot of efficiencies coming out of the restructuring. I think that at the end of the second quarter, we were almost 90 [FTDs] below budget and we have substantially reduced the headcount from acquiring those systems.

So overall, we have been able to achieve a high degree of efficiency. That combined with the rate increase in Switzerland and the strong data sales is, I think, what is responsible for that performance.

And I think in the Netherlands, you will see us rebound next year as we get more and more digital deployed and we reduced our operating expenses accordingly.

Gene, do you have a sense for the voice business in Austria turning back around? I think you guys said it was down 7% year on year. Is that just expanding the VoIP footprint and driving the penetration rates going forward?

I think the real opportunity in Austria with respect to increased voice penetration is in our off footprint area through Inode. As you know, we have fairly high penetration in our existing footprint, both with data and telephony. So we're looking to Inode to give us the uplift there.

Adam Spielman, PPM America.

I just had a couple of quick questions. I was trying to reconcile the growth rates that you showed on Slide I think 19 versus 15. I think both of those are the European operations. One, you showed the banker, but there was a pretty big difference in the OCF growth?

That has to do with Switzerland is not in the (multiple speakers) group. And obviously delivered a very strong quarter so that's the difference there.

Got it, okay. And then again, the Czech acquisition you're talking about it being almost 10 times on '07 EBITDA. It seems like -- I guess I'm just curious as to the quality of the asset or the growth characteristics that would get you to pay kind of that almost double-digit forward multiple.

Yes, it's a big number. We agree with that. It was a competitive auction process with several rounds of bidding, but it was our view that in this market where we own the largest cable operator and where we have seen fantastic growth, world-class kind of growth on the revenue and OCF line, it made sense to stretch a bit to own it. We are going to fund it with about 5 times bank debt out of the bank group. And I will tell you that even leveraged modestly, and that is modest leverage these days, since private equity guys are leveraging assets anywhere from 7 to 9 times, even with that modest leverage, it is a mid-20s IRR for us.

So it felt like the right thing to do in a core region where we see perhaps additional opportunities coming down the pipeline and where you can look out in the first 12 months and see cash flow growth that is high 20s, maybe even 30%. You just don't see those types of opportunities every day and over a three to four-year timeframe, while it won't be quite as robust in 2007, it will certainly be well above the average growth rate we've seen in other markets.

So this was the sort of asset we felt it made sense to stretch for. Sort of asset we can integrate into our existing operation very quickly, fund right off the balance sheet and will be accretive to any analyst expectation or guidance out there because of the growth profile.

It's worth saying also Czech rates are very low. As you may know, they are below euro rates in terms of the cost of capital. This is a relatively low risk economy.

You mean interest rates?

Yes.

Brian [Dembrosia], [Ramos] Capital.

Hey, guys, just a few questions. First, where do you see the Company in five years? How much equity shrinking capacity do you think you still have and what is your reason for the discrepancy between current, public and private markets [EB to] EBITDA valuations?

Well let me start with the last one. The discrepancy between private values and public values, which today I don't want to say it's at an all-time high but it's at least 4 to 5 turns of cash flow depending on the asset and the market and the buyer, can be -- is hard to explain. Let me start with that.

But one explanation would certainly seem to be the robust financial markets. By that I mean the average private equity investor can acquire a nice cash flow producing cable asset utilizing up to 8 or 9 times debt. When you shrink the equity check that considerably, you don't need to see the kind of growth that you might otherwise want to see to pay 12 times cash flow.

Now, that, in our view, may not last. Those types of markets typically don't last but it certainly has created a robust M&A environment around cable and for the foreseeable future, seems to be where values reside.

We have said before in that context, we are sellers of certain assets and buyers of others, where we can make strategic and financial sense of it. But regardless of whether we are buyers or sellers, our cash flow is undervalued, simply put. Because we have yet to see an asset on the market that is better than anything we already own, quite frankly.

And so, we are frustrated by it but it's our job to continue to try to shrink that gap by demonstrating to investors and convincing investors that the rate of return they will derive owning our stock is as good or better at 4 or 5 times leverage and a hack of a lot riskier than perhaps private equity investors are trying to realize in individual single market transactions.

In terms of shrinking our equity, we have a capacity today to continue to do that. We are not telling you today we will do that because we have to be very careful with this tender offer out there in terms of expressing any future intentions. So I can't tell you what we will continue to do. But if you look at our business, it is a cash machine. We've dividended up to the parent -- you know, I said this on the last call on a pro forma for France, I bet it's even higher -- but over $3 billion of cash in the last 12 months. And as we continue to grow cash flow at the rates that we forecast, we should be able to continue to dividend cash up to the parent as a result of refinancings or recaps or maintaining leverage at 5 times in our core operating subsidiaries.

So our ability to generate cash to the parent and utilize that cash to shrink equity is significant and will be there for some period of time. And if the value gap persists, we will have to look very closely at continuing that initiative. But I can't tell you today that we will or won't.

Over five years, if we did that, there wouldn't be much equity left. So, we obviously believe that our long-term prospects are significant and favorable. Especially in relation to where we trade today in the marketplace.

As we step back and look at five years, the only thing we can forecast is our current business opportunity and our current business platform. As we do that, organically, we think there's plenty of growth in the businesses that we own today, as you would expect? And we remain very confident about the competitive environment, our ability to execute in that competitive environment.

As I said at the outset, the cloud seems to be lifting a bit here in the U.S. around Comcast's and Time Warner and other cable operators' ability to deliver the numbers. And if I am an investor at the end of the day, that's all I'm really interested in; can you deliver the numbers? Because the rest of it is smoke and mirrors or crystal ball stuff. All you can really hang your hat on is what you're doing this quarter and what people think you're going to do next quarter and we haven't seen this kind of growth out of our business ever. So we're confident that we can continue to have great operating results. We're confident that cable is the winner in this particular competitive environment, almost in every market we operate in. And we're confident that over the next five years, well, three to five years, pick a timeframe, we don't see anything on the horizon -- telcos, satellite, DTT or otherwise that is going to fundamentally change the trend you're seeing today. That's our view of the business.

I think with that, operator, we are done. So we thank you for getting on the call today and as usual we look forward to talking to you next quarter. So, thanks.

Ladies and gentlemen, that does conclude today's call. We thank you for your participation and you may disconnect at this time.