Liberty Global plc (LBTYA) Q3 2011 Earnings Report, Transcript and Summary

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 expressed written consent of Liberty Global is strictly prohibited. At this time, all participants are in a listen-only mode. Today’s formal presentation materials can be found under the Investor Relations section of Liberty Global’s website at www.lgi.com. Following today’s formal presentation, instructions will be given for a question-and-answer session. As a reminder, this conference call is being recorded on this date, November 3, 2011. I would now like to turn the conference over to Mr. Mike Fries, President and CEO of Liberty Global. Please go ahead, sir. Mike Fries – President and Chief Executive Officer: Great, thank you operator. Good morning everybody or good afternoon wherever you maybe. We have a number of people on the call with us this morning as we usually do and folks you will likely hear from are Bernie Dvorak and Charlie Bracken, our Co-CFOs; Diederik Karsten, Managing Director of our European Operations; Balan Nair, our Chief Technology Officer; Mauricio Ramos who runs Latin America; and of course Rick Westerman. Before we get going, I think we have a Safe Harbor statement. Operator?

Thank you. Page 2 of the slides details the company’s Safe Harbor statements 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 the company’s expectation with respect to its outlook for 2011 and future growth prospects and other information and statements that are not historical facts. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risks include those detailed from time-to-time in Liberty Global’s filings with the Securities and Exchange Commission, including its most recently filed Forms 10-K/A and 10-Q. Liberty Global disclaims any obligation to update 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. Mike Fries – President and Chief Executive Officer: Great, thanks. The agenda we will use here is pre-typical. I will make some opening remarks, talk about the highlights of our business, little bit our operations and then Charlie will run through the financials and then we will try to get to your questions hopefully in about 20 minutes. As the operator said we are going to be speaking from slide today and I am going to start with slide four which is a quick snapshot of the quarter for us. I think the key storyline continues to be our subscriber growth. This was our strongest third quarter in history with 320,000 net new RGUs added. In fact as most of you know, the summer months are typically very quiet in our business and yet we just delivered the second biggest quarter we have ever had. And the driver continued…

(Operator Instructions) And we’ll take our first question from Jeff Wlodarczak with Pivotal Research Group. Jeff Wlodarczak – Pivotal Research Group: Good morning guys. Normally fourth quarter is the strongest hard you quarter season of the year. Is there any reason I believe that change this year given stronger third quarter was follow up?

Well, I mean I am going given you just after first quarter results of course but I will say that as been strong start in the fourth quarter. So this was an unusually robust third period as you noted and as people would know given history of those summer months and fact that its generally not a strongest. But I mean I won’t give you directionally at answer there (indiscernible) started very, very strongly. Jeff Wlodarczak – Pivotal Research Group: Fair enough. And then when do you expect you very strong hard you results of going translate into accelerating rebased revenue growth.

Right into 2012, so as we look at ‘12 we should certainly see the benefits of this larger customer base in our financial results. Jeff Wlodarczak – Pivotal Research Group: Great, thank you.

Great, yeah.

All right. And we’ll take our next question from James Ratcliffe with Barclays Capital. James Ratcliffe – Barclays Capital: Good morning, thanks for taking the question. On marketing spend, the acceleration this quarter is that something that given what you seen on subscribers you’d expect to extent into 4Q or is that more of a timing issue year-on-year that last year we spent more in 4Q and this year, more shifted to 3Q. And also if you talk a little bit about programming cost you mentioned Telenet and the line and your program cost small, but have gone up. How they changed at this call as a percentage of our video revenue or how is that affected video gross profit and how would you expect that change in the future?

I will adjust the second one and (indiscernible) you can start thinking about the marketing spend question. Turning today, you would know that we have certainly high video gross margins and our numbers indicate that those margins as on a percentage terms might come down slightly or will come down slightly as we add digital customers. So that on an analog customer which paying us €15, we’re going to have an 85% gross margin on the analog programming cost and digital customer that might pay a €30. We’re going to have significantly more gross margin, but potentially slightly lower gross margin percentage. All in, it’s still on 80%. So, our job is to keep programming cost in check. We don’t have the pressure that a lot of the U.S. operator feels from one or another dominant programming group because of the nature of our market in the fact it’s so fragmented. I’ll also point out that when we launch Horizon in Holland in the first quarter we’ll launch that product with over a 65 plus channels of linear streaming television and over 3000 hours of on-demand content including catch up TV, movies, etcetera and we’ve been able to assemble that content for that platform very, very inexpensively. Because of the relationships we have with programmers in Holland because of our history and the size of the our business there so, I think when you look at where programming costs will be going over the long run as more or more of activity comes on demand and/or over the top to a horizon platform. We’re able to maintain regionally good programming cost there and I think in the end they are going to hang around that area that might come down slightly, but our long range plan does not show a material (indiscernible) programming launches.

Yeah, hi guys, the increase which you see in Q3 is largely volume driven and it’s tracing to I’d say higher absolute numbers in the sales cost particularly the commission – the sales commissions. It’s not so far the variable gross related to the higher volume. It’s not so much to a more fixed piece of the marketing cost like above the line that leads to the conclusion that what we see is that there is more effectiveness of our campaign and that may have to do with effect of this year we started to apply I’d say learning from one country to the other country so the effective campaigns from one country start to well so and take effect in others. So, I’d say largely volume driven, sales cost, which is rising the total.

I think it’s fair to say as a result that if we have very strong progress in Q4 and I think as Mike mentioned we started well, but not making any promises you might see a similar effect in Q4. It’s good capital investment, obviously we’re getting subscribers in return with a good payback. James Ratcliffe – Barclays Capital: Great, thank you.

Thank you. I want to ask you guys about the high speed data subscriber growth in the quarter particularly in the larger markets so from like detailed the both, can you guys give us a sense, I mean, nine months to-date what do you think your flow share is on sort of new customers in broadband across determining Netherlands and Switzerland and how we can generalize our each market is different. And then second related question is what do you say the incremental ARPU or marginal customer is bringing in on ARPU for data relative to the base because I think you talk about revenue accelerating next year, Mike and certainly if the subscriber growth that you are seeing comes in without any ARPU degradation or impact ARPU goes up and that certainly it’s sort of a hockey stick effect. So, I was wondering if you guys could talk about this.

Sure. I can tell you that we do calculate market share of net adds or net gain in every territory pretty regularly and in the markets are two reference Germany and Netherlands, were anywhere from 80% to 100%. If you look at Netherlands for example in the third quarter, we added something new order I think 30,000 roughly 30,000 broadband net adds and that’s on our 30% footprint. I think KPN reported someone order of 20,000 loss, guys, something like that 9,000 loss maybe but I think loss, sorry 11,000 net adds loss. So, we gained roughly 30,000 net adds in the third quarter I think were backwards 11,000 they have nationwide footprint. So if you extrapolate that, clearly were getting all gain in the marketplace and that has been in the case for six, seven quarter here. You could got it I mean we’ve had between 20,000 and 30,000 net adds in Holand going back for five years here and they’ve essentially last customers every quarter. Germany, I think the number of cost 70%, 80% of net adds, there are other operator non-DT operators in that market. But there is no question our bundles are formal compelling on speed and product basis. And that’s really positive things in terms of ARPU, I would say and Diederik can comment on this well as we’ve ramped up speed for example Holand as we taken the sweets spot are primary bundle for 25 meg, 50 meg we’ve added ARPU are priced to that bundle price. So what was €45 and €49 we are trying to maintain not just stable ARPU for bundles into broadband but also ARPU appreciation if you will on those products and services. And some instances there promotional discounts for period of time and those will see a little…

DT going 80% to that and we had really good quarters which have been we added 10,000 broadband net adds and eight quarter in terms of shares. I think its over 50% today.

Yeah, right and it has been rising we are not there in Switzerland like you said where we are in the Netherland and where we take the full growth in the market at the expense of DSO. But we are picking up share points in Switzerland with the strengthened portfolio which indeed like you said Mike is also moving to kind of between 30 and 50 make as sweep going and that’s also under bidding superiority we are able still to construct in our products. I mean we are still having lot of flexibility in the speed and if we get with the speed increases we can also step wise raise the ARPU in Switzerland is a healthy after market willing to keep that way. We feel confident about for the further growth looking at Germany for example our base share is only 12% growth and so we still see enormous potential to make people switch from DSO still largely eight DSO lowest speed and towards our products and its just matter all kind of keep supporting it and keep relying on the market. In the Netherland and Switzerland are base share is higher or so it will go at the expense of the DSO players in somewhat more aggressive (indiscernible) so far with Holand taking more than 100% of the growth and Switzerland 50, we’re confident we are on the right side. James Ratcliffe – Barclays Capital: Okay, thank you guys.

Yep.

All right. And we’ll take our next question from David Joyce with Miller Tabak Company. David Joyce – Miller Tabak Company: Thank you. I was wondering if you could give us an update on what your past might be towards doing all digital in the event you might need a free of capacity for the horizon rollout.

Sure, (indiscernible), you want to just add.

Sure. We have movements to go all digital in the near future, our sense is that what the price that would be past issues and we’re doing a number of studies internally, but certainly you’re not going to see as do anything in the next 24, 36 months in the future. David Joyce – Miller Tabak Company: And secondly if I might could you please update us on the relative size of your commercial market in the video voice and data subs.

Sure, you just want adjusted B2B in Europe.

Yes, what we see in B2B is very successful country particularly behind a new – renew mix where we focus more than previously on the (indiscernible) with products, which have their origin in superior broadband mix as make us the fixed voice and there are some countries like Germany where we’re starting from stretch so where we still have great opportunities, but we have to build – seems it is building from the stretch take us sometime. And that will also help us to further strengthen the total European contribution of this decision which we still see as a highly potential that related to just adding countries to the group, which is already successful and that’s the way we built it. There are may be some (indiscernible) growth, there are may be some acquisition opportunities that will be very cautious for example DSL providers and so forth is not on our list so, it’s going to be mainly autonomous growth buy out so hope careful CapEx that may be some acquisitions when feasible.

Yeah, it’s a relatively small piece of our overall revenue stream, 3% to 4% may be and growing at about 5% organically, but it has a potential to be much larger especially when you considered the fact that markets like Germany we had zero B2B revenue because the historical owner just never exploited that opportunity. So, I think there are tremendous upside in the B2B business especially as (indiscernible) said in the so over small medium segment. We’ve launched cloud services in a number of markets to relatively positive result in some cases we owned data management and all type businesses so with the mixed bag in each market, it’s not necessary a consistent product offer in each country, but most of our countries have the beginning of or at the medium stages of relatively interesting and robust B2B businesses that we are trying to take advantage of a more consistent base across Europe. David Joyce – Miller Tabak Company: All right, thanks for the update and nice execution in the phase of this market.

Thank you.

We’ll take our next question from (indiscernible).

Thank you. I just want to focus on the KBW deal account for second. Could you talk around the various concessions that you offered to the cost all of this and essentially what the financial impact of those might be has to do progresses, thanks.

Sure, just to generally we want to keep this process tight with regulator, but the concern expressed by the German regulator revolved around two principle areas, one was the role that cable operators play in the large housing associations and the attempt to which cable operators might someday expand or extend their reach across orders into other territories where they don’t operate today to provide more competition in that MDU or housing association market and the second concern was about the role we play and what they called the feed in market where our programmers are looking for distribution across our networks. We have a very different view of cable position in the German market and was expressed by the regulatory. We view – cable is the only industry sector that is investing in next generation networks 100 megabit broadband speeds there is a reason why we are getting 70%, 80% of net gain is because we’re providing the products in the servicers and consumers one and we are very, very small in the scheme of the German marketplace to combined KBW and Unitymedia would be something like a €1 billion of revenue compared to 35 billion for Deutsche Telekom in Germany alone. So, it’s almost, it’s a very, very strange and we may respect the analysis has come out but nonetheless we are very cognizant of it, this is an important deal for the market. And we’re trying to be responsive in the two or three things we’ve done, we think our responsive one of which is to continue in Unity what KBW is already been doing and that is unencrypting in basic digital package to make access to that basic digital package easier not just for consumers but essentially resellers and which we’re happy to do and has had little to no effect on KBW business. And also looking at, perhaps changing the nature of our relationship for certain housing authorities in a way that might make it easier for other operators to enter into those markets are context. In the end it’s hard to know what impact these we have on our business and so, I can’t give you a number. But we do feel that in the context of the importance that this merger hold not just for us but for the German market and for German consumers they were not costly.

Very clear, thanks, I have one follow–up actually. I just wanted to understand a bit back to the motivation behind the switch. That you talked about toward vendor financing arrangements which I think is sort of a non–cash additions profit in equipment I think you mentioned is started in the second quarter. And I just wanted to understand who is providing the financing over what assets and what’s the impact, this in terms of CapEx and OpEx and what it made for the customer. Thanks

I think.

I’m not saying in general we been very much focused on try to improve our working capital management benchmark ourselves (indiscernible) company resulted there are opportunities left for us to exploit. So, which one is better financing it’s really a (indiscernible) payments we been trying to push our average (indiscernible) up from 45 to 60 days and there were 60, 70 days. And the way you counting work we have to fund, has been the financing work I think (indiscernible).

I would reply the dramatic shift is going on but what it means that we are trying to (indiscernible) reduced our prepayment cash or our relationship with our vendors some that gives classes when the plans because if we go beyond 90 days with the vendor that becomes that’s the small path of general push on working capital. And the way impact is on CapEx is that we report cash CapEx to any in terms on CapEx I means affected the cash CapEx as we impacted by that. But the scheme of the numbers we’re talking about I don’t believe it’s material the size of our cash (indiscernible) costs base. So I, wouldn’t have replied.

I guess, so it’s not a change your approach around set–top box is (indiscernible).

No, sorry it’s not taping on that, no it’s just been a working capital management. Which is the good take.

All right. Thank you.

And our next question comes from Daniel Morris with JPMorgan. Daniel Morris – JPMorgan: (indiscernible)

Hello.

We are not able to hear you Mr. Morris. Can you speak up please? Daniel Morris – JPMorgan: It’s now better.

Much better, thank you. Daniel Morris – JPMorgan: Okay, thank you very much. An interview today your chairman expressed an interest in the U.K. market. Now I appreciate that he is interested in other sectors but can you comment on where do you see value in U.K. cable and if there is a (indiscernible) tax assets help you future U.S. cash (indiscernible) needs. And I have a follow up thank you.

Well, that interview actually took place along with the new think three or four weeks at least when we were in London together. And I red it briefly yesterday I haven’t studied the course of the article. But I would not read anything into that I guess that’s a point. What’s your follow–up. Daniel Morris – JPMorgan: Okay thanks. The follow up is just on the subs versus revenue growth question. Can you just gives an idea and how back end related to subscriber grows was in Q3 of the margin maybe September would be a very strong month?

Do you comment on that?

Yes that’s true. September was a strong month within (indiscernible) that’s followed always to watch which was so far to strongest. So, it is September strongest than August and July, it’s correct. Daniel Morris – JPMorgan: Okay, thank you very much.

Yep.

And our next question comes from Hugh McCaffrey with Goldman Sachs. Hugh McCaffrey – Goldman Sachs: Good afternoon guys, I’ve got a couple of questions please. Firstly if and the decision from the SCU is negative. Are there any other options you have to pursue the deal with KPW and careful on a little bit is there any deadline associated with the (indiscernible) structure. And secondly just can you give us an update on regulation on do you have any view on sort of the suggested copper price comps have come up with (DC). Thank you.

Yeah, I think it’s soon to respond the third one I’m not sure what is there any impact that would have I don’t know (indiscernible) add anything to that in terms of the German transaction it’s been clearly articulated that December 15, they will have at that point assembled all of the information they need from the market, we will have continued our dialog with them on remedies and they will reach a decision about the transaction. At that point, there is very few things we could do certainly if they were not to be a positive result I can if you could expect that we would pursue litigation, but that’s just normal in ordinary course I wouldn’t you in our view this is a transaction that certainly be clear and may not be the last time we have such a situation in front of us or other operators for that matter. So, we would certainly look to understand better, at least led a (indiscernible) whether this is the right situation, but that would take a longtime so, I wouldn’t expect that would necessary lead to a reversal in the amount of time necessary to only asset that would really be for seeking market clarity if you will down the road, really there are a lot of options beyond that. You stand on the business if you don’t have regulatory approval regulatory approval is a important necessary precedent closing and so if it don’t happen on the 15 we’re really there are no other easy options. Hugh McCaffrey – Goldman Sachs: Okay, that’s clear. Thanks Mike.

Yep.

And we’ll take our final question today from Jason Bazinet with Citi. Jason Bazinet – Citi: Thanks so much. As it relates to Austar, I think on the last earnings call I think a reasonable manner of optimism that ultimately the sale we go through and I was just wondering is there anything changed only or…

No, I think the situation, the fluid as it always is in these matters, but there is a very good healthy dialog among Austar, Foxtel, and the ACCC, the competition commission in Australia, there we’ll continue to be up until the moment that they provide the ruling and also point out there is a new ACCC commissioner who is now sort of assume the position almost after the fact of the objection is being published and has in our view the reasonable approach to this interestingly though unlike Germany if that announcement did not go the way we wanted to go, that could be reversed rather quickly in the courts and was recently a similar transaction was recently reversed and them closing. So, I think there is far more optionality or far more control over outcomes in that marketplace. Having said that, I really feel like in the end this transaction has great potential to be proceed favorably with or without remedies in that I’m hopeful that will get that done. Jason Bazinet – Citi: Okay, thank you very much.

Yep. Mike Fries – President and Chief Executive Officer: I think that said we appreciate everybody here on the phone call with us this morning. And as I said, we look forward to talking to you about a robust fourth quarter and until then, we wish you well and thanks for joining us.

Ladies and gentlemen, this concludes Liberty Global 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.