Liberty Global plc (LBTYA) Q2 2007 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and thank you for standing by. Welcome to Liberty Global's Second Quarter 2007 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 expressed 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 9, 2007. I would now like to turn the conference over to Mr. Mike Fries, President and CEO of Liberty Global. Please go ahead, sir.

Thanks and good morning or good afternoon wherever you may be, welcome to our call. Let me do some quick introductions. We have got Charlie Bracken and Berny Dvorak, our co-CFOs today; Gene Musselman who we all know runs our European division; Michelle Ramos from Santiago; and Graham Hollis; Rick Westerman; and Liz Markowski. I am going to turn it back over to the operator for a quick Safe Harbor and then we will get right into it.

Thank you sir. Page 2 of the slide on the associated webcast details the company's Safe Harbor Statement regarding forward-looking statements. Today's presentation will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including Liberty Global's expectations with respect to its full year 2007 guidance targets, the timing and impact of digital products and services, completion of announced transactions and borrowing availability, its insight and expectations regarding competition and its markets, the impact of its M&A activity on it's operations and financial performance and other information and statements that are not historical fact. 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. Factors that may cause Liberty Global's actual results to materially differ from those expressed or implied can be found in the Company's filings with the Securities and Exchange Commission, including its most recently filed form 10-K and Form 10-Q. I would now like to turn the call back over to Mr. Mike Fries.

Okay, thanks. We're going to stick with the usual program. I'm going to walk through some highlights and then Gene Musselman will hit a few key topics in Europe, Charlie will take us through the numbers and we will go right to your questions. And we are referring to some slides that you can find on our website and I'm now on slide 4. Start with some headlines; I'm actually pretty pleased with the second quarter on several fronts here. Now first of all, it was a very strong quarter for us financially and particular at the OCF line, we will walk you through that. And as a result we are confirming all the financial guidance today. And secondly, we completed some smart transactions on the M&A front, in particular in Japan and Belgium, and third, the timing of both our asset sales and financing activities seem to be pretty darn good. We've got great liquidity, virtually zero exposure to recent volatility in credit markets and then lastly, we're out there buying the asset we know best, our own stock. So, we believe the leverage growth strategy we've been deploying is the right one and we're sticking to it. Slide 5, you'll see some financial and operational highlights. Revenue for the second quarter was $2.2 billion and OCF was $861 million. I think the key takeaway here is we continue to deliver double digit revenue growth and operating cash flow growth is at the top end of our guidance range. It was 16% on a consolidated basis and 17% if you exclude telling it. We've thought sometime about reaching 40% operating cash flow margins. We're ahead of schedule at 39.5% already. Now that's up 400 basis points from last year. Operationally, we had 623,000 RGUs year-to-date and that's on an organic basis. You've no doubt noticed the second quarter was a bit lighter than we've expected at 266,000 net adds. A big part of that variance is related to increased churn in Romania and to a lesser extent Hungary particularly amount lower end video subs. So while it's definitely having an RGU impact, it's not having much of a financial impact and Gene's going to take us through a bit more detail on both those markets at the end here as well as how we are doing on digital in Europe. I will just say that with respect to digital anyway we are starting to see the benefits from rollouts across the market in particular Holland and the Netherlands group operating cash flow 20% year-over-year and that was largely a function of ARPU uplift from the digital video launch there. We turn to slide 6, some other highlights. As usual we have been very active in managing our balance sheet on our fronts really and Charlie is going to take us through some numbers that leverage is right where we like it at 4.6 times. Our cash position continues to build if you include the expected proceeds from the J:COM loan and the announced Telenet recap, our cash is about $2.6 billion of which $2 billion or so sale is available at corporate. We don't believe in saving all your cash for a rainy day as you know by now. So we continue to put that cash to work. Of course we announced last Friday, another $500 million self tender on top of $640 million of stock purchased through June 30. And then lastly we did announce some important transactions on the M&A front including the long awaited rationalization of our Japanese programming interests. We are certainly very pleased with the outcome there, we exited shop channel at a great multiple and put the remaining channels into J:COM for equities, those are both very tax efficient deals. We also increased our stake in Telenet 50%, and as you should know we have announced a return of capital that should net us about $400 million. So we are happy where we sit with that investment as well. Subscribers, you will see page 7 a snapshot of our customer base at June 30. Over half of the 23 million RGUs today are advanced services or broadband, voice, or digital, and that number is up 50% year-over-year. Of course that's a combination of organic growth and acquisitions. We also continue to improve our networks. So we've added over 0.5 million new two-way homes organically in the first half of the year and 2.5 million if you include Telenet. So at June 30, 87% of our footprint is now capable of delivering the triple play. On the right hand side, you can see that we've made some good progress in driving the bundle. Today over 30% of our customer base has taken two or more products, that's up from 26% a year ago. And we've got 2.1 million triple play subs, and that's up 54%. Again that's a function of both organic growth and the Telenet consolidation. So overall bundling is at 1.44 so that group as a whole is gaining on our mature markets like Japan and Chile which are 1.7 and 1.9 products per home. If you got slide 8, you can see the results of that effort if you look at the individual products. Broadband internet continues to be our most profitable product and fastest growing. We added 378,000 broadband subs in the first six months including 130,000 in Central and Eastern Europe alone which is ahead of budget on that product. Since Eastern Europe now stands at 18% broadband penetration, in fact all of our Central and Eastern markets are now at double digit penetration including Romania. It wasn't long ago that we described those as single penetration markets... single digit penetration. And of course that compares to roughly 30% penetration in some of our more mature broadband markets like Western Europe and Chile which are still in the growth mode. Telephony group faster than broadband for the first quarter ever, we added 161,000 RGUs and 333,000 year-to-date. We now stand at about 15% penetration in that product. And Gene's going to give us more... and more in-depth update on digital, and we did add 193,000 digital subs in the second quarter, that's up sequentially. Over half of those subs come out of Japan which now sits at about 50% digital penetration after 2.5 years. The Holy Grail for us, no question, is driving more revenue out of each household. We've talked in the past about growing customer ARPUs primarily as a function of penetrating the higher margin voice and data products and also driving our digital video services. If you look at Europe, customer ARPUs were up 6% year-over-year to €21.5 or about $30 per customer and again that's coming from a combination of what I have just described voice and data growth in Central and Eastern Europe as well as digital video growth in the Western Europe and we will talk about the six year uplift in Holland for example. Japanese ARPUs have been pretty stable on a consolidated basis about $61 but that's largely as a result of the Cable West acquisition which was dilutive on an ARPU basis. If you exclude that ARPUs were up 4% in Japan and if you look at the product by product broadband ARPUs have been very stable in that market despite the competitive environment. ARPUs in Chile are up 4%, that's equivalent of about $48 today. Voice and data ARPUs have been flat but we continue to drive the bundle. In fact 35% of homes in Chile today are triple play homes. So overall ARPU's a great story for us along with peer penetration rates and volume growth. I mean it's a right way to measure our productivity on the operational front. With that let me turn it over to Gene and he is going to give us a little more information on European digital services as well as Central and Eastern Europe. Gene?

Thank you Mike. I would like to take the next couple of minutes if you will to review with everyone our digital progress in Europe. Taking a look at the right hand side of your page, the chart... you will see that digital RGUs increased 48% year-on-year as we had 330,000 digital RGUs across all of our markets in the last 12 months including 50,000 in the second quarter. Starting with the Netherlands, there's been limited RGU growth during Q1 and Q2. This is largely due to the fact that, number 1, we've moved from an aggressive push to a pull strategy that we have talked about before. We have pulled back our marketing efforts during Q1 and Q2 in anticipation of the rollout of our digital drivers, that's DVR, HDTV and VOD which I'm happy to say at this point all are available in the market in the Netherlands since the... since late second quarter. Also significant and worth mentioning we have seen a decided improvement, as Mike had mentioned, in the quality of our digital base with incremental ARPU increasing from €4 to €6, that's a 50% increase since the beginning of the year. Additionally we've seen a significant take-up of our extra channel pack which is our basic package or basic digital package with 60% of the digital subs choosing to pay an incremental €2 above the digital entry and new subs as of July 3 paying an incremental €6 for an improved expanded channel pack, that's up from 42% at the end of €6. Equally encouraging has been the launch of our VOD in Amsterdam and Modderdam and we anticipate that the balance of the Netherlands will be rolled out by mid-September. So we're tracking very good there. Although it's early days, the initial uptakes looks very promising. Currently we are in the process of finalizing our fall marketing campaigns that will focus on the benefits of course of the digital drivers, VOD, PVR and HDTV and those that are in the progress as I speak. Looking to Switzerland, it's been... we've seen digital penetration accelerate there following the re-launch of digital in April that included the expanding of our existing digital offer, the introduction of a new entry tier and the lowering of the purchase price of our DVR and set-top box. Also I should mention that in July we introduced the D4A platform now which allows us to leverage our suite of set-top boxes across the... across to Switzerland and realize the synergies from the cost savings there. And we've expanded our Teleclub offering including the channels which under the new agreement enables us to offer the channels on our box whereas in the past we had to actually do it through Teleclub itself. Lastly I would like to mention that DVR has also been a key driver of digital growth with more than 50% take-up of the new subscribers in Switzerland. Central and Eastern Europe, we are accelerating our rollouts in Czech and Romania using the legacy platforms inherited from the Carnival and Astral acquisitions. In Czech, we've already started the deployment of digital into the UPC Broadband. And in Romania we'll expand our digital offering in Bucharest starting in September followed by launches in our other larger cities depending upon the success of it... of... in Bucharest. Lastly everything is on track for re-launching digital in Austria. Actually we've accelerated that time schedule and we'll start that rollout in December of this year and that will be followed in by launches of digital in Poland and Hungary in early '08. So by the end of the second quarter of next year, all of our markets will have a digital product. Turning to page 11, just a quick update on the competitive situation in Romania, I think first to try to put things perspective. You can see from the pie chart that Romania only represents 10% of our European sub days and contributes only 5% of our OCF since Romanian video ARPUs are the lower of all of our countries. In some places in Romania they are less than 6 years old. And also as a result of the RGU losses to date, it has not had a major impact on Romania's financial performance. Rebased revenue was up 10% in Q2 and OCF is up 15%. So pretty solid results through Q2. You can also see, if you are looking at the ball... the bar chart that Romania is really an emerging market for us. With a bundling ratio of 1.15 and an ARPU per customer only €9. And you just heard a few minutes ago from Mike the higher bundling statistics that we are realizing across our other countries. Also our ARPU average throughout Europe is closer to €25. Adding to the challenges of the emerging market we have also seen the emergence of unsustainable low-end competition in the video space. As I've indicated to you in the past there are 5 different satellite providers vying for the business in the marketplace; that's in a market that's less than 1/10th the size of United States and with only 8 million homes. Two operators in particular, Digi TV owned by the number 2 cable operator in Romania, and Dolce which is owned by Romtelecom, the Romanian telephone incumbent who entered the market in December have been particularly aggressive in their channel offerings as well as their retail price points coming in as much as 50% below us with a comparable package and then even in some cases offering 6 to 12 months free service on top of that, so very, very aggressive. In order to avoid overreacting and to understand this strategy, we kind of took the... our foot off the pedal during the first-half and at this point we have either just launched or we are in the process of launching a number of measured actions to reinvigorate the growth and I will just enumerate a couple beginning with the acceleration of a digital rollout in Bucharest which I just mentioned along with the introduction of a digital entry package there to take advantage of our first mover advantage. At this point there isn't any other fixed operator offering a digital service in Romania. And it also includes accelerating or upgrading a two-way plant including selected and mid-side cities that have been heavily targeted by both Dolce and Digi TV since those plants are not upgraded and they have pretty soft underbellies. Our plans are to have about 80% of the total plant two-way by the end of this year. So coming out of '08 we should be in pretty good shape to compete on a triple play level. Also we are looking at extensions of customer loyalty discounts for our MDUs who agree to sign one- or two-year contracts and as I said we are just in the process of either rolling these our or have started in recent weeks and it appears at this point that our actions are starting to produce some positive despite the seasonality. Usually you don't sell that heavily during your second and third quarter. The bulk of your sales come through the first and last. But in the last six weeks we've seen a big improvement in CATV sales. They have increased by almost 50% at this point or above budget for the first time this year and DT8 sales remained strong, increasing by almost 40% in the last 6 weeks. So, those are encouraging signs. I think the combination of improved sales and some vigorous retention activities that we are also putting in place are very encouraging. On the other hand, should we continue to erode going forward on video as we have, then this is going to put our... your guidance target of 1.6 million net additions at risk. While we're not changing our guidance, I think as Mike indicated at the beginning, I think it's worth noting that there is risk in this particular forecast. With that said, Charlie, I'll turn it over to you.

Thanks Gene. For those following on, I'm on page 13 now. Financial results were very strong. We continue to build upon the Q1 results and it's consistently... we're still achieving our double digit organic revenue growth or reverse revenue growth and mid-to-high-teens OCF growth. The revenue was $2.18 billion, an increase of 37% from Q2 of '06 and that was positively impacted by acquisitions including the consolidation of Telenet and the acquisitions of Inode, Karneval and Cable West. And we are still getting a big bounce out of the dollar which continues to weaken against our basket. Now, rebase revenue growth at 10% is in line with the guidance. OCF was $861 million, that's an increase of 52% over Q2 '06 or 16% rebase. With the same factors it is with revenue but it's also worth pointing out that the margin is up 380 basis points, so a big part of the increase. On Page 14 we are showing you the revenue breakdown and the punch line is that rebase growth is very consistent across the markets at around 8% to 11%. UPC is at $961 million in Q2 which is up 8%... and that was 8% in Western Europe and 11% in Central-Eastern Europe and that's very consistent. Western Europe is more mature but generating a lot of cash whereas Central and Eastern Europe still shows pretty good top line growth despite the other competition in Romania. J:COM and Telenet did very well. That had a rebase growth of 10% or 11%, [indiscernible] and VTR was at 9%. So overall LGI was at 10% rebase growth for Q2 and yet today we're at 10.2. And as always we are really driving this growth through volume rather than price, adding more subscribers to our advanced services. But the real story is on page 15, and that's the strong organic OCF performance growth in all our markets. And that's not just driven by revenue growth but by the significant margin expansion. I will talk about that a little bit more in the next slide. Let me just give you some of the numbers. Broadband generated $407 million, and OCF in Q2 that was 30% up over 18 on a rebased basis. And Western Europe regrowth... had substantial growth after some slower years in Holland; 15%, essentially Eastern Europe is 20%. Holland has 20% rebased growth and that was much more reflective of the target of digital strategy and also the investment we made last year paying off. Telenet and J:COM were slightly below the adjoining [ph] average at 11% or 13% respectively and with the champions VTR which had 23% rebased growth which is building on the 21% in Q1. And in fact since we did that Metropolis acquisition in early 2005 VTR has averaged over 20% rebased OCF growth for the last nine quarters which is a very impressive performance. So LGI overall was 16% OCF growth at the high end of our 14% to 16% target range for rebased growth and excluding Telenet, it was at 17% which is similar to Q1. And on page 16, let me just talk about the margin? We've been promising for some time the benefits of scale and it has been driving our margin up solidly. Q2 is at a new high, 39.5% OCF margin, which is up 380 basis points over Q2 '06. And even up over Q1 by 30 basis points. What's driving it? Well, we are still realizing the benefits of scale, we talked about this so long and there's more to come, and our model has operational leverage particularly as you can control some of the fixed costs like corporate. Also as subscribers drop in some areas, you see a lower impact on [ph] marketing costs which shows a variability and the high return on capital of our model. We're also getting great synergies in cost savings out of those markets where we had acquisitions particularly Chile and Switzerland. Both are looking great acquisitions there. Those who know in the regional bullets, all the major segments, UPC, J:COM, VTR, they all are up over last. And Telenet continues to do very well contributing about 111 basis points to the pick up. We're on track to hit the 40% everyday margin and at this stage we think we're ahead of schedule. We just turn to CapEx, page 17. CapEx including cap lease [ph] additions as a percentage of revenue with 22.3% for Q2 against 27.5% in the comparable period last year. Now as usual the majority of the spend is associated with subscriber growth. When we look at CPE and what we call scalable infrastructure by investing in the network in response to more demand has been variable with RGU additions. And these categories together were over 50% of the total spend year-to-date. We also spent other variable CapEx in Q2 on upgrades and new builds due to success based investments which we think have good returns. We added 330,000 new two-way homes passed in the second quarter. Most of that activity accrued in Central and Eastern Europe particularly in Poland and Romania. Year-to-date CapEx as a percentage of revenue was 24.3% which is flat year-over-year. But we expect it will be within the 23% to 25% guidance range for the full year. But to hammer home the point, we feel most of our CapEx around 80% is revenue generating, either subscriber related or network related, thus making money and return on capital and if we don't have the return in capital we don't have to spend it. Overall the CapEx is moving in the right direction which is down as a percentage of revenue as the company starts generating more and more free cash flow. We just turn to the balance sheet on page 18. We ended the quarter with $15.8 million of total debt. That was an increase in $1.4 billion over Q1. The increase was driven by financings that we completed in the quarter just before the credit crunch. And we have got to resume term A shares and the restructuring of our short channel interest and we did a zero cost share collar transaction which is essential a form of margin loan without any downside risk to us. We borrowed around $760 million against them. We also did a final refinancing of the UPC facility which both increased the total borrowings and brought cable com [ph] and VTR into the credit. The key benefits of that were we expanded the maturity and lowered the margin by 25 basis points and by putting VTR into the UPC credit poll, they were to get that business indirectly to 5 times [ph]. We also raised a new loan of the UPC holding BVA [ph] at $250 million and at $250 million revolver LGI. So cash is slightly over $3 billion which includes $492 million of restricted cash, about $1.9 billion in corporate cash. Since Q2 we exercised the Telenet options and furthered the sale of Melita but we also have been investing and getting more cash in J:COM which we have to come in and also $400 million for the Telenet at recap which would be offset by a $400 million [ph] tender. So adjusting for everything, $2.6 billion in cash with $2 billion for corporate and adjusted most for $4.7 million. In terms of the liquidity the key takeaway from this slide is that we're ought to be protected form the credit... current credit account in any worsening conditions. Our limited natural [ph] maturities with the majority of our debt maturing for 2012. We also got all our interest rates and currencies matched. So we should be in a position to have sufficient liquidity to conduct our business for the acquisition from buybacks in both of these credit markets, and also well positioned to take advantage of any opportunities that come up if private equity gets into trouble. The final conclusions, we are delivering industry leading OCF growth, we are confident in our ability to drive RGUs in the second half, Romania looks like an isolated issue and the portfolio is working well for us. And with forecasting, pretty strong Q4 in terms of subscriber editions. We are on target to achieve our 2007 financial guidance targets but there is some downside risk because of this Romania... price to all of our RGU. But we are still looking that we are going to hit 1.6 million net adds for the year, the terrific cash balance and substantial liquidity, we remain very focused on delivering value for our shoulders and we think our leveraged acuity growth model is doing just that. With that I will turn over to Mike and the operator for questions.

Okay thanks Charlie. Operator we are ready. Question And Answer

Thank you. Today's question and answer session will be conducted electronically. [Operator Instructions]. We will take our first question from Jeff Wlodarczak, Wachovia.

Good morning guys, two questions. Mike can you provide more color on that RGU network, using your analogy from the analyst day is 1.6 Mutumbo taken a 3 or is that Allen Iverson taking a 3. And then there's been significant tightening in the credit markets. Can you talk about if for target leverage ratio four to five times gross leverage has changed the result? Thanks.

Sure. That's an excellent way to put the RGU question. I think what we said... what Charlie and Gene said is sort of what we are going to stick to here, we have put out 1.6 million as our guidance, we aren't necessarily changing that guidance. We are encouraged by the activity that Gene Musselman described in the two... in the primary affected markets in Central and Eastern Europe and we are really bullish on the fourth quarter which for us is anywhere from 35 to 40% of our net adds. So it's really hard in advance of that fourth quarter to take your eye off the ball or to somehow adjust your thinking for the full year. Whether it is Mutumbo or Allen Iverson; that's too tough. In credit markets, from our perspective hadn't really impacted us in any meaningful way. We are as Charlie and his team have been focused on... we really de-risked our balance sheet, our interest rates are almost 90% plus hedged, our currencies are hedged, any amortizations are pushed out and we are free cash flow positive. So as we sit here today I think our balance sheet is perfectly aligned to take advantage of the opportunities if they do arrive in the M&A environment or to continue to buy our stock. But we don't feel like we are pressured or feeling any additional pressure because of what's happening in these volatile credit markets. We haven't changed our view on four to five times. We think that's still the right place for us to be and as John tells us consistently we have all been here before. So we just stay patient and keep our eye on the ball.

I think the other... the other good news is I think that we can still get credit four to five albeit at a different price. So it's not... at that level, the market shut. I think where the market shut is the highly leveraged big transactions from private equity buyers. And that's to our advantage because that means that we're not competing in any of these acquisition or options with guys who are putting in very, very cheap with very leveraged money.

Thank you.

Yes.

We'll go next to Vijay Jayant, Lehman Brothers.

Mike, thanks for taking the question. Just wanted to address the fact that there is a press release that's out everyday on your interest in Virgin Media but any comments on that but just generally I think just some comments have been recently made that private equity may be struggling to compete. Are you seeing better opportunities on the M&A front in general and has that really impacted the valuation of those assets also?

Well, I mean I really can't add anything to what's already been stated publicly by myself or John on that topic of Virgin and I think everybody is aware that the company has decided to postpone any process. So there's really not much to add to that. I think if you read our comments, in particular my comments closely, you'd know that this is typically something that we're exploring or should explore but aren't necessarily anywhere on... and as the process has been postponed, not much to say. It's too soon to know if the volatility in the credit markets will impact specific deals that we're looking at or private equity interests. I do think you can take as an indicator anyhow, the situation around Virgin that the process being stalled as it is, is clearly a function, the expected appetite given the credit market. So it's not too... I don't think its a big stretch to assume that if this continues there may very well be greater opportunity for us to look at some strategic or accreted deals in Central and Eastern Europe, for example, how the markets where historically sellers have been rather aggressive on their evaluation. So, we have our fingers crossed.

If I had... can I have a follow-up. Given that management is compensated on EBITDA growth and very well compensated at the high end of the range and you guys have been hitting the high end of the range. Is it something for us to assume that we should just focus on EBITDA growth and not really care too much about RGU because it will balance that, the right mix of profitability and growth?

Well, I'm glad you asked that question because I think it's a very fair question and one I'd like to address. Despite what the management compensation plan might indicate or reward over the next two years, we're all in this for five years or longer. I mean the point is that the plan pays out over five years. So, nobody is in anyway focused on short term profitability to the... somehow to the disadvantage of the long-term value creation in this company. We wouldn't be buying our stock if we felt that the plan we're implementing, the strategies we're implementing aren't for the best interest of this company in the long term. I think the growth that we're experiencing, EBITDA is both top-line growth, I mean, 10% top-line growth, Vijay, is largely what we have been doing historically. So, there is no massive variation in the top-line growth figure and our EBITDA growth is a function of both that top-line impact as well as just being a little bit better on the efficiency side. We're getting synergy benefits from acquisitions. We're scaling in core markets. I think all the things that we had built in two years ago quite frankly are now coming to fruition on the operating cash flow line. So, I look at the top line, I focus on the cash flow, we have not in any way decided that RGU growth is no longer important. We've always been focused on profitable RGU growth and I will just repeat what both Gene and I have said we love Romanian RGUs like any other RGU but not all RGUs created equal. And because we operate in so many different markets I think you have the focus and slice and dice if you will that RGU growth figure which we will try to do a better job if we aren't doing a good one today of helping you understand.

Thank you

Okay.

We are going next to Ben Swinburne, Morgan Stanley.

Thanks, good morning guys. Thanks for taking the question. A couple of things first on Western Europe and in Switzerland, can you talk a little bit about what the incumbent telcos are doing with their video platform. I think KPN rolled some pretty big price cuts through on video, I am just interested in how Mike, you, and Gene think that product backs up to what you guys are rolling on digital, and maybe the same question as it relates to Swisscom, I think it has been a little more lately. And then on the cable com business, I think you got to... got to raise rates again next year; if you could just sort of comment on video. Can you comment on that and what that might mean for margins. Can this be a 55% margin market? And then lastly the bank debt about $1.8 billion, could you just comment on how much of that floating rate debt's been swapped into the fixed and if there's any explorations on those agreements that we should know about?

Sure, why don't we move backwards. Charlie you want to hit the bank debt one?

Yes, the bank debt, it's 100% throughout this year and... I don't have the exact numbers exactly in front of me but drifting down over the next €6, €7 towards 50%, 60%, 70% but I think you can assume very little volatility. And any interest rates on the bank debt were highly hedged and most importantly we are also matched on the Eastern European currencies, we have swapped out the funds [indiscernible] exposures.

Sure and on... I will let Gene round it out here. But in Holland if KPN had... it appears anyway focused more of their marketing attention on there DTT product, Digi 10 [ph] which is as far as we can tell largely capturing second outlets and folks who are not connected in campers at cottages or boats or things of that nature. From our perspective their IPTV product has had a limited if any results for them to date and continues to be in a, I guess, a pre-launch or soft launch phase and we are pretty focused in our digital markets to be the service leader and the product leader with HD DVRs and VOD and thus far we haven't seen a meaningful impact from Digi 10 we believe and we really are the only one on our markets offering all of those products and services. The... no real update on Swisscom unless Gene you have got something to add. They continue to be at the, I think, between 20,000 and 30,000 depending on which press release or who you listen to. But we on the other hand have had great success with our switch roll out in particular. I think 60% of our sales, our DVR sales so that's working extremely well. We are... our net adds on digital are up meaningfully from the prior year and we do have a rate increase next year. We have and I don't think been specific about that number if you haven't, Gene, correct me but that ought to have a nice impact, no question, on the operating cash flow line. Do you want to add anything to that Gene?

I guess with respect to KPN I think what you are referring to in fact that KPN announced that I think in August 2nd, they would reduce the price of their Mine package which is their interactive package from €19.95 to €9.95 and the issue as you know, are we going to be able to put together competitive offer and I took a look at that today and did some comparisons and one thing you have to keep mind is that KPN still... you still have to take an ADSL connection with them. So if add the lowest cost ADL connection, it would take their price up to €24.95 vis-à-vis part at €19.04. So that you can see we've got about €5, €6 price advantage there. In addition to that, at least looking at their website there's a activation fee of €14.95 plus a cost of €8.95 for sending the box to the subscriber. They also have a purchase model versus our rental market... model. So, in our case the box rent was built into the €19 fee. On the other hand you have to purchase their box and again, there is a one-off cost right now of €19.95 and I understand that they actually charge you €149.99 and that you get a €50 rebate upon request. So, you've got €150 outlay just to get into the package there. And then the €19.95 price, I further understand it is a first year promo and that will increase at the end of the first year. So, from a competitive standpoint on their package... their IPTV package, I think, we're very competitive now, given the fact that we've got the digital drivers that we will be rolling... that have been rolled out, and will be a prominent part of our fall campaign. I'm confident that we will be right in there slugging and doing well. And as Mike indicated the Digi 10 package they reduced it by 50% as well but that's primarily attracting the person that has a summer vacation home or the boat or an RV, and I think they have around 300,000 subscribers. The good news is if you take a look at out turn, our churn is much less than what we had forecasted and that simply means that we're not losing subscribers to KPN and the way that was anticipated. So from that perspective I think we're in good shape and with respect to blue win, I would just agree with what Mike has said. They haven't seen to be able to get any traction at this point and we certainly are coming out the gate strong with the re-launch of our package and we're lining up the fall campaign. We'll put the... we'll put significant resources behind that. I would expect that we'll have a good fall.

Thanks so much Gene.

We'll go next to Alan Gould, Natexis.

Thank you. Gene, I have got two more questions for you if I could. Your costs are realty being kept low. It seems a lot of that is marketing costs are low. Is there a timing difference when you're marketing this year versus when you're marketing next year. Will that impact margins when you start promoting and marketing more in the second half of the year. And my second question is I understand KPN can't offer a high definition TV right now with their IPTV product. Is HD as big and important in Europe as it is in the US?

I'll take HDTV first of all. It depends on market-by-market. In the Netherlands there isn't much HDTV available at the present time and I don't think it's the key factor. We'd like to see it develop as such and if you watch the market, a high percentage of the TV sets that are being sold are HDTV ready. But I don't think it's going to take a complete years for the... to... for the HDTV market to develop although we are introducing this... we've already rolled out an HDTV receiver and this fall we will be rolling out in the Netherlands an HD DVR as well. But I don't think they are going to be hurt that much by not having an HDTV product initially. With respect to our marketing costs I think they are running about the norm. We try to keep our marketing expenses somewhere between 6% to 10% of revenue depending upon whether we are launching new product and the maturity of the market. I think for the most part that we are spending in that range depending upon the systems we are getting better I think at segmented marketing. We have put a lot of emphasis on setting up databases and doing what you call database mining and segmenting and targeting audiences better and I think that's not only paying dividends in terms of... we are paying dividends in terms of developing cheaper channels of acquisitions.

[Multiple Speakers] fair to say that... Gene it's fair to say that there were two real buckets of advertising... of marketing as above the line or below the line, and that below the line is... talk to the salesmen and the like and people on commission. That is more variable, so low and net adds broadly translates through into lower marketing. So to me it was very encouraging that you don't spend on marketing just to stand still, it is a true success space investment and I think what's good about the Q2 results clearly we took a little bit of a hit in Romania on subs. What's encouraging is lower subs to translate through into a level variance to budget at least on markets.

And if you are looking at it on a year-to-year basis you got to back out... we've reduced significantly the cost of the marketing and the sales expense related to the rollout of Deep Ray [ph] in the Netherlands.

And there's been a slight difference been on the HD point, just to add to what Gene said, I think what we have experienced and will experience in sort of the US listeners would agree with us, and HD has a waterfall effect. And you have got three variables. You have got to get the TV sets, you have got to get the broadcasters in particular and key programmers and you have to got have the network and the capability. I think the fact that we are well positioned with HD with... today with limited content but it's available and we can provide HD to core customers. There's going to be a huge differentiator over the next 12, 18 months because once the broadcasters go... when you have the Olympic, when you have key sporting events, it's our experience that that is going to be an important marketing message and we are going to drive the heck out of it, I can promise you.

Okay thank you.

We will go next to Matthew Harrigan, Ferris, Baker Watts.

Good morning. You talked a little about the boost in services opportunity at BTB at your Swiss conference and I know it's a somewhat peripheral area and it's not something you typically address on the... on your earnings call, but I was curious if you could give us and update us to how that was going?

I mean we said high teens revenue growth when we talked about it I think in March. It was and remains one of our highest growth product areas in Europe and for the most parts we are on track. And we reviewed the numbers last week but we are largely on track and B2B familiar. I think we have been conservative in our approach to the product and the service. We are not spending a lot of CapEx, hardly any incremental CapEx, we are taking the low-hanging fruit. And as I said the high-teens revenue growth opportunity for us and it's on track.

Thanks Mike.

Yes.

We go next to Gregory Kolb, Janco Partners.

Hey thanks for taking my call. I was wondering VTR if you could give a little bit more color, a heavily strong quarter, bundling ratio was up 9% sequentially with good margin improvement. I was wondering if we could get some more color there?

Okay, is that it?

And if... maybe we could get a little bit of update on WiMax in Australia and Chile?

Okay. Well we have got Mauricio and I will let him address a few highlights on the VTR front but WiMax in... I will tell you WiMax in Australia and Chile are really in early stages. We have selected vendors in both institutes, Motorola in one and Nortel in the other. Australia we are still in an exploratory mode, we haven't done anything meaningful yet. But in Chile we have started to grow out and... for reasons that are required by the license as much as anything and we are having good success with Motorola down there and I will Mauricio fill it in.

On...

Mauricio, you there? Looks like we may have lot him. Anyhow I think the biggest... the RGUs in that particular market in the second quarter were more or less on budget through the year and the Company is actually ahead of budget I believe on all three products. So it's had a good showing both on video, voice and data. They have rolled out digital in that marketplace. I think we are 20% plus penetrated which has had a nice impact on video customer growth and total customer growth. It's a market where I think, if you look at the total customers year-over-year growing not as much as anything, a key benefit to us, because we're almost selling two products per customer. So, if we add a home, we're pretty much adding two RGUs and with triple play penetration 35% and third of the case we are adding three RGUs. So, they've been focused primarily on customer growth as much as anything. The competitive environment remains somewhat benign, I mean, the Telefonica and others have been with DTH and other products trying to duplicate the triple play. The VTR stands alone in that market with significant penetration in broadband, I think 30% plus penetration in broadband, 35% somewhere penetration in telephony and a growing video penetration and the only provider who can do all three and do it pretty much on nation wide basis. So, we continue to be very pleased with that business and despite what you might have read around Telmax or others, you been approached by nobody and are not necessarily entertaining offers. So, we're happy with that business.

The only thing I would say, Mike, is I mean they are doing terrific job on court.

Yes, I mean 23% cash flow growth is about as good as it gets in our business. And I wouldn't describe VTR as an early stage business. It's not a mature business but it's been churning out 20% plus cash flow growth for years. And it's nice in this second full year plus of the merger there to still be having that kind growth. So, we're pleased.

Great. Thanks.

We'll go next to David Kestenbaum, Morgan Joseph.

Hey thanks. Since you are doing so well in Netherlands, I was wondering if were thinking of reintroducing maybe a D4A program because obviously digital net adds have slowed?

I mean, no.

Doing something like that in Switzerland too.

No.

Definitely.

No, I mean, I think we have been consistent in saying that the approach we took in Holland we believe was the right one. If we had to do it all over again I guess we would do it a little bit better because the second time you do anything you do it a little bit better. But we would mostly do the same thing. And we really jump started that business for us and as Jean pointed out a lot of the disconnects in many cases returned boxes were from folks who really hadn't even installed it or experience it. And so the quality of the customers we now retain are fantastic and the penetration we are getting on the EBS tier and the premium products in the 60%, 70% range are what we expected to see. So we are happy with what we did and we are happy with what we are seeing in terms of the ARPU uplift in particular. But I don't believe we need to do it in any other market. I think we have learned a ton from the process every other market's different. In Switzerland we have a benefit of a... the billing to reduce channels in analog, a very low entry tier price. So I think we have got a different formula there that we believe should continue to work and has been working if you look at the net adds year-over-year.

Okay. And J:COM seem to be doing pretty well and so any changes in the competitive environment there in Japan?

Graham do you want?

Yes.

Do you want to address that?

No, there's no change in the competitive environment there.

Okay, thanks.

Alright.

We will go to our next question David Joyce, Miller Tabak.

Thank you. I apologize I missed a little bit of the call but can you give... quantify the... or give some color on how the churn has improved were days [ph] been available especially in Netherlands where it's digital and how much of the ARPUs have improved from the increase from digital after the retention... after the promotion?

Okay. Well I think you are specifically asking about the Dutch digital experience and I think we mentioned... we did mention that ARPU is up to €6 incremental and that's about what we'd anticipated and certainly dropping to the bottom-line and having a big impact on operating cash flow growth in that marketplace. The... I mean, the churn we represented was 1, 2 in the first-half of the year. We did see some churn off from the fourth quarter net adds. But you have to remember when we identified an RGU... digital RGU in Holland, we included in that number folks who accepted the box. In many cases the box wasn't actually... we learned it wasn't actually installed or maybe not installed correctly and so a lot of customers that turned off in the first-half didn't churn off, they didn't like the product. They thought it was too expensive. Many of them didn't get there if you will. So we are seeing a lot of that decline. If you look at churn in the last 10 weeks, Gene, I think it's down 50% from the prior 20 weeks something like that. So we are seeing that churn peel off and I think the second half of the year should be more beneficial than the first half of the year in terms of net adds. And you cut out a couple of times during your question, David, so I am not sure we got it all.

Maybe if you just add a little bit more color I mean if Mike is correct that our churn has actually dropped about 50% in the last 10 weeks as primarily the result of the fact we have stopped the six months pre-promo that's been reduced to three months now. We have got the expanded channel pack and premium services penetration has grown dramatically up to over 60% at this point and we have got the... all the products that you need to drive digital in the market at this point in addition to having introduced, SVOT, TVOT, Delay TV, all these are having a positive impact on churn but another thing that I should like to point out is the fact that when we churn, if that's the word you want to use, our digital subscribers, they actually don't leave us. They actually downgrade to analog. So if you looked at pure churn, the churn is in the range of about 4.2% annualized because between 85% and 90% are going back to the analog product itself and not spinning out to the competition.

That's a good point Gene. Third point I would make, I think you asked about the promotional period. I think 80% of the digital customers are now off that free trial period. So for the most part we've got customers you want to stick.

Correct. Great and a couple of housekeeping items. I was wondering if there are any working capital swings and free cash flow that will help that metric in the second half and finally with acceleration into... into the business customer market when you might bringing out some of those metrics?

I think the big thing with free cash flow, I will take that question, is Cablecom which is in Switzerland, will have to pay a year in advance, that we did get a very substantial inflow in Q4 of cash there which does provide significant liquidity. Otherwise very broadly if there is prepayment, it actually incurs in Q1 particularly in the Netherlands, in Austria otherwise throughout the year working capital is pretty stable.

Yes, what was the second question Dave?

On the business...

Yes, I mentioned that we had... we will... I mean we will consider putting more metrics there but I won't promise anything. But we talked about in March, it being a high-teens growth on the revenue line and thus far it's largely on track. So we're taking a low-handing fruit approach to it. We're not swinging for the fences, spending a lot of capital. And from that point of view, we're pleased but we'll consider maybe putting some more information in there next time.

€123 million revenue year-to-date with a 63% gross margin and CapEx of 10% of sales.

Great. Thanks guys.

Yes.

We'll take our final question from Jostine Gassler [ph], Avondale --

Just to say that was a... that you [indiscernible].

Okay, operator?

And Jostine Gassler [ph], your line is open.

Yes, thank you for the taking the call. I have a quick question on Hungary. You mentioned obviously, Mike, earlier, great opportunities in Central and Eastern Europe and also given the latest regulatory changes in the market, particularly on the market concentration, maybe you can comment a little bit on that and then how are seeing the competition in particular from Digi TV in this market.

Yeah, we were just in Budapest, we had our entire Board over there for... every summer we take our Board somewhere for a Board meeting offsite in the field and we were in Hungary this year. And we spent quite a bit of time with regulators and others in that marketplace, as we normally do. They have eliminated the rules or the cap that was on consolidation there in the cable sector as they should have, quite frankly. And we'll see what happens. There are a couple of operators and some opportunity to grow in that market and we can bet we're evaluating all that. No question. We addressed Digi TV indirectly by discussing, as Gene did in his remarks, the Romanian and Hungarian situation, in particular Romania and so I'm not sure what more I add to that except that we believe they are taking what appears to be an unsustainable approach to the lower end market and that market not that we don't want to serve low-end market or the 3, 4, 5, or 6 year of sub, but I do think that with the kind of network we are building and the kind of products and services we can sell, we are shooting a bit higher. And unfortunately some of our lower end subs, particularly Romania are being impacted by that marketing approach. We wish him all luck, he has got an... he's got... that's one way to do it. But we don't see it as being particularly sustainable in long run knowing what we know about his margins, his programming costs, and other elements of his business plan. But from that point of view, we think we are putting in place all the right tools to compete in our core segment.

Excellent, thank you.

Yes. All right. Well, I think that was the last question. We've gone a little bit over an hour. We appreciate you getting on the call. I hope you enjoy the rest of your summer if you are in the Northern Hemisphere. And we look forward to updating you on the third quarter. Thanks everybody

Ladies and gentlemen, this concludes the Liberty Global second quarter 2007 investor call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global's website www.lgi.com. There you can also find a copy of today's presentation materials.