Liberty Global Ltd (LBTYK) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's investor call. This call and the associated webcast are the property of Liberty Global, and any redistribution, retransmission or rebroadcast of this call or webcast in any form without the express written consent of Liberty Global is strictly prohibited. (OPERATOR INSTRUCTIONS).

As a reminder, this conference call is being recorded on this day, May 8, 2008. I would now like to turn the conference over to Mr. Mike Fries, President and CEO of Liberty Global. Please go ahead, sir.

Great and welcome everybody to our first-quarter call. Let me just take a moment to introduce who is on here with us. We have Bernie Dvorak and Charlie Bracken, our Co-CFOs, of course; Gene Musselman, President of our UPC division; we have got Miranda Curtis and Graham Hollis who oversee Japan and Mauricio Ramos, President of VTR in Chile. We also have on the call folks you might hear from Rick Westerman, who you all know, Balan Nair, our CTO, and Shane O'Neill, Chief of Strategy.

So with that, I think I will turn it back to you operator, but first let me remind you that the slides we will speak from today are online and hopefully easily accessible to you. So while we're going through the lengthy Safe Harbor statement, you might want to track those down. Operator?

Thank you so much, sir. Page two of the slides details the Company's Safe Harbor statement regarding forward-looking statements. Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including with respect to Liberty Global's outlook, future growth prospects and rollout of advanced services; its expectations regarding competition and M&A activity and other 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 those detailed from time to time in Liberty Global's filings with the Securities and Exchange Commission, including its most recently filed Form 10-K and 10-Q. Liberty Global disclaims any obligation to update or revise any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based.

I would now like to turn the call back over to Mr. Mike Fries.

Thanks, and yes, we are big fans of consistency here. So the agenda will be that I will make some opening remarks, and then we will hear from Gene who will spend a couple of minutes on Europe, Miranda will take us through a slide on Japan, Mauricio will take us through a slide on Chile, and then Bernie Dvorak will walk through the financials, and then we will get your questions, hoping this will take about an hour.

So I'm on slide four, which provides some highlights. And I think as you work through the results here, you will find that this was a pretty strong operating quarter for us across most of our global footprint with a few markets which we will discuss impacting more heavily some of the headline figures in particular revenue, and we will talk a lot about that today.

What should jump out at you, of course, is our operating cash flow performance, which exceeded $1.1 billion for the quarter or about $4.4 billion on an annualized basis. This represents 14% rebased growth as we typically calculate and 34% reported growth, and it might be worth pointing out that we do continue to benefit from strong local currencies versus the dollar here with most of our main currencies up 10% to 15% over the last 12 months.

OCF margins are now over 42%. That is up nearly 300 basis points over last year, so we are achieving on our profitability goals, or I might even say overachieving on our profitability goals. Let me just assure you that is not coming from marketing and sales. It is mostly efficiencies and smart management of our costs, which we continue to I think do a very good job of.

There's really not much to report on the M&A front. But we did close on a few small tuck-in acquisitions in Japan and Europe totaling about 62,000 RGUs. I'm not going to dwell on it today. I'm happy to take questions I suppose, but there are small signs that the second half of the year could be more active for us both in the capital markets and in the consolidation pipeline.

In the meantime we are mostly focused on our own stock, not surprisingly. We have already purchased 7% of the stock year-to-date over $900 million in the first four months, and you have seen I'm sure that we announced another $500 million top-up to our prior authorization, which brings our current buyback availability to $650 million.

And if you have been keeping track, which perhaps some of you have, our running total is now over 30% of our equity repurchase since we started or about $4.5 billion. In my opinion, that should tell you really all you need to know about how we view our business and growth opportunity and the confidence we have in the broader strategic and financial plan that we are executing.

Let me turn to slide five. It is going to show you some headline numbers for the first quarter compared to last year. I will just pick out a few here since you've probably run through these in the press release already. But RGUs at 24.4 million, representing over 16.1 million unique customer relationships.

Just a quick historical anecdote. When we started life as LGI almost three years ago, those numbers stood at 12.2 million and 9.2 million. So through organic growth and some accretive acquisitions, we have doubled the subscribers and I think definitely scaled this platform.

Net adds were 302,000. That is down a bit from last year, but really not far off our average growth over the last five quarters, and there's some positive operational news in those numbers which I will touch on in a second.

I have already talked about cash flow margins, so I will make just a couple of comments on revenue, which was $2.6 billion in the quarter, up 24% on a reported basis, and again that is driven largely by currencies. And unlike perhaps many of our multinational peers, we do strip out currency for you and show rebased growth, which was 6% in the quarter.

If you turn to the next slide, slide six, I think you will see a breakdown of that revenue growth by region. I think the clear message here is that most of our operations -- Japan, Chile, Australia, even Telenet -- are largely in line with our full-year guidance of 7% to 9%. The exception this quarter is UPC and Europe. I will dig into that a bit in a slide or two as will Gene in his remarks.

I think with respect to guidance, we would simply say that we feel very good about operating cash flow, but perhaps it is prudent to flag some risk to the top end of our revenue range. However, I will tell you that we on this call have not conceded that point internally.

One of the reasons is illustrated well on slide six, Subscriber Growth Trends, which shows those trends over the last five quarters. You can see there are net adds of 302,000 in the top left charts there and how that compares to prior periods. It is not far off our average actually, and there is obviously more to this story.

If you start at the bottom of the page for a second with voice and data net adds laid out for the last five quarters, I think you will see that our results with these core products taking into consideration seasonality have been pretty consistent. We added 170,000 telephony RGUs -- that is actually higher than the same period last year -- and 182,000 broadband subs, which is close to the average for prior quarters. The punchline is that we continue to realize very strong volume growth on our high margin voice and data services.

Now at the top right, you will see our video results, and that is perhaps the story line here despite adding nearly 50% more digital subs in the quarter over last year, which is just over 290,000. We continue to experience incremental video churn in certain European markets, really primarily among our low-end TV subscribers. We will provide some color on that in a second. But I will say if it were not for those video losses, obviously total net adds would have matched last year.

And I will recap on slide eight before handing it over to Gene here. The goal of this slide is just to give you I think some very good context and background to our operating results. On the positive side, we're adding advanced services, so digital, voice and data, at a faster clip. 652,000 advanced services were added this quarter. That is up 10% from last year and above our average over the last five quarters.

Now, as a result and as you would expect, the ARPU we're pulling out of each household is growing around 6%, which is around what we had estimated. Second, digital cable, which is now launched everywhere as of this month, is really starting to make a difference. With 3.7 million subscribers, we are only penetrated 27%, and that reflects a range of 70% in Japan, which is our most mature market and 0 in Poland where we just launched this week. So from our point of view, there's lots of room for growth here. And I think encouragingly the killer applications of DVRs and VOD and even HD are gaining traction faster than we anticipated, helping to drive digital video ARPUs up typically 25 to 50%, and I will tell you even higher in many cases.

On the flip side, our challenges continue to fall in two main areas. First of all, voice and data ARPUs, especially in Europe, remain under pressure as we penetrate more mature markets and fend off competition from DSL, but this should not be a surprise to anyone. We flagged this for years now.

Our plan here is to continue to simplify and refine our bundles, and Gene might speak to that. But I think, also importantly, to accelerate DOCSIS 3.0, which we think is a game-changed for us in this market, especially in Europe, where our competitors are bandwidth constrained with ADSL2+ or even VDSL.

Second, as I indicated previously, despite video growth in Chile, in Australia and Japan, we're seeing higher churn among some of our more vulnerable low-end analog customers in Europe, and again this was not unforeseen. We have been transparent about this for some time. But when you sift through the numbers, you'll find that nearly all of those 57,000 sublosses could be attributed to three markets, Austria, Holland and Czech Republic, and of course, we operate in 15 countries, each of which encounters some unique challenges in the quarter.

So the game plan for us across Europe, which responds to these two points, I think is very clear. We're going to let digital do its thing -- simplify the bundles and employ some retention strategies on a market by market basis. And while it is still early days, I will simply say as a case in point, if you look at Romania, we have positive video growth there for the first time in five quarters. So these strategies work, they can and do work, and we are implementing them where we need to.

With that, I will turn it over to Gene with some comments in Europe. Gene?

Alright. Thank you, Mike. For the next few minutes, I would like to specifically focus on UPC and our results for Q1. I think as you are all aware, our growth is about selling advanced services, what we call triple-play, broadband, voice and digital TV. And if you take a look at the chart on the right, it indicates that we had a good quarter on that front with 319,000 net adds. This was above our average, as Mike pointed out, for the last five quarters and up 12% year on year.

Digital was a major contributor to this growth, and I will talk about it on the next slide. Also, voice and data subscribers continued to grow with 205,000 net adds in the quarter, largely driven by improved triple-play bundling.

On the broadband front, we continued to battle DSL, but we still have the speed and bandwidth advantage in nearly all of our markets with over 20 to 25 megabit products. This is a key strength, noting that speed remains the key driver in the push for broadband market share in Europe.

In order to maintain this lead, we're on a fast-track for deployment of EuroDOCSIS 3.0. In the Netherlands we just completed 120 megabit data trial, using 3.0 infrastructure with very positive results, and we plan to introduce 3.0 based mega-speed products starting in one Dutch city by the middle of July, followed by selected cities throughout the balance of the year.

Following the Netherlands, we will expand our 3.0 deployments across all markets in '09. Targeting the hotspots first, these deployments are expected to be within our CapEx framework and our current long-range plan.

Finally, we feel there is a window of opportunity to exploit due to the limited VDSL or fiber competition that we have in our markets at the present. With deployment of EuroDOCSIS 3.0, we should be able to maintain our speed leadership, as well as capture additional market share going forward.

Now let me turn for a minute to OCF, which, as you can see, was up 32% this quarter and 13% rebased. In addition, OCF margins remain strong, increasing to 46%.

Here I think it is worth echoing Mike's comments that we are not sacrificing marketing spend and growth opportunities for cost savings. The best evidence of this are total our gross sales figures. Q1 '08 results were more than 80,000 above Q1 '07 and actually about 60,000 above our current budget. Despite these developments, analog churn remains an issue in a few markets like the Netherlands, Austria and Czech Republic where competitors are principally bottom fishing for price-sensitive customers.

In addition, we're experiencing voice and data ARPU compression across a number of our markets or particularly those markets due to the competition. Research suggests that the majority of the analog churners are single play customers, and as such, we have put into place active retention programs to reduce the churn, along with new triple-play offers, including digital TV. These programs, as Mike pointed out, are working in Romania, and we have added -- and as he also indicated, we added RGUs in the first quarter compared to a loss last year.

To sum things up, we maintained solid operating cash flow growth in Q1, despite a very highly competitive environment, and I feel confident about the tactics and tools that we have in place to meet the competition going forward.

Turning to the next slide, digital cable update, here you will note that digital cable has become one of our key growth engines with revenue up 35% year on year. As of this week, we launched Poland, which is our last market to launch, and this is a key milestone for UPC. At the top right of the chart, you can see evidence of our digital ARPU growth, which totaled nearly 1.4 million digital subs at the end of March. Stimulating this growth has been the rollout in advantaged features such as DVR, VOD and HDTV in seven out of 10 of our markets.

For example, in Switzerland roughly 50% of all of our sales include a DVR at this point, and nearly 40% of digital subs in the Netherlands have used VOD at least once. And better yet we're starting to see high-definition TV pickup in our markets as a result of better content. These features really drive demand in ARPU, perhaps as much or more as increased content offerings and offer a meaningful competitive advantage to us.

NL is a good case in point of what can be accomplished with the digital platform. Today approximately two-thirds of all digital customers take an expanded tier or service above the basic package. This is driving digital ARPU growth, which at $10 or EUR10, I should say, is 2.5 times the amount generated just 15 months ago. Also, NL has been successful in significantly reducing digital churn and driving penetration to 27%. To further increase penetration and retain customers, NL continues to launch new services with the first HD DVR rolling out in this market this week to be followed with four new HDTV packs and HD content for VOD this summer. The HD DVR launch is in cooperation with Philips who will sell HD, the standard HD box and the HD DVR boxes at retail, alongside a UPC HDTV monthly subscription. We think it is key to be in the retail market, and for the first time, when someone buys a new HD flat ready screen, we will be there.

Also important is the upcoming HDTV broadcast of the European soccer championships and the Beijing Olympics. These events should add momentum and drive continued uptake of our digital offerings.

Overall NL demonstrates the strength of digital cable as an enabler to sell advanced services and to build incremental ARPU. Our plan going forward is to leverage what we have learned in the Netherlands across all our markets. We think digital is truly a significant growth opportunity for UPC.

And with that said, I will turn it over to Mauricio for an update on Chile.

Thank you, Gene. Q1 was another good quarter for us at VTR with good results across all our key metrics. We added 68,000 value-added services, sustained rebased revenue growth of 10%, and a 19% rebased OCF growth against the first quarter of 2007.

As in prior quarters, our new gains in topline growth, in addition to our sustained cost controls, continue to provide the benefits of scale to the VTR OCF line. This has led to an OCF conversion ratio of 71% for the first quarter. That is roughly the same level as the conversion ratio we obtained for all of 2007, and we think it is a good ratio. As revenue grows, we contained rather than cut back on SG&A expenses, and that is basically how we're driving OCF margins north of 40% with a 300 basis points gain over the first quarter of 2007 in this quarter.

As in prior calls, I would also like to briefly provide an update on the status of the key strategic initiatives that are driving these results. Our binding strategy, as you know, remains a key engine of our RGU growth. During the first quarter, we reached 1 million customers, and some time in May we expect to reach 2 million RGUs with 40% of our customer base now taking free services from us. All of these are, of course, important milestones.

With regards to our bundling strategy, however, it is important to note that we also continue to market our flagship triple-play product, of course, but are now placing emphasis on the bundle of Internet and telephony as that is where the highest growth resides today.

Our digital strategy seems to be working well as well and particularly the decision we took at the end of last year to include a digital box with all-new triple-play sales. As a result, digital penetration of our video subscriber base is now 26%, and we expect that number to continue to grow steadily.

In March, as some of you may be aware, we increased broadband speeds to our entire subscriber base, forcing our competitors to follow. As a result, we gained further brand and customer recognition and, of course, first mover advanced. During the quarter, in fact, we continue to grow strongly in Internet subscribers, whereas our main competitors gain remained flat for the quarter.

So it was overall a very good quarter for VTR, and we are, of course, proud of that here, particularly in what is an increasingly competitive marketplace. Our strategy for the rest of the year will continue to be focused on digital migration, targeted bundling and reaping the benefits of scale. That drives high cash conversion ratios on our revenue growth and, as a result, sustains this high OCF growth.

And with that, I will turn it over to Miranda for an update on Japan.

Thank you, Mauricio. J-COM has turned in a strong and steady first quarter, with all line items above or very close to our expectations. They are ahead of last year, and churn continues to decline.

As Mike mentioned, digital penetration is now at 70%, and J-COM continues to move steadily toward full digitalization with an additional boost expected this summer from the Beijing Olympics.

Meantime 160 meg is now a proven growth engine for J-COM, and they are preparing to roll it out nationwide. Gross adds are demonstrably stronger in areas where 169 has been rolled out with almost 30,160 meg subscribers by the end of the first quarter.

What is also interesting to note is that approximately 40% of the new 160 meg customers in the Kansai area are churning off fiber to the home and on to cable. The growth so far has been achieved on the basis of the pre-DOCSIS modems, but the full national rollout of DOCSIS 3.0 modems began in the last few weeks. There have been no technical problems whatsoever, and several thousand orders have already been taken.

And in parallel with that process, J-COM management is working on defining the pricings of their midlevel data peers and bundles to preempt competition in that area.

On the video competition front, overall growth in Japanese market channel television remains relatively flat. While J-COM continues to deliver steady growth, DTH shows a net decline. IPTV remains anemic, and growth in fiber-to-the-home appears to have peaked.

On M&A J-COM continues the steady process of rolling out smaller operators, particularly in the Kansai region where this quarter the acquisition of Kyoto and Kobe added almost 40,000 subscribers.

J-COM management is highly focused on cost controls, and it has delivered a 30% increase in OCF against first '07 at 11% rebased. Integration of the JTV operation is now complete with further streamlining of the channel lineup still to come.

The JimJam Channel in partnership with NHK launched successfully last month, and discussions continue about other content transactions to reinforce the J-COM lineup. It is worth noting that J-COM now carries 24 high-definition channels, which accounts for 26% of their total lineup.

On the sales side, new sales channels such as J-COM branded kiosks and shops are helping to sustain the renewed growth. The sales and marketing team remains focused on high ARPU value-added services and bundles, particularly the 160 meg, the high-definition channels and the high-definition DVR.

Meantime, J-COM's recent announcement that it will pay a dividend for the first time, that is JPY500 in semi-annual installments, plus a special dividend of JPY250, has helped to sustain the J-COM share price.

And with that, I will hand you over to Bernie Dvorak to take you through the financial results.

Thanks, Miranda. If you turn to slide 14, it shows our financial highlights for the quarter, and you can see revenue for the quarter was $2.6 billion, an increase of 24% over Q1 '07 on a reported basis. The increase was driven in large part due to the strengthening of the local currencies that we operate in against the US dollar. In fact, the FX impact accounted for 16% of the 24% overall increase in revenues.

The balance of the revenue growth was mostly organic, representing rebased revenue growth of 6% with a minor boost from fill-in acquisitions that Mike mentioned earlier.

OCF increased to $1.1 billion, an increase of 34% over the prior year, and more than half of that growth or approximately 18% came from currency movements. Organic growth or rebased OCF increased 14% in the first quarter.

Turning to the next slide, we will get into more revenue and OCF detail by region. Slide 15 highlights our reported results by region and our rebased revenue and OCF growth rates. Rebased growth rates eliminate FX movements and neutralize the impact of acquisitions.

On a consolidated basis, rebased revenue grew 6% overall, principally driven by volume. In terms of specific markets, we had good strong performances in Poland, Australia and Chile with rebased revenue growth rates of 19, 14 and 10%. In Europe UPC grew revenues to $1.1 billion, representing 3% rebased growth. Removing Austria, Hungary and Romania, which were discussed earlier by Gene, the UPC revenue growth rate would have been 5%. On a consolidated basis, removing those same three properties would have resulted in revenue growth of 7%.

Telenet increased revenue to $374 million, representing rebased growth of 9%. J-COM had a rebased growth of 7%, reaching $675 million in the first quarter. And lastly, VTR delivered revenue growth of 10%, reaching $187 million of revenue in the first quarter, and continues to be a great performer.

OCF grew to $1.1 billion in the quarter, reflecting a 14% rebased growth rate. Anchoring this growth was Australia, Chile, Ireland, Netherlands and Poland with each of those markets growing in excess of 15%. At UPC rebased OCF growth was 13% to $514 million. Again, if you remove the three most challenging markets in Europe would result in 20% OCF growth at UPC and 17% for LGI as a whole. Telenet and J-COM each turned in 11 to 12% rebased OCF growth in the first quarter, while VTR came in at approximately 19%. So overall we are quite pleased with the OCF growth story.

Turn to slide 16, we achieved a 42.2% OCF margin in the quarter. This represents a 300 basis point improvement over both the fourth quarter of '07 and the first quarter of '07. We realized margin improvements in 14 of our 15 countries, realizing economies of scale across the board. A regional perspective would show that year-on-year increase of 410 basis points at UPC, bringing OCF margin to almost 46% and a 300 basis point improvement of VTR finishing the quarter at 40.5.

Key drivers of our improved OCF margin were margin improvements in both operating expenses and our G&A, including a rigorous focus on controlling corporate costs. In the operating expense category, we are seeing scaled benefits in Europe from network operations and from billing and collection as we continue to rollout our Darby triple-play billing platform.

It is also important to recognize that our margin improvement is not coming just from the cost side. We are also realizing margin benefits as we scale our new service deployments, particularly in Central and Eastern Europe where we are still mostly at single digit penetrations of VoIP and digital TV.

Another area where we excel is in our ability to efficiently transfer topline growth into OCF as Mauricio touched on. This can be seen in the conversion ratio, which shows that 89% of intermetal revenue growth is dropping down to OCF. We view this as best-in-class among cable operators, and it is certainly an important factor that is helping to counterbalance the slowing revenue growth that we are seeing in most of our markets.

Slide 17 shows our free cash flow and CapEx results. First, free cash flow was $128 million in the first quarter. The breakdown of this reflects cash from operations of $648 million, an increase of $85 million from the first quarter of last year, while CapEx was $520 million in Q1 '08 compared to $505 million last year, resulting in a free cash flow increase of $70 million or more than double last year's first-quarter free cash flow.

FX, of course, was a positive contributor to that number. Although $128 million might seem like a small absolute number, it is important to note that our cash interest for bank and bond payments and cash payments for taxes primarily at J-COM are typically highest in the first and third quarters of the year. For reference total outflow for cash interest and taxes was $544 million in Q1 '08, representing $473 million in interest and $71 million in tax compared to a total of $245 million last year in the first quarter.

On the right side of the slide, we will look at capital spend in more detail. CapEx equaled 20% of sales in Q1 compared to 24% last year. In absolute terms, CapEx increased $15 million on a reported basis. However, adjusting for currency movements, it was actually down year-over-year. We would expect CapEx to be modestly higher as a percent of sales as you look to the rest of the year compared to the first-quarter ratio of 20%.

Our variable CapEx, which we consider to be CPE and scalable infrastructure, represented 57% of our total spend in Q1, and of the balance, 22% was on network upgrades and line extensions, mainly in Eastern Europe, and 20% represented support capital.

Slide 18 is a snapshot of the balance sheet at March 31. Total debt is $19.5 billion, an increase from $18.4 billion at December 31. The increase is due principally to FX as there were no material financings in the first quarter. Our blended cost of debt after impact of swaps was just below 6% at the end of the quarter, and as we have previously indicated, we are well hedged on currencies and interest rates, and we have very limited debt maturities between now and 2012.

At quarter end, we had cash of $1.85 billion, which includes $485 million of restricted cash. The decrease of $660 million from December 31st is due mainly to stock buybacks that we have talked about a couple of times now. Our gross leverage was 4.4 at March 31, a reduction from 4.8 times a quarter ago. This is all due to the OCF growth we generated in the first quarter. I think that reduction displays how dramatically our leverage shrinks in the absence of any new debt financings.

So, in summary, we believe that margin growth and expansion is ahead of our plan. We continue to see positive subscriber trends in advanced services. As Mike and Gene discussed, we are facing the competitive challenges head-on, and we have ample liquidity to continue our stock buyback and pursue future M&A.

So with that, operator, I would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Jeff Wlodarczak, Wachovia.

Revenue growth has slowed for four consecutive quarters to 6% in the first quarter. It is clearly getting more competitive in certain markets.

Just to make sure I understand, looking at the balance of '08, is it mainly sort of digital DVR, HD VOD that gives you comfort you can see an acceleration towards the 7% to 9% full-year guidance?

And also, do you expect to see an acceleration in Western European RGUs off the plus 5 in Q1, and is that also very reliant on sort of advanced TV services, or is that a bundling price combo?

I will take a quick crack at that. I think we have addressed in the call here the key variables impacting revenue growth. And those are principally expected ARPU compression in voice and data as we bundle aggressively, as we continue to penetrate those markets, and as frankly some of the voice usage tapers off a bit, which I think everybody in our business is feeling. So to some extent it is an ARPU issue, and to some extent it is a volume issue principally in the low-end analog TV business.

So our game plan, if you look at those two variables, is to continue to drive volume in voice and data, and as a result of improving our product portfolio, as a result of maintaining what we think is a huge speed advantage in these markets and taking advantage of the fact that Europeans consume more bandwidth than US consumers by a reasonably large margin, we think the attractiveness of a 3.0 product whether you start at 50 megabits or higher is going to be a game changer, as I said, and allow us to really make an impact.

I will also say that, as we look at individual markets, the percentage of customers that we have on the old, classic, expensive and relatively slow tiers are diminishing rapidly. So to some extent the change in mix of our customers in broadband is nearing the end . In Holland, for example, I believe it is now less than 10% of our customers would be in that category of expensive classic products.

So the market is evolving rapidly, and as that happens, I think you start to near a point where a natural bottom evolves in ARPUs for data in particular.

And the last thing I would say is, you know, there are some specific impacts on revenue this year. Romania, despite the improvement in video growth and RGU growth, still has what we would describe as a hangover effect from the impacts of 2007, which we talked about quite a bit.

So because we have sort of rebased the product pricing, we are going to see some unfavorable results there. In another markets like Hungary and Austria, there are unique factors that I can assure you, Gene and team, are focused on immediately.

So, as I said, we're not changing guidance here on revenue, and certainly as a management team, we're committed to fixing the issues as they come up. But the message we hope you get is, it is not a global issue for us. Inevitably when you operate in 15 countries, you're going to have a few countries you have got to spend a little extra time on. And that is what I think we are finding, and as a result, that is what we're spending our efforts, and hopefully those efforts will be favorable for us.

On the Western European RGU front, the biggest impact we can have on Western European RGUs results is to continue to launch digital because we grow voice and data subs very, very nicely. Have positive voice and data results in every market I think with the exception of possibly Austria.

The real name of the game is to let digital do what we know it can do, which is make people fall back in love with TV, reduce that churn figure and drive ARPU. And it is still early days for us. I mean I said that at the outset. I will repeat it. We're 25, 26, 27% penetrated and even lower in Europe, and we now have all products launched on a common platform for the most part, all markets launched on a common platform and the key products making a difference. So we're pretty encouraged by what we will see in the second half of this year, the last two-thirds of the year, especially from those digital

If I can ask one follow-up, what percent of your markets are going to be DOCSIS 3.0 capable at the end of '08 and then versus the end of '09?

Well, I will let Gene or Balan take a crack at that. We think by the end of '09 we should have DOCSIS 3.0 rolled out virtually everywhere. But we're going to be careful and deliberate. We will start in Holland we believe this quarter, but remember for us the DOCSIS 3.0 issue is a lot less about technology. We think it works. Vendors are supporting us. So far where we have trialed it and/or rolled it out, it seems to scale CPE and pricing, PP pricing is coming down. For us it is much as anything, Jeff, a business model question. What are we going to charge for it? How is it going to impact the tiers we already have in the marketplace? How do we make a meaningful difference in market share without disrupting the general ARPU environment?

So to me the bigger leadtime here is not the technology. I think it is really the business model, but I don't know if, Balan, you want to discuss that quickly?

I would agree with everything you said, Mike. By the end of 2009, we should have most areas covered with DOCSIS 3.0. As you know, we've launched official DOCSIS 3.0 in Japan already in this last couple of weeks. There may be just some small pockets where with some of the Cisco gear that their release would come out with the later part of 2009, the older platforms, the Cisco 7000s, and those may just trail, but the rest of them we should be out there in 2009.

Vijay Jayant, Lehman Brothers.

Mike, just continuing on the same theme, obviously I think containing probably the concern on the stock is that with decelerating revenue growth, can you keep doing obviously 14 to 16% EBITDA growth. So on the basis of that, can you talk about what are the relative margins? Because there is also a mix shift happening from analog to more voice and data, even though there's ARPU pressure on that.

So can you address that? And you also mentioned that you are not under-investing obviously in your spending on SG&A. There is an effectively 800 basis point drop between revenue growth and EBITDA growth. Can you sort of talk about what SG&A on a rebate basis grew, what your other efficiencies sort of declined the other costs? Any color on that will be helpful.

Yes, on the second point, we slice and dice these numbers every month, so we know exactly where we're realizing efficiencies, cutting costs and spending money. And I think to simplify it for you, the most meaningful variable there is sales and marketing costs, and we are not I don't think in any market reducing those costs either as a percent of revenue or in absolute terms. In fact, I think I recall that in Europe alone I think our sales and marketing costs were up something on the order of 15% year-over-year. And, as Gene indicated, we're adding more sales. Our gross sales exceeded last year and exceeded our budget.

So we do not think it is an issue around selling the products, and we think we are investing sufficient capital in marketing the products, designing the products, and getting the products in the field. And, as you look at topline, that should be your main concern. And I can tell you that is not what we're doing.

Where we are scaling is principally on G&A. I think we took a good hard look at how many people we have and how many people it takes to run this business, and we determined that, gee, we can be more efficient here on general and administrative costs. And those costs are typically down year-over-year, possibly flat. But in the third category, which would be more general operating expenses, are perhaps up marginally.

So the savings in G&A are offset by the increase in OpEx, but in sales and marketing, which I would separate from there, we believe we are in most cases spending an appropriate amount of funding.

Now, as the year goes on, we might take some of this cash flow that we are overachieving, if you will, relative to budget and reinvest that in sales and marketing, and we work on these things dynamically. But I do think that the vast majority of our efficiencies are coming from areas that are not revenue -- that do not impact revenue in the way that I think people have expressed a concern. And that is something that we think helps sustain the kind of EBITDA growth we're achieving or operating cash flow growth we're achieving when you look at it.

So what I said, probably the best answer is we said we feel very confident about our operating cash flow guidance of 14 to 16%, and that really reflects how we understand the dynamics in our business. And maybe lastly I will say that we are seeing some gross margin improvement.

One of the things that is flowing through here, but because we do not report it that clearly perhaps, is our gross margins are higher than we expected for a couple of reasons. One, principally as voice usage declines, we are seeing higher margins in our voice product. So generally speaking I think almost everywhere, our voice gross margins are higher than we expected.

So we are making a little bit up -- we're making some of it up in gross margin, better gross margin delivery, and we're making some of it up in looking at those sorts of administrative and general administrative costs that don't allow you or don't impact your ability to drive revenue.

David Joyce, Miller Tabak & Co.

I was wondering if you could maybe give us some color on how the economic situation might be impacting you either on the levels of tiers that consumers might be taking or any deceleration that might be affecting, for example, if people are choosing DSL over cable just to be price-sensitive. And also how the ad revenue has been at Chellomedia?

Well, on the first point, I will let perhaps Shane talk about ad revenue in Chellomedia. I think on the first point we have not seen in particular in Europe meaningful impact from economic factors. I'm not going to lecture on the European economies per se, but I will say that relative to the US there are some big differences. There is not a lot of new home growth, so we're not seeing, quite frankly, a decline in new home growth, and we have never been meaningfully dependent on new home growth. People do not move as frequently in many of these markets, and as you can see, our products are priced reasonably low to begin with. So our average customer is generating $45 a month, not $100.

So, in principle, I think we start with some advantages relative to the US, an economy that is in a different position and dynamics and variables that drive our subscriber base and that are quite different. And some of the economies we are in are growing very well and above average like Central and Eastern Europe and other markets.

And lastly, we are diversified. So what happens in Western Europe does not mean it is happening in Chile, Central and Eastern Europe, Australia and Japan. So the benefit of being geographically diversified is that I think we will if any particular areas become affected, we ought to see that perhaps balance out somewhere else. Do you want to comment on advertising in Chellomedia?

Yes, sure. I would say we have seen some softness in the UK ad market, but the UK business is a relatively small part of the overall Chello business. But I would echo what Mike said. In Central and Eastern Europe, ad growth is still strong, and in many of the markets we are in, the local ad market is a relatively novel market. So it is coming off a low base, but that is obviously still growing strong.

And finally, if I could just ask about the consumer premise equipment, do you have an ability to reuse that across different countries or platforms to make your CapEx more efficient?

Do you want to address that, Balan?

Sure. We're continuing to back the issue of costs with CPE. As a matter of fact, one of things we will be doing in the next 60 days or so is launching a very large auction across all of our properties across Japan, Europe, South America in driving CPE costs even further.

I might add, you know, our digital product, which we commonly refer to as [Deep Ray], that is a common platform, and we utilize basically centralized warehousing and ship anywhere in Europe those boxes. And for all practical purposes, other CPE is usually restricted to one or two vendors, and we are able to rotate or move the equipment from one market to another without any difficulties.

David Kestenbaum, Morgan Joseph.

Looking at the rebased growth slide, it is clear that UPC lagged the other markets. But structurally is there any reason that you could not if you did everything right at UPC closer at least to J-COM? Is that a goal, a realistic goal, for the type of revenue growth or not?

I am not going to give you insight into how we budgeted for the group. But UPC is a reasonably large part of our revenue base. Obviously you can figure that out on your own.

But I do think that certainly it is a major operation impacting our total results, and if we believe that the range or perhaps even the bottom end of the range may be a more reasonable goal, then clearly we think we can improve revenue in that market through the course of the year.

Okay. And then --

By definition, we do believe that -- you know, I think I will say that the second quarter -- you remember, one of things to point out here is we had a very strong first quarter last year. And so some of these numbers are being impacted by an extraordinary first quarter, and we did not have a particularly strong second quarter last year. So growth rates are just that. It is what is the denominator, what is the numerator, and both of those things change through the course of the year, right?

And you said the acquisition opportunities are opening up. Is that globally, or is that just in Europe?

Well, what I said is we're starting to see very small signs that sellers really are starting to consider their options through the course of the next 12 months. And whereas the phone was not ringing at all six months ago, people are starting to have dialogue. So much of that is dependent upon financial markets, and I might just let Charlie spend a minute on where he sees the markets that we principally operate in, and Charlie, if you want to provide us some color on that quickly.

Well, maybe you have seen our bonds, and indeed, our bank debt has started to recover pretty strongly. And, in general, it looks like there is an improving sentiment in the high-yield markets, which is clearly helpful to us if we had to do some acquisitions and also as we try to maintain our four to five times leveraged target. So we're not there yet, but we certainly see better trading in our secondary market, and we are pretty optimistic that the markets may open in the second-half of the year.

So the combination of improving access to capital in the second half of the year and another six months going by for some of these financial owners of assets and the prospect of perhaps a further time holding period, may actually create some opportunity. I don't even know why I threw that into my remarks, except to say that in reality we're seeing some movement that we did not see six months ago.

Frank Knowles, New Street Research.

I have a couple of more detailed questions based on some of the comments Gene made on Europe. First, on the DOCSIS 3.0 rollout, you mentioned that CapEx for that was within your CapEx framework. I just wanted to clarify, is that just the sort of CMTS CapEx for getting the network's DOCSIS 3.0 ready, or does it also include some budgeting for CPE costs and possibly node splitting and so on if you actually get a lot of usage at the higher speed levels?

And then the second point was on high-definition. You mentioned that you're working with Philips high-definition TV sales and that the Olympics might be a driver. But there's a lot of HD sets already out there in Europe, and the World Cup two years ago was supposed to be a big driver, and that really did not happen. So I wonder what has changed to make you think that now is the time that consumers are actually going to be willing to pay more for HD in Europe since they have not so far?

Well, maybe I will take a crack at the HD question, and you guys work on the CapEx, 3.0 question. I think the issue with HD, as I have said in the past, is a bit of a chicken and egg. And the question that should be relevant for us as operators is, when will that tipping point be reached?

One of the things that is undeniable is that I think we heard from -- we had a forum, just an internal forum a couple of weeks back, and we had someone from Sony in there. I believe the numbers he gave were that there should be somewhere in the order of 40 million TV sets sold in the EU this year, and more than 60% of those, the number he was hedging, originally he said it was a higher number, would be HD capable sets.

It is turning in Europe. There's already somewhere on the order of 30 million HD sets, and that is perhaps the most important component of the chicken and egg equation is getting folks to purchase these sets. And then secondly, having operators like us dedicating bandwidth to HD. And what I see more broadly from this view is that more and more broadcasters, more and more programmers and more and more events are starting to become available in HD, and this will feed on itself. This will build.

Where will we hit that true tipping point? To be determined. But the trajectory is undeniable, and that is something we're playing into heavily, especially as to maintain low-end customers from whom, you know, the alternative provider has none of this. So Gene or Balan, do you want to talk about CapEx?

No, but let me just give you an example on the HDTV, though, market-specific where we're working with Philips. HDTV penetration in the Netherlands now is I think around 25, 30%, and the latest forecast that I saw was 40% by the end of the year. So, as Mike indicated, the number of HDTV sets or the penetration is growing rapidly.

In addition to that, it is largely content. For the first time, we're able to get significant content to drive HDTV. For example, in the Netherlands we have Discovery. We have National Geography. We have the History Channel. BBC. Adding [Vume]. MGM. Eurosport. We have our own channel, the film one and sport one available in HD, and in addition to that, we will be broadcasting the summer Olympics. So these are driver channels, if you will.

So in the Netherlands, in particular, we're heavily focused right now on getting a campaign out and really starting to promote HD. And, in addition to that, we have now just introduced the HD DVR in the Netherlands and in the process of rolling it out also in Hungary and Poland. In those markets we're also starting to see the development of a content proposition.

With respect to EuroDOCSIS 3.0, I believe for the most part that we have the CapEx both short-term and long-term fully covered in our budget and our long-range plan. We will be updating it over the next couple months, but that would include the upgrades and the node splitting, the CPE, the full works in order to roll EuroDOCSIS 3.0 out.

And if I can add on that, Gene, on DOCSIS 3.0, I would say that the reason there is no significant capital increases would be a couple of three things.

One, the CMTS, our existing CMTS's, all we are doing is swapping out a couple of cards. So we're not wholesaling replacing a whole bunch of CMTS's out there. The CMTS's we have are primarily fiscal 10-Ks, the (inaudible), and those are fully upgradable.

On the node splits, there is a difference between peak bandwidth and consumer bandwidth. So even though we are increasing the peak bandwidth, the consumption does not necessarily increase as well. And, therefore, just because you are rolling out DOCSIS 3.0, it does not mean you're going to trigger a whole bunch of node splits.

We have already done a lot of node splits over the past several years, so that positions us pretty well at this point in order to fully roll DOCSIS out, as Balan said, without having to do a lot of splitting going forward.

That is really, really helpful. If I could just clarify one thing on the HD. Of all those channels you mentioned in Holland, are all of those being offered essentially free or as bundled in with the basic TV product to people, or are you charging anything extra for any of them?

No, we offer four pacts above -- including the entry-level digital offering. And for HD there is an incremental nine-year-old charge, except for if you purchase the box from Philips, then there is a reduction in those packages by approximately EUR5.

We have time for one more question, Operator.

Gregory Kolb, Janco Partners Inc.

I was just wondering if maybe you could expand a little bit more just on Austria and the Czech Republic and the unique challenges that they were facing.

Well, we think we touched on some of them, and they vary by market. I mean I will let Gene provide the details. In Austria, it is very different than the Czech Republic. In Austria, on the broadband side, we're seeing certainly some impact from mobile data cards, which have been launched by I would say the third or fourth mobile players in the market mostly.

What we would argue is a relatively low speed product of 7 meg that delivers even less than that, but is a having an impact in certain of our markets in particular where we offer off-net DSL and where we might have a slight soft underbelly with more expensive product. But it is something we have addressed, and it is impacting also -- we have also seen some impact in Austria on the B2B side. Some of it systemic; others just underperformance.

So B2B in off-net DSL in my view account for most of the revenue and OCF impact in Austria. The core cable business is performing reasonably well, and the Czech Republic is an inverse problem. We took some rate increases at the beginning of the year, and we held firm on those. So some of the churn we are seeing in the Czech, we are just absorbing here in the first quarter with the real benefit coming from the rate increase and the aggressive rollout of digital.

So in a nutshell I mean, Gene, I don't know if you add anything to that, but that's typically the two big factors there, different in each market but also ones we think we're coping with and understand.

No, not much if you want to go into more detail.

Yes. So I think maybe, operator, I will just wrap it up here, and then you can do your little speech. But from our point of view and as the conclusion slide said, we're hitting our OCF goals or we're exceeding our OCF goals. No question about it. We're not getting there by sacrificing anything that we believe is revenue generating or strategically important to this business. We will assure you of that every quarter if necessary.

Advanced services, which are the bread and butter of our opportunity, digital TV in particular, but voice and data, those units are moving. So the volume side of our business in the critical advanced services area is working.

Where we have challenges, we understand our business extremely well. We have articulated those challenges. In some instances, they are market-specific, and you can be sure we are approaching those markets and those challenges everyday in a way that we believe will be ultimately successful.

And I guess I would lastly say, we're thankful to have finally delivered these results since we are no longer in a blackout period, and you can expect us to continue to be opportunistic and aggressive with our equity.

So with that, I appreciate your attendance, and operator, I guess you have a concluding statement.

Thank you. Ladies and gentlemen, this concludes Liberty Global's investor call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global's website at www.lgi.com. There you can also find a copy of today's presentation materials. This does conclude today's conference.