Liberty Global Q4 2006 Earnings Call Transcript

Mar. 1.07 | About: Liberty Global, (LBTYA)
TRANSCRIPT SPONSOR
Better Than AdSense
Click to enlarge

Liberty Global Inc. (NASDAQ:LBTYA)

Q4 2006 Earnings Call

March 1, 2007 11:00 am ET

Executives

Mike Fries - President and CEO

Charlie Bracken - SVP and Co-CFO

Shane O'Neill - SVP, Chief Strategy Officer, and President of Chellomedia

Gene Musselman - President and COO, UPC Broadband

Miranda Curtis - President, Liberty Global Japan

Graham Hollis - SVP, Liberty Global Japan

Rick Westerman - SVP of IR and Corporate Communications

Analysts

Jeff Wlodarczak - Wachovia Securities

Vijay Jayant - Lehman Brothers

Jakob Bluestone - HSBC

David Joyce - Miller Tabak Research

Ben Swinburne - Morgan Stanley

Alan Gould - Natexis Bleichroeder

Frank Knowles - New Street Research

Gregory Kolb - Janco Partners

Presentation

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Liberty Global's Fourth Quarter and Year End 2006 Investor Call. This conference call and the associated webcast are the property of Liberty Global Incorporated 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 March 1, 2007.

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

Mike Fries

Thank you and thanks for being patient this morning. We were trying to get everybody dialed in. With me in Denver, I've got Charlie Bracken, Bernie Dvorak, of course our Co-CFOs; Liz Markowski, our General Counsel; Shane O'Neill is on the phone as well as Gene Musselman, who runs Europe for us, UPC; Miranda Curtis and Graham Hollis, who oversee Japan; [Leo Stegman], our Controller; and Rick Westerman, of course you all know, Rick.

I am going to turn it back over to the operator for the Safe Harbor statement, then we will get right into the call.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Click to enlarge

Operator

Thank you, sir. Page two of Liberty Global's presentation details, the Company's Safe Harbor statement regarding forward-looking statements. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Including statements about Liberty Global's anticipated launch of modified Dutch auction tender offers, its plans to upgrade analog customers to advanced digital services, to increase the downstream speeds of its broadband Internet access services across most of its markets, and to increase its aggregated telephony penetration. Liberty Global's insights and expectations regarding competition in its markets, the impact of Liberty Global's M&A activity on its operations and financial performance, its expectations about 2007 and other information and statements that are not historical facts.

These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these statements. Please refer to the publicly filed documents of Liberty Global, including its most recent Form 10-K filed with the SEC. For information about the risks and uncertainties related to Liberty Global's business, which may affect the forward-looking statements made in this presentation. The forward-looking statements in this presentation speak only as of the date hereof.

Liberty Global expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements made in today's presentation to reflect any change in Liberty Global's expectations, with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

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

Mike Fries

Thank you. As normal we have slides on our website, so if you haven’t gone to those please feel free to do so. If you have, on the agenda slide here, we are going to stick to our normal outline. I am going to walk through some highlights and then Charlie will review the numbers.

I think as most of you know we have an Investor Conference coming up in a couple of weeks in Zurich, and so we are going to save a lot of the fire power, if you will, for that call. I'll let the numbers here do the talking and get right to your questions.

So I am on slide 4, and I am going to hit some headlines here. And hopefully you are getting used to the three core drivers of value creation: the growth, M&A and capital structure for us. It's more than just a nice graphic actually. Just about everything we do falls into one of these buckets and we believe in 2006 all three were really clicking here.

Now first of all we pride ourselves on achieving a best-in-class organic growth. We did that last year. We exceeded all of our full year guidance targets for net subscriber additions, revenue, CapEx, and operating cash-flow.

OCF grew 18% organically in Q4 and 16% in the full year and of course both of those numbers are rebased, for FX and M&A activity.

On the M&A front, we set out to rebalance our operating businesses exiting sub-scale markets and expanding into existing or new markets that had greater growth potential for us.

I think as most of you know, we sold out of France, Norway, and Sweden as what we believe were premium multiples. We generated $2.5 billion of cash proceeds most of it tax sheltered. And we consolidated our position in markets like Romania and the Czech Republic, Switzerland and Japan, all of which have proved to be fantastic markets for us operationally, financially and strategically.

On the capital structure side, we continue to manage aggressively to drive equity returns. We stayed right within our leverage target of four to five times with recaps and refis in Europe and Chile and Australia. Of course, we put $2 billion to work in our own stock and we shrunk the equity by 17%. And if you have seen our release this morning we just announced another $500 million tender.

So, I think while most cable companies can and do talk to you at their quarterly calls about growth. I think few are able to support and enhance that story, with what we think are fantastic M&A opportunities and I think just as importantly a capital structure that's really suited to drive equity returns.

Turn to slide 5. This is a snapshot of our subscriber statistics at December 31. We ended the year with 19.4 million RGUs. We added 2.5 million RGUs in the year about a third of those through acquisitions.

I think more importantly though if you look at the pie chart, 50% of our RGU base at yearend are just under 10 million with high ARPU, advanced services like digital, and broadband and voice. And that's up a little over 4 million just two years ago.

Like our peers the bundle is a big part of that growth. Triple-play customers last year were up 45%. And in markets like Chile and Japan, one out of every two customers has actually taken a bundle today.

On the right hand side, you will see organic net additions, excluding M&A. So we added 1.63 million RGUs in 2006, that’s 200,000 better than our guidance for the year and up 45% from last year.

Just a couple of key points here. I think first since we don't double count digital as do some of our U.S. peers, 80% of that growth came from voice and data, but that means the other 20% came from video. We added 260,000 video customers net new video customers last year.

Second, as in past years, Europe has always been the bulk of our growth, but Central and Eastern Europe represents the vast majority or over 55% of the growth in Europe this year.

We always talk to you about the importance of harvesting the rebuild activity in Central and Eastern Europe. We added 1.7 million Two-Way Homes last year. I think the numbers are starting to prove that out.

Slide 6 is the tale of the tape, if you will, on key products. Starting with Internet, which once again exceeded both our internal and external expectations, I am happy to say that. We added 220,000 Internet subs in the fourth quarter and 750,000 for the full year.

I guess, the punch line here is we were experiencing increased volume in our most profitable product. That's really the key takeaway there. Especially in markets where penetration is still pretty low, in the low to mid-teens, we've got a lot of primary growth ahead of us.

We ended the year with 3.8 million broadband subs that's up from over 2 million two years ago. We added 600,000 telephony RGUs for the year, that's up 46% from last year's net adds, driven of course by VoIP which is now launched in every cable market and represents about 13 million of our 20 million voice homes ready for service.

Digital may be the biggest story here. We ended the year with 3.2 million digital cable or DTH sub that's up five-fold from where we were just a couple of years ago. And that includes 0.5 million subs in Holland, where nearly one in four homes now take digital. That's an important milestone certainly from our perspective. And we surpassed the 50% penetration mark in Japan.

Slide 7 is a snapshot of the financials. Charlie is going to dig in to the numbers a bit more. The revenue for the year was $6.5 billion, operating cash flow $2.34 billion. Both of those numbers are up about 45% on a reported basis, because we are layering in acquisitions. But if you rebase those numbers as we do, can net out M&A and FX movements.

Revenue was up 11% for the year and operating cash flow was up 16%. That's about two percentage points above our guidance for 2006.

There are several things that work here from my perspective. First of all, as the RGU numbers indicate, we are accelerating subscriber growth in our high ARPU, high margin products, like voice and data, and that’s obviously trickling down to the OCF line.

Secondly, bundling is driving more and more revenue out of each home. You can see ARPU per customer are up generally 5% to 10% across the regions. And third, we were clearly starting to scale at the OCF line, especially in Central and Eastern Europe and Chile, where OCF margins are up about 150 basis points.

As indicated earlier, all of that momentum is carried in to 2007. And I am going to close my remarks off with the slide 8 here, and just talk a little bit about where we are on our three core drivers this year. Definitely we have high expectations for organic growth.

Rick says we are going to give much more color on guidance in Zurich in two weeks at the investor conference. But I think you can expect to hear us say that we plan on maintaining or increasing that pace.

I'll make two additional operating points on the organic growth side of things. First of all, our digital TV plans around the world are accelerating and that's a good thing. The next phase of our digital rollout in Holland, for example, is going to help to push double-digit OCF growth in that market, whereas we were flat last year.

We are starting to export the Dutch hardware and technology platform to save money and improve the speed to market in other digital rollouts.

Killer applications like PVRs and High Def and VoD are either launched or ready for prime time. And I think it's fair to say that our competitors are still either perfecting their IPTV services or they haven't yet rolled out. So, we believe the window is fairly wide open here for digital.

Second point, we believe that after the large acquisition, CapEx is trending down for us, especially as a percentage of revenue, and there is three drivers impacting that number.

To begin with; scale continues to benefit our cost of capital on the technology front. CEP prices, the prices for equipment alone this year are expected to decline between 7% and 15%. Integration and one-time CapEx from acquisition is going to slowdown as well, as we continue to rebuild those markets. And then the rebuild activity in Central and Eastern Europe is going to trail off as it should, as we were nearing a fair amount of the Two-Way Home build activity being completed there.

On the M&A front, I'll simply say that activity and interest is picking up a bit really in all core regions of the world for us. I am happy to take questions on that. But the punch line from our perspective is that we will remain disciplined on the buy side and we will remain opportunistic on the sale side.

You look at the capital structure. I think it's fair to say our access to capital markets remains almost unprecedented here. We continue to refinance at lower rates and on better terms. In fact, we are in the market right now with the UPC transaction.

Should we need an acquisition financing, it's readily available. And as we de-lever through growth, we continue to recap subsidiaries with dividend that capital upstairs of the parent. So while we are not reliant on these markets for liquidity, I think it's important to point out that they add leverage for our growth strategies and they are more than available to us today.

And then lastly, we are net buyers of our stock, that’s obvious. As we look at 2007 and as we look at 2008, which we think are the right valuation metrics for our business, we are always looking to put our cash to work in the most strategic and high return equity that we can, and at this point that’s our own.

So with that, I will turn it over to Charlie. He will walk through the numbers and then we'll get to your questions.

Charlie Bracken

Thanks Mike. For those following along, I'm now on page 10. This slide shows the revenue broken down by division, and it also highlights the rebased growth figures for Q4 as well as the full year of 2006, as compared to the same periods in 2005. Just to remind you all again rebasing means adjusting all 2005 periods to include acquisitions on a comparative basis with the 2006 actuals and it also adjusts out any FX differences.

So you can see from this slide, UPC Broadband in Europe had revenue growth of 11% for Q4 and the full year it was at $3.3 billion. 9% of that revenue growth came from Western Europe and 16% in Central and Eastern Europe. Japan saw 13% growth in Q4 to $544 million and 12% for the full year to $1.9 billion. And Chile had a really great year, 14% to $559 million.

So, overall LGI revenue was up 12% in Q4 and 11% for the full year to $6.49 billion and that's consistent with our goal of generating double-digit revenue growth.

Turning to page 11, this shows rebased OCF growth. UPC Broadband in Europe, OCF was up 22% for Q4 to $355 million and 18% for the full year 2006 to $1.3 billion. In terms of a split between Western, Central and Eastern Europe, Western Europe is up 13% for the full year and Central and Eastern Europe up 22%. Gross margin expansion in Central and Eastern Europe is up 1.8% year-over-year.

Japan J:COM had a very solid year, up 14% for Q4 and 13% for the full year to $739 million. Chile grew faster than Central and Eastern Europe. OCF was up 23% for the full year to $200 million. Five years ago, VTR was less than $50 million of OCF that's up four years in a row. Overall LGI was up 18% in Q4 and 16% for the full year to $2.34 billion and that's consistent with our goal of mid-teens OCF growth.

I am now going to turn it over to Rick to take us through free cash flow and then we will go to questions.

Rick Westerman

Okay. Free cash flow was $117 million in Q4 and $10 million or more or $127 million for the full year 2006. And the overall increase for the full year was driven primarily by a $540 million increase in cash flow from continuing operations as compared to 2005. Now as many of you know, we are not really prioritizing free cash flow generation given the abundance of high return investment opportunities that we have. But we do strive to be at least breakeven to positive on a consolidated basis at our key funding pools.

Our CapEx in the fourth quarter was $458 million and it was $1.5 billion for the full year. Adding in capital lease additions that were $150 million for the full year, which was primarily J:COM financing at CPE, total CapEx and capital lease additions were 25.6% of revenue. And that's about 150 basis points below our full year guidance of 27% of sales and despite the fact that we added over 200,000 more subscribers in our guidance following a very strong Q4.

Moving on to slide 13, to give you a little bit more detail on CapEx, you'll see that over 80% of our spend in 2006 was revenue generating. This category includes CapEx related to subscriber growth, which is CPE and scalable infrastructure. It also includes network spend, which is primarily upgrade and new build. So, 59% of our total spend or approximately $1 billion was related to subscriber growth, and that's all generally variable success-driven spend. 22% of our spend was on network CapEx.

We upgraded over 1.7 million new Two-Way Homes in 2006, including about 1 million new homes in Central and Eastern Europe, most of those were in Poland and Romania as we upgraded over 300,000 homes in each country. All of that is very high spend. We are looking for a cash-on-cash paybacks on new build in that region, generally less than three years.

The balance of our capital expenditures or about 19% was support capital and that spend is mostly related to things like information and billing systems. But generally speaking, we see CapEx heading down as a percentage of sales going forward.

Moving on to the balance sheet, slide 14. We reported $12.2 billion of total debt and $2.4 billion of cash at December 31. That cash figure includes about $480 million of restricted cash, which has mainly been set aside to defease our high-yield bonds at Cablecom in Switzerland. And I think as many of you know, we are actually planning to fold Switzerland into our Pan-European bank deal as early as mid-April.

Our gross leverage at December 31st was 4.8 times. I will walk you through the calculation here of our net debt of $10 billion. If you take our fourth quarter operating cash flow and run rate that gross leverage 4.8 times, net leverage about a turn lower at 3.9 times, then on the right hand side we've got a column that adjusts for the defeasance of those Cablecom bonds that I just mentioned as well as for assets that we've monetized to back-out the debt there. And when you make those adjustments gross leverage comes down from 4.8 times to 4.5 times, which is really right in the middle of our range.

We do have untapped maximum availability of about $2.7 billion. That’s the borrowing capacity at December 31st, and that includes about EUR1.3 billion of untapped borrowing capacity in our key European credit facility.

We did complete several different financings during the year. And as Mike mentioned we are actually now re-pricing our UPC Bank debt and expect a favorable outcome there. Overall, our cost of debt remains in the 6% range and if you exclude Japan where interest rates are very low, that number would be right around 7%.

We have hedged our European facility into Eastern European currencies, and we swapped our recent debt in Chile into pesos. So, we are very much matched on currencies between debt and cash flow. And our debt is generally termed out beyond 2010 and we continue to extend maturity as we refinance.

So just in conclusion, I think we feel great about our 2006 performance and even better about 2007. I think we look forward to seeing many of you in Zurich in just a couple of weeks time. If you haven’t registered, we would encourage you to go to our website and do that. Space at the event is fairly limited. So we would encourage you to sign up quickly to make sure you don’t get shut out. And I think we are going to have a pretty exciting program for you capped off at the end of the day with a keynote at dinner by John Malone, our Chairman.

So with that I think operator, we are ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from Jeff Wlodarczak with Wachovia Securities.

Jeff Wlodarczak - Wachovia Securities

Hi good morning guys, congratulations on a good quarter. Mike can you give us the latest on the J:COM rationalization? Is mid '07 still a reasonable timeframe? And then may not getting in to specifics obviously, but can you talk about general options you have for that asset? And then one more quick one, more color on operating margin expansion. You are seeing acceleration in some of your higher margin RGUs. Is 40% still a reasonable level over the next couple of years in operating margins, thanks?

Mike Fries

Sure. Well, on Japan I think I will repeat what I have said, because I feel I need to do that every time I am being asked the question. We are happy with the businesses we own. J:COM has been a great performer for us. It’s a very strong operating business. And we have been very successful with our investment to date in Japan, and we have a very strong relationship with our partners Sumitomo.

We have as I have mentioned also in the past been looking at ways of creating value or getting greater value recognition for the assets in that region of the world, and we remain very busy and active on a few different ideas. I am hesitant to give you any more than that, except to say that we are very busy on some ideas. And they could involve any of the assets there and there are two big ones, J:COM and our interest in the programming assets.

So, the reason I am reluctant is, every time I do make a comment, our partners show me the transcript. And I want to make sure they understand and you understand that we are happy in the market. We have great partners, but we are always looking at ways and it's our obligation to look at ways to make sure we are getting the best possible value recognition in any market for us. And those are the kind of things we are doing. This year, we hope to have a couple of interesting projects underway and we will keep you posted as we get there.

On the operating margin front, no doubt in my mind that 40% is an attainable number in these businesses. When you roll out the model, you can certainly achieve those types of margins. Remember we are generating on average about a third of what Comcast generates out of every home. And yet we have comparable EBITDA margins to Comcast.

So while we are generating two-thirds less out of each home because of the nature of our video business primarily, we have comparable ARPUs on voice and data. We still generate 36% margin. So as we drive that revenue per home from an average of say $35 across our footprint to $50 or $60 which you have already achieved in markets like Chile and Japan, you are going to see a bunch of that drop to the bottom line.

It also tells you that we run a very efficient company here. If we can achieve comparable EBITDA margins on less revenue out of each home because of our video ARPUs, I think that tells you that we run an efficient business to begin with. So we are pretty confident. I am not going to give you a timeframe. We'll provide more color on that in Zurich. But I will tell you that is an achievable number.

Jeff Wlodarczak - Wachovia Securities

Thank you.

Operator

The next question today comes from Vijay Jayant with Lehman Brothers.

Vijay Jayant - Lehman Brothers

Thanks. Mike a couple of questions. First any update on what KPN and Swisscom are doing on IPTV. There have been some press releases recently. Are you seeing them in the marketplace at all? And second on again press release coming out, that is you guys may be interested in wireless assets especially in the Netherlands. Is owning wireless assets key to -- do you need a quad-play generally? Thanks.

Mike Fries

Yeah. I will hit the points on KPN and Swisscom as well your wireless question. Then I will let Gene chime in to give you more color from the ground level. But the punch line on KPN is they've yet to roll out an effective product. And I think that’s not unusual. We are seeing many of our tele-film competitors struggle to either integrate or launch a product that they can argue as a replacement service for cable. Swisscom has launched and they have reported 30,000 customers unclear whether those are actually installed, whether they gave it away, what the promotional element is there. But I would say that they are also experiencing similar difficulties with the platform that they have chosen.

Let me address your wireless question and I will ask Gene to give you a little more color on those IPTV rollouts. We have said in the past that we don’t feel there is a need to spend a considerable amount of time and resources right now on mobile or cellular services, we do have MVNOs launched in many markets and we are experimenting with end-marketing of quad-play bundle.

Owning a wireless business is a very different capital decision and a very different strategic decision and we’ve yet to see one that made tremendous sense, primarily because the wireless assets for sale are either third or fourth in the market share ladder and were in markets that are already 100% penetrated.

So, having said that in instances where you can participate with the potentially join a consortium of other likeminded operators you might find a way to benefit from owning an infrastructure, but to do that on our own in NL for example where Orange is for sale unlikely.

And Gene do you want to comment anymore on KPN and Swisscom?

Gene Musselman

I can’t add too much more than what you said. I think everyone is aware that KPN for example rolled out. I think it was late summer of last year and that anticipated being in the market with a full commercial launch by the end of December. Unfortunately hadn’t they experienced technical problems and announced that that would be delayed until January timeframe and subsequently they've announced. We haven’t seen any real activity from them and it's our belief at this point that you probably won't see them into the market until maybe the second half of this year if then. They are experiencing many of the technical problems that operators do when you are trying to rollout a complex product as the triple-play.

In the case of Swisscom, Mike is correct, the last number I heard was about 30,000 subscribers. On the other hand they too are having considerable technical issues. There has been a number of articles in the local press commenting on the problems. And even one of the executives from Swisscom was quoted as saying they were experiencing problems in the markets. And they didn’t know when and if they could resolve those issues in the near-term. So, my guess is that we have still got a 6 to 12-month window and it's our objective to take advantage of that opportunity.

Vijay Jayant - Lehman Brothers

Great thanks.

Operator

Moving on, we will hear next from HSBC's, Jakob Bluestone.

Jakob Bluestone - HSBC

Hi, it's Jakob Bluestone from HSBC. I was just wondering, first of all could you just talk a little bit about how you see, high-definition services involve in some of your major markets. And secondly, when you say that you are looking for M&A deals to be accretive, is that earnings accretive or cash-flow accretive or both? Thanks.

Mike Fries

Sure, let me the M&A question first. It's accretive on a number of levels, it's accretive ideally from a valuation perspective by that I mean when we look out 5, 7 years owning that asset makes our stock more valuable today than not owning that asset. So, it's accretive from a valuation point of view. It may or may not be accretive from a direct multiple point of view. To us that’s not the only issue and question you got to make sure that the forecast in the long range plan you put together for that business support the transaction you are doing.

Whether you are a buyer or a seller it's accretive typically from a growth point of view ideally, in a sense that owing the business benefits your overall growth profile in some cases it might, in some cases it might not. If it doesn't then you got to find other benefits either from scale, efficiencies, consolidation of a market. So, there is strategic value there which I would say is the third element of being accretive. As we are strategically accretive to the broader goals we are trying to achieve in a region or market. So, for example, we might buy a small, we might consolidate a small asset in Czech Republic than on a standalone basis, looks to be perhaps maybe a bit more expensive than other assets, yet might fill the hole of a donut if you will for a core region or a core marketplace.

So, it's really about valuation, operations and the strategic objectives we are trying to achieve in a marketplace. On HD I will turn over to maybe Miranda and Graham talk a little bit about Japan where we have the greatest experience of HD. I will simply say that is our view and I have said this before that HD is a killer app that once people experience high definition television on their flat screen they are not moving back. And it’s a huge advantage for us relative to Telco's and that one that you can expect us to push very cost effectively very aggressively in markets where we have that capability, and maybe Miranda or Graham if they want to talk about Japan where it really is the killer app for us. Miranda?

Miranda Curtis

Yes Mike, I am happy to do that. I think as some of you are aware to take home transition to digital has been extremely successful. We now have over 52% of the half of the subscribers on digital and then moving steadily towards total conversion. 100% of those digital subscribers are high definition, and that’s been driven by very active government support for high definition in the broadcast environment. And that’s allowed us to build a high definition platform, and then to layer on the advanced service so that in the last year we sold over a 100,000 high definition PVRs to our subscribers base. And on the JTV side we are gradually transitioning all our channels to high definition. We already have Discovery and MoviePlus high definition, and we are preparing to launch high definition versions of LaLa, Golf Network and J Sports in the next 12 months. So high definition is absolutely key and is absolutely fundamental must have to our success in digital in Japan.

Jakob Bluestone - HSBC

So if I can just ask one follow up. Could you possibly comment on how important HD would be in Europe for you. Thanks?

Mike Fries

Well, go ahead Gene.

Gene Musselman

We plan on rolling out High Def in the Netherlands in the August timeframe. And that same box that we will be deploying in the Netherlands, will also be capable of deployment in Cablecom in Ireland. So one of the things that we have tried to do is standardize our platforms and to take it a step further. As we roll out digital in our other markets, of course those boxes would be deployable and leverage both there as well. In the Netherlands there still isn't a large number of high definition television set penetration. And as a result there is not a significant domain. So I think being in the market by August is sufficient.

In Ireland there is more High Def programming available particularly on the BSkyB Platform, which may cause us to go faster there than what we anticipated, but we do have products ready to rollout particularly in those three markets.

Jakob Bluestone - HSBC

That's very helpful. Thank you.

Operator

Next we will take a question from David Joyce of Miller Tabak Research.

David Joyce - Miller Tabak Research

Thank you. If you can give a little more color on CapEx in the quarter, I know it is wider than expected, on greater than expected RGUs. Can you quantify perhaps what portion of expenses related to the RGU growth might have flown through operating expenses, is the first question?

Charlie Bracken

I think CapEx. As Q4 is our biggest selling season, so a lot of the CapEx in terms of adding subscribers results in CPE in being added and that from Q4 you would have seen a lot of CPE coming through. We also had a few delays in the summer on some of our build out projects in Europe. So a lot of it is caught up at year end and we continue to make investments in the IT and support platforms. The key impact of adding subscriber, you don't see subscriber acquisition costs and apples-to-apples you should see that increase in Q4 as compared to Q3. So we remain in line with our usual metrics and subscriber acquisition costs. I didn't see any particular increase in the cost of acquiring a subscriber.

Mike Fries

We see the guidance on the RGU adds for the fourth quarter. That certainly had an impact on the CapEx figure being slightly higher than our full year number as a percent of sales. But there is a lot phasing in the fourth quarter that ends up being spent because it was not spent in the first three quarters and we really focused on the full year. So if you are looking at the fourth quarter in particular concerned about the impact of either that CapEx figure, but I wouldn't be to too worried about it.

David Joyce - Miller Tabak Research

And you've mentioned how you are pretty fully upgraded for Two-Way capability in Central and Eastern Europe. Are there any markets that you still need some digital upgrade enhancements?

Mike Fries

Well, I think the answer is let Gene speak to you more specifically. We will have this year a digital product in all of our markets. The question though is the extent to which we roll that out in the entire market. So while we might have a digital product to Czech, we haven’t necessarily rebuilt every home in Czech. Gene you want to talk on that.

Gene Musselman

I guess I would just comment and say that, as you look at '08, there is still plenty of upgrade opportunity in Poland and Romania. In Romania now we've made the major acquisition a year ago of Astral and so there is a lot of activity going there in '07 and will continue through '08. The same applies to Ireland, where we've acquired NTL and so you can expect a significant amount of upgrade activity to Two-Way plat in that market and a conversion of MMDS subs over to cable plant. And then finally in Switzerland another M&A activity. We have a fair amount of upgrade potential there as well. In the past there have been homes that the system has been unable to gain access to and we are working on that and resolving that issue as I speak. And then there are number of plant kilometers that are 450 and one way or even 600 in one way. That we are looking at improving the economics upgrade and hope to have the majority of those completed in '08 and maybe into '09.

Mike Fries

If you look at it in a broad sense there are about 3 million homes in Europe and about 13 million that are not yet upgraded. 2 million of those are in Central and Eastern Europe and a million are in Western Europe as Gene just described in Ireland and Switzerland. We are not going to upgrade all 3 million of those homes. We are going to target and focus and prioritize and I think our budget roughly this year is about a million homes in Europe where we are trying to prioritize to re-build. And I don't think you should expect that all 3 million of those homes will get re-built.

David Joyce - Miller Tabak Research

Alright great, and do you have any general guidance for the year on OCF and free cash flow, will the CapEx be below 26% of revenue?

Mike Fries

We are going to provide that guidance in a couple of weeks when we do our presentation in Zurich. So I encourage you to either attend or dial in.

David Joyce - Miller Tabak Research

Great. Thank you.

Charlie Bracken

Hey Mike may I add one other on the upgrade.

Mike Fries

Sure.

Charlie Bracken

You should take note that if you are relating the Two-Way upgrade to the deployment of digital that's not necessarily the case. We have rolled out digital on one way plants and we would continue to do that in some instances. So, we are not limited in our digital deployment by necessarily Two-Way fully upgraded plants.

Mike Fries

Next.

Operator

Our next question will come from Ben Swinburne with Morgan Stanley.

Ben Swinburne - Morgan Stanley

Hey, good morning guys, thanks for taking the question. One on the operating side, then a more strategic question Mike. First, you made some comments up front about exporting the digital I think the technology and maybe some of the experience from the Netherlands and the other markets. But I know, you've also talked about shifting from sort of a push to a pull strategy in the Netherlands, maybe if you could just give us a sort of state of the union on digital in Europe. How do you see marketing that product and what that means for ARPU and margins? I am extrapolating from some of the comments you've made in the past that margin expansion is a key part of the long-term story. So, just trying to figure how we should think about digital deployments in that vein.

And then, second on cash structure, you guy's have been buying your stock back aggressively now. I actually can't remember how many tenders you've done, I think it's four. Being a public company it's helpful if you are buying other companies with equity, but you tend to use cash and given the interest rate environment. At some point does it make sense to be public? How do you think about that option and what it means, the benefits of being a public company versus the headaches associated with it and the opportunity to maybe be private?

Mike Fries

I'll take the second one and Gene you start working out with the first one. There is no grand scheme here in the sense of the buybacks having the intent of slowly privatizing the company. We are buying our stock as we sit each quarter and look at our available liquidity and the opportunities in front of us and as we get smarter about the '07 and '08 timeframe and the growth potential in our business. We draw only one conclusion which is we should be net buyers of our stock.

So, at some point obviously, if you were to extrapolate this calculus the idea of creating liquidity through leverage and to be balancing of assets, tax efficiently and then driving it into your equity. At some point it's not going to be much top class, that’s a long time out. I think we are reviewing this because we see it as the smart way of deploying our capital in the business we understand best.

Being a public company has pros and cons, but the cons are certainly significant enough for us to look at a transaction or a privatization for that purpose alone. We’re hopeful at some point; we can use our currency in transaction. You are correct we’ve used cash primarily because we don’t want to use stock that we think trades at eight for devised up to ten if you don’t have to. And because cash and Charlie and the team are doing such a great job of creating capital for us when needed it’s easy to make the decision to use cash.

However, clearly we would like to see our stock trade higher if we continue to buy it, maybe it will at some point and it perhaps has incremental benefit from that would be the ability to use that as currency. So, we’re not making any, there is no 180 degree turns on this it's an incremental approach to value creation and growth. And I think you correctly pointed out the pros and cons, but we are going to play the card we have dealt with and I think they are pretty good.

Gene do you want to talk about the digital and particularly the question was what we are doing about exporting primarily the platform in Holland not necessary in the business model and how we see it with digital in Europe?

Gene Musselman

Yeah I can approach it first maybe from 30,000 foot level and then try to come down in a little bit more detail. As in '06 I mean if I would look back and review what we’ve done Monday morning quarter back and I would say that '06 was a very successful year in the Netherlands and that we’ve created an install base of more than 0.5 million digital subscribers using as you said a combination of push and pull strategies.

Although very heavily reliant on the push strategy and towards the end of the year the exception straight at the door we saw a decline and also an erosion of the economics, although, we continued with that push strategy throughout the end of the year. I think that strategy was successful, however, and if we were to look at rolling out The Netherlands, again, I probably wouldn't recommend changing it.

In '07, on the other hand, we’re going to modify that strategy to some extent and focus more on the pull strategy and building value. Last year, we were trying to build a base in which we could scale the operations and make acquisition of the contents. [It’s value needed to be affordable], et cetera.

And also, this year we'll have the digital drivers to roll out in The Netherlands that we did not last year. That is DVR, HDTV, and VOD, all of which were in the process of putting into the market, as I speak.

Our next launch is in Cablecom and we will re-launch them starting April 1. They have 135,000 digital subscribers at the present and we are just in the process of installing the D4A platform there, which will allow us then to use the same [PE] and leverage our down in that market.

You may not be aware of it, but we have close 1 million digital subscribers now, and some of our M&A activity last year, we actually acquired digital platforms, for example, in the Czech Republic, the Karneval acquisition in December. They have a digital platform and we will continue to use it and roll out throughout the UPC Czech areas this year.

In Ireland, they have a digital platform and we are just in the process of moving from the NTL platform in the UK and consolidating operations in Dublin and we’ll be rolling out the D4A platform along with DVR there in the next couple of months.

In Romania, through the acquisition we acquired a digital platform, which we will continue to roll out in Bucharest for the balance of the year. And we are also in the process now of developing business cases for Hungary, Poland, and Austria.

Although, in Austria, we’ve deployed and we’re looking at taking out the legacy platform and putting in the D4A, but we will be making decisions with respect to those three markets in the coming months.

Mike Fries

The point I would make, Gene, maybe just add to that a bit is make sure you understand these are being phased properly, and paced properly, and that the benefit of using the digital platform in Holland is we get cheaper boxes, better technology, more stable systems.

And so, the education we received in Holland will certainly benefit us in new markets, and Gene's right, we're taking a more, a pacing, we're approaching the business at a different pace, but the platform itself is really one of the hidden benefits here, because of the pricing we have driven down vendors on with respect to the boxes and the expertise around integrating the systems. That's a huge benefit to us, as we roll it out elsewhere.

Gene Musselman

That's correct. I will just end by saying, in most of those markets we will probably use a combination of push-pull, but based upon what we learned in The Netherlands. So if there is anything else, I’d be happy to address it.

Ben Swinburne - Morgan Stanley

That's very helpful, thanks a lot guys.

Operator

Moving on, we will hear from Alan Gould with Natexis Bleichroeder.

Alan Gould - Natexis Bleichroeder

Thank you. I have got a couple of questions please. First, Miranda, I believe J:COM's guidance is that they will have mid-teens EBITDA growth excluding Cable West. I think there a couple of smaller acquisitions in there as well. What would the organic growth be at J:COM? And second, Mike, could you address a little bit on the programming asset side, what's happening there?

Mike Fries

Yeah, I will let Graham perhaps address the guidance point on J:COM and then Shane O’Neill, who’s on the phone, can talk about content.

Graham Hollis

On the guidance, I don't think that J:COM hasn't been specific than the number that you guys.

Mike Fries

But I think the question is that’s an organic figure.

Alan Gould - Natexis Bleichroeder

Is that organic or wasn't there a couple of other smaller acquisitions, so [organic] will be a little bit less than that?

Graham Hollis

They were very small. It’s largely organic. I don't think it’s a meaningful difference.

Alan Gould - Natexis Bleichroeder

Okay.

Mike Fries

And then, on the programming front, I will introduce it as, we own programming assets everywhere, and in fairness, they don't always make it on the slide show, but they are meaningful and they are starting to get more important strategically and financially for us. We own programming businesses in Australia and obviously Japan where the [Sharp] channel is quite significant.

And in Europe, Shane and his team have done a great job of starting to build the programming platform, and Shane, you want to take a couple minutes perhaps and update us on that?

Shane O'Neill

Yes sure, Mike. The programming business in Europe is called Chellomedia and it really has four key divisions. We have one, if you like, global or pan-regional business and then three regional businesses. The global business is called Zone Vision. Its two best known channels are Extreme Sports and Reality. And then we’ve built three regional businesses; one in the Benelux., one in Central/Eastern Europe, and one in Spain. And those businesses operate both premium -- well in the Benelux, they operate premium movie and premium sports and some thematic. In Central Eastern Europe, it is basic sports and thematics, and Spain and Portugal, it's predominantly thematic content. And all of those businesses make around $40 million of EBITDA.

We financed a lot of the growth in the business through a debt facility and we think the business is poised very well for growth. We think that will participate and benefit from growth in digital, which is happening right across Europe, growth in multi-channel advertising and growth from accessing new distribution platforms, including cable, satellite, mobile, and web. So, that's really the strategy in a nutshell as it stands today.

Alan Gould - Natexis Bleichroeder

Where was that $40 million a year or two ago?

Shane O'Neill

Zero, to be honest. Two years ago, it was around zero.

Alan Gould - Natexis Bleichroeder

Thank you.

Operator

Our next question will come from New Street Research’s Frank Knowles.

Frank Knowles - New Street Research

Yes, hello. I got two questions. One specific one, it seemed to be an extremely good quarter in the fourth quarter in Austria in terms of Internet ads and to some extent telephony, I just wondered if there were any special promotions or anything or if that's a sign of an accelerated pace we might be able to expect during 2007?

And then the second question, a much more general one on Internet trends, we’ve heard that there has been a dramatic growth in some markets in peer-to-peer video content and that's been putting some pressure on network capacity for some operators. I just wonder if that's something you are experiencing and whether you are going to have to spend any significant amounts on CapEx in increasing both upstream and downstream capacity for that? Thanks you.

Mike Fries

Maybe I'll take the second one, Gene, and you can talk about Austria. I'll tell you, we are not seeing a meaningful impact during the day from any of the online video activity. Certainly, it's nice because we have a more robust upstream than our competitors, you could find at night that as much as 90% of your traffic is peer-to-peer or people are uploading videos or doing what they are doing, but during the day it’s maintaining in around 45%, 50% level, which is what we used to see.

In our recent statistics, just the other day, that only about 2% of our traffic in Europe is estimated to be YouTube traffic, for example. So, those are not the kind of numbers that are going to swing our bandwidth capacity or usage and with our traffic shaping tools and our ability to manage that bandwidth more effectively as time goes on. We’re not concerned about it.

Gene, do you want to talk about Austria for a second?

Gene Musselman

Yes, I'll just take it. I think it’s more of a general statement, I think that the growth that you saw in Austria is simply a function of the fall campaign and the higher spend in that market. But on the other hand, I think you would have also seen a significant uptick in data sales, in telephony sales, and the other markets as well.

With respect to looking forward, one of the things that we’re in the process of doing is refining our bundling strategy, and we spent a great deal of time on that in the last, I'll say, two months. I have sent some people back to United States. We have visited Time Warner. We have visited Comcast. We've picked up best practices. We've brought our own Pan-European group together.

We've done some sharing of best practices there and we are just getting ready to kickoff with a spring campaign built around the whole refined bundling strategy. So, I would hope that, that strategy would produce good results throughout all of next year in terms of both our data and our telephony product across the markets.

Frank Knowles - New Street Research

That’s great, thank you.

Operator

We have time for one more question. Our next question will come from Janco Partners’ Gregory Kolb

Gregory Kolb - Janco Partners

Hey guys, great quarter. I just wanted to ask one quick question, as you are thinking for the Amdocs CRM platform or have you switched over in Romania and Switzerland? How do you guys plan on utilizing that platform maybe going forward and expanding it, and do you think it's going to allow you to do more cross-selling and more focused marketing effort?

Mike Fries

Are you referring to the IT platform?

Gregory Kolb - Janco Partners

Yes

Mike Fries

Go ahead, Gene.

Gene Musselman

I am not sure I can give you a good answer, because, first of all, as you said, these are two markets that we’re just deploying Amdocs. It’s because we have different generations of [Darby], which is our building platform and that's kind of the -- the new deployments really are a next generation, where we are trying to get to a thinner client.

And we have no plans at this point to my knowledge to expand Amdocs into markets that we have already deployed. Although, I could be incorrect and there is something I would have to go back and talk to our IT people as well.

Mike Fries

The beauty of what well we call [Darby], our IT platform in Europe is that, it’s more or less plug-and-play, best-of-breed applications. So that while in Western European in markets like Holland and it used to be in France and Austria and Ireland, we are rolling out a more or less common platform.

In Central/Eastern Europe, we’ve charged the team with coming up with perhaps just as robust but less expensive platform that does the same thing and the beauty of that is you can pull certain applications out and put other ones in.

So, I don't think it's appropriate for us to say which ones are naked, if that's the purpose of your question here. Except to say that, you maintain a flexibility of plugging in and pulling out applications that we think aren't going suit that particular market. That’s the beauty of that particular IT system for us.

Gregory Kolb - Janco Partners

Great, thank you.

Mike Fries

Yeah. All right, well, we appreciate your joining us and hopefully look forward to seeing many of you either on the web online or in Zurich, and take care, bye-bye.

Operator

Ladies and gentlemen, this concludes Liberty Global's fourth quarter and year-end 2006 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.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Click to enlarge

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!