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Liberty Global, Inc. (NASDAQ:LBTYA)

Q1 FY08 Earnings Call

May 08, 2008, 11:00 AM ET

Executives

Michael T. Fries - President and CEO

W. Gene Musselman

President, Liberty Global Latin America and Chief Executive Officer, VTR Global Com S.A.

Miranda Curtis - President, Liberty Global Japan

Bernard G. Dvorak - Sr. VP, Co-CFO

Balan Nair - Sr. VP and CTO

Shane O'Neill - Sr. VP, Chief Strategy Officer, and President, Chellomedia

Charles H.R. Bracken - Sr. VP, Co-CFO

Lehman Brothers

David Joyce

Morgan Joseph & Co.

Frank Knowles

Janco Partners Incorporated

President and Chief Operating Officer, UPC Broadband

Mauricio Ramos

Analysts

Jeffrey Wlodarczak - Wachovia Securities

Vijay Jayant

Miller Tabak Roberts Securities

David Kestenbaum

New Street Research

Gregory Kolb

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to Liberty Global's Investor Call. This call and the associated web cast are the property of Liberty Global and any redistribution, retransmission or rebroadcast of this call or web cast 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. As a reminder, this conference call is being recorded on this date, May 8, 2008.

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

Michael T. Fries - President and Chief Executive Officer

Great. And welcome everybody to our first quarter call. Let me just take a moment to introduce who's on here with us. We have Bernard Dvorak and Charlie Bracken, our Co-CFOs, of course; Gene Musselman, President of our UPC Division; I've got Miranda Curtis and Graham Hollis, who will oversee Japan and Mauricio Ramos, President of VTR in Chile.

We also have on the call, folks, you might hear from Rick Westerman, you all know, Balan Nair our CTO and Shane O'Neill, our Chief Strategist. So with that, I think I'll turn it back to operator.

But first let me remind you that the slides will speak from today are online and hopefully easily accessible to you. So, while we're going through the lengthy Safe Harbor statement, you might want to track those down.

Operator?

Operator

Thank you so much, sir. Page two of the slide details the company's Safe Harbor statement regarding forward-looking statements. Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including with respect to Liberty Global's outlook, future growth prospects and rollout of advanced services, its expectations regarding competition and M&A activity and other statements that are not historical 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. These risks and uncertainties included those detailed from time to time in Liberty Global's filings with the Securities and Exchange Commission, including its most recently filed Form 10-K and Form 10-Q. Liberty Global disclaims any obligation to update or revise any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based.

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

Michael T. Fries - President and Chief Executive Officer

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

So, I'm on slide 4, which provide some highlights and I think as you walk through results here, you'll find that this was a pretty strong operating quarter for us across most of our global footprint with a few markets, which we will discuss impacting more heavily, some of the headline figures in particular revenues and we'll talk a lot about that today. What should jump out to you, of course, is our operating cash flow performance, which exceeded $1.1 billion for the quarter or about $4.4 billion on an annualized basis and this represents 14% rebased growth as we typically calculate and 34% reported growth. And it might be worth pointing out that we do continue the benefit from strong local currencies versus the dollar here with most of our main currencies up 10% to 15% over last 12 months.

OCF margins are now over 42%, that's up nearly 300 basis points over last year. So, we are achieving on our profitability goals or I might even say overachieving on our profitability goals. And let me just assure that's not coming from marketing and sales. It's mostly efficiencies and smart management of our cost, which we continue to, I think, do a very good job of. There's really not much to report on the M&A front. But we did close in a few small tuck-in acquisitions in Japan and Europe, totaling about $62,000 RGUs. I'm not going to dwell on it today. I would be take questions I suppose. But there are small signs that the second half of the year could be more active for us both in the capital markets and in the consolidation pipeline.

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

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

Please turn to slide 5. It's going to show you some headline numbers for the first quarter compared to last year. I'll just pick out a few here since you probably run through these in the press release already. But RGUs at $24.4 million representing over $16.1 million in unique customer relationships. Just a quick historical handle [ph] when we started life as LGI almost three years ago, those numbers stood at $12.2 million and $9.2 million. So through organic growth and some accretive acquisitions, we've doubled the subscribers and I definitely scale this platform.

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

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

If you turn to the next slide, slide 6, I think you will see a breakdown of that revenue growth by region. I need to clear that it's here is that most of our operations Japan, Chile, Austria and even Telenet are largely in line with our full year guidance of 7% to 9%. The exception this quarter is UPC in Europe. I will dig into that a bit in a slide or two as will Gene in his remarks. I think with respect to guidance we would simply say that we feel very good about operating cash flow. But perhaps it's prudent to flag some risk at the top end of our revenue range. However, I will tell you that we, on this call, have not conceded that point internally.

One of the reasons is illustrated well on slide 6, subscriber growth trend, which shows those trends over last five quarters. And you can see there are net adds of 302,000 in the top left chart there and how that compares to prior periods to get not far off our average actually and there is obviously more to the story. If you start at the bottom of the page for a second with voice and data net adds laid out for five quarters, I think you will see that our results with these core products taking into consideration seasonality have been pretty consistent. We added 170,000 to RGU. That's actually higher than the same period last year. And 182,000 broadband subs, which is close to the average for prior quarters.

The punch line is that we continue to realize very strong volume growth on our high margin Voice and Data services. At the top right, you'll see a Video results and that's perhaps the story line here. Despite adding nearly 50% more digital subs in the quarter over the last year which is just turn to 290,000, we continue to experience incremental video churn in certain European markets, really primarily among our low-end TV subscribers. We'll provide some color on that in a second. But I will say if you work for those video losses obviously, total net adds would have matched last year.

And I'll recap on slide 8 before handing it over to Gene here. The goal on this slide is just to give you I think some very good context and background to our operating results. On the positive side, we're adding advanced services so digital Voice and Data at a faster clip. 652,000 advanced services were added this quarter. That's up 10% from last year and above our average over the last five quarters. And as a result and you would expect the ARPU we are pulling out of each household is growing around 6%, which is round about what we had estimated.

Second, digital cable, which is now launched everywhere as of this month, is really started to make a difference. With 3.7 million subscribers, we're only penetrated 27%. And that reflects a range of 70% in Japan, which is our most material market and zero in Poland where we just launched this week. So from our point of view, there is lots of growth here. And I think encouragingly, in the killer applications in DVR's and VoD and even HD are gaining traction faster than we anticipated, helping to drive digital video ARPUs up typically 25% to 50% and I'll tell you even higher in many cases.

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

Our plan here is to continue to simplify and refine our bundles, and Gene might speak to that, but I think also importantly to accelerate [inaudible] which we think is a gain changer for us in this market. Especially in Europe where our competitors are bandwidth constrained with ADSL2+ or even VDSL.

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

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

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

W. Gene Musselman - President and Chief Operating Officer, UPC Broadband

All right. Thank you, Mike. For the next few minutes I would like to specifically focus on UPC and our results for Q1. I think as you all are aware our growth is about selling advanced services, what we call triple-play, broadband voice and digital TV. And if you take a look at the chart on the right, it indicates that we had a good quarter on that front with 319,000 net adds. This was above our average as Mike pointed out for the last five quarters and up 12% year-on-year. Digital, was a major contributor to this growth and I'll talk about it on the next slide. Also voice and data subscribers continued to grow with 205,000 net adds in the quarter, largely driven by improved triple-play bundling.

On the broadband front, we continue to battle DSL but we still have the speed and bandwidth advantage in nearly all of our markets with over 20 megabit to 25 megabit products. This is a key strength noting that speed remains the key driver in the splits for broadband market share in Europe. In order to maintain this lead we're on a fast track for deployment of year-old DOCSIS 3.0.

In the Netherlands we just completed a 120 megabits data trial using 3.0 infrastructure with very positive results and we plan to introduce 3.0 based mega speed products, starting [inaudible] by the middle of July followed selected cities throughout the balance of the year.

Following the Netherlands, we will expand our 3.0 deployments across all markets in '09 targeting the hotspots first. These deployments are expected to be within our CapEx framework and our current long-range plan. Finally, we feel there is a window of opportunity to exploit due to the limited VDSL or fiber competition that we have in our market at present.

With deployment of year-old DOCSIS 3.0 we should be able to maintain our speed leadership as well as capture additional market share going forward.

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

Here I think it's worth echoing Mike's comments that we are not sacrificing marketing spend and growth opportunities for cost savings. The best evidence of this are our total growth sales figures. Q1 '08 results were more than $80,000 above Q1 '07 and actually about $60,000 above our current budget.

Despite these developments analog churn remains an issue in a few markets like Netherlands, Austria and Czech where competitors are principally bottom fishing for price sensitive customers. In addition, we are experiencing voice and data ARPU compressions across a number of our markets, particularly those markets due to the competition.

Research suggests that the majority of the analog churners are single-play customers and as such we have put into place active retention programs to reduce the churns along with new triple play offers including Digital TV.

These programs, as Mike pointed out, are working in Romania and we have added... and as he also indicated, we added RGUs in the first quarter compared to a loss last year.

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

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

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

NL was a good case and point of what can be accomplished with the digital platform. Today, approximately two-thirds of all digital customers take an expanded tier or service above the basic package. This is driving digital ARPU growth, which at $10 or 10 euros, I should say, is two-and-a-half times the amount generated just 15 month ago. Also, NL has been successful in significantly reducing digital churn and driving penetration to 27%.

To further increase penetration and retain customers, NL continues to launch new services with the first HD DVR rolling out in this market this week to be followed with four new HDTV packs and HD content for VoD this summer. The HD DVR launch is in corporation with Philips who will sell HD, standard HD box and the HD DVR boxes at retail alongside the UPC HDTV monthly subscription. We think it's key to be in the retail market and for the first time, when someone buys a new HD flat screen, we'll be there. Also important is the upcoming HD TV broadcast of the European Soccer Championships and the Beijing Olympics. These events should add momentum and drive continued up tick of our digital offerings.

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

With that said, I will turn over to Mauricio for an update on Chile.

Mauricio Ramos - President, Liberty Global Latin America and Chief Executive Officer, VTR Global Com S.A.

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

As in prior quarters, RGU gains and top line growth in addition to our sustained cost controls continued to provide benefits of scale to the VTR, OCF line. This has lead to an OCF conversion ratio of 7.1% for the first quarter. That's roughly the same level on the conversion ratio we obtained for our 2007. And we think it's a good ratio as revenue grows, we contain rather than cut back on SG&A expenses. And that's basically how we are driving OCF margins in north of 40% with that 200 basis points gain over the first quarter of 2007 in this quarter.

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

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

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

In March, as some of you may be aware; we increased broadband speeds to our entire subscriber base forcing our competitors to follow. As a result, we gained further brand and customer recognition and of course, the first-mover advantage. During the quarter, in fact, we continued to grow strongly in Internet subscribers where as our main competitors gain remained flat for the quarter. So, it was overall a very good quarter for VTR and we're of course proud that year particularly in what is an increasingly competitive marketplace.

Our strategy for the rest of the year will continue to be focused on digital migration, targeted bundling and reaping the benefits of scale. That drives high cash conversion ratios on our revenue growth and as a result sustains this high OCF growth.

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

Miranda Curtis - President, Liberty Global Japan

Thank you, Mauricio. J:COM is having a strong and steady first quarter with all line items above or very close to our expectations that are ahead of last year and churn continues to decline. As Mike mentioned, digital penetration is now at 70% and J:COM continues to move steadily towards full digitalization with an additional boost expected this summer from the Beijing Olympics.

Meantime, 160 meg is now proven growth engine for J:COM and they are preparing to roll it out nationwide. Growth also demonstrably stronger in areas where 160 meg has been rolled out with almost 30,000 160 meg subscribers by the end of first quarter.

What's also interesting to note is that approximately 40% of the new 160 meg customers in the Kansai area are churning off fiber to the home and on to cable. The growth thus far has been achieved on the basis of the pre-DOCSIS modems but the full national rollout of DOCSIS 3.0 modems began in the last few weeks. There'd be no technical problems whatsoever and several thousand orders have already been taken. And in parallel with that process, J:COM management is working on refining the pricing of their middle level data peers in bundles to prevent competition in that area.

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

On M&A, J:COM continues the steady process of rolling out smaller operators, particularly in the Kansai region where this quarter, the acquisition of Kyoto & Kobe added almost 40,000 subscribers. J:COM management is highly focused on cost controls and has delivered a 30% increase in OCF against first quarter of '07, that's 11% rebased.

Integration of the JTV operation is not complete with further streamlining the channel line-ups still to come. The JimJam channel in partnership with NHK launched successfully last month and discussions continue about other content transactions to reinforce the J:COM line up. It's worth noting that J:COM now carries 24 high definition channels, which accounts for 26% of their total line up.

On the sales side, new sales channels such as J:COM branded kiosks and shops are helping to sustain the renewed growth. The sales and marketing team remains focused on high ARPU value-added services in bundles, particularly in the 160 meg, the high-definition channels and the high-definition DVR. Meantime, J:COM's recent announcement that it will pay dividend to the first time, that 500 yen in semi-annual installments plus a special dividend of a 250 yen, has helped to sustain the J:COM share price.

And with that, I'll hand you over to Bernard Dvorak to take you through the financial results.

Bernard G. Dvorak - Senior Vice President, Co-Chief Financial Officer

Great. Thanks, Miranda. If you turn to slide 14 it shows our financial highlights for the quarter and you can see revenue for the quarter was $2.6 billion, an increase of 24% over Q1 '07 on a reported basis. The increase was driven in large part due to the strengthening of the local currencies that we operate in against the U.S. dollar. In fact, the FX impact accounted for 16% of the 24% overall increase in revenues. The balance of the revenue growth was mostly organic representing rebased revenue growth of 6% for the minor boost from fill-in acquisitions that Mike mentioned earlier. OCF increased to $1.1 billion, an increase of 34% over the prior year and more than half of that growth or approximately 18% came from currency moments and organic growth of rebased OCF increased 14% in the first quarter.

Turning to the next slide we will get into more revenue in OCF detailed by region. Side 15 highlights our reported results by region and our rebased revenue in OCF growth rates. Rebased growth rates eliminate FX movements and neutralize the impact of acquisitions. On consolidated basis rebased revenue grew 6% overall, principally driven by volume. In terms of specific markets we have good strong performances in Poland, Australia and Chile with rebased revenue growth rates of 19%, 14% and 10%.

In Europe UPC grew revenue to $1.1 billion representing 3% rebased growth. Removing Austria, Hungary and Romania, which were discussed earlier by Gene, the UPC revenue growth rate would have been 5%. On a consolidated basis removing those same three properties would have resulted in revenue growth of 7%. Telenet increased revenue to $374 million, representing rebased growth of 9%. J:COM had a rebased growth of 7%, reaching $675 million in the first quarter and lastly VTR delivered revenue growth of 10%, reaching $187 million of revenue in the first quarter and continues to be a great performer.

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

Turn to slide 16, we achieved a 42.2% OCF margin in the quarter. This represents a 300 basis point improvement over both the fourth quarter of '07 and the first quarter of '07. We realized margin improvements in 14 countries of our 15 countries, realizing economies of scale across the board. A regional perspective would show the year-on-year increase of 410 basis points at UPC, bringing OCF margins to almost 46% and a 300 basis point improvement of VTR finishing the quarter at 40.5%. Key drivers of our improved OCF margin were margin improvements in both operating expenses and our G&A including a rigorous focus on controlling corporate costs.

And in the operating expense category we're seeing scale benefits in Europe from network operations and from billing and collections as we continue to roll out our [inaudible] triple-play billing platform. It's also important to recognize that our margin improvement is not coming just from the cost side. We're also realizing margin benefits as we scale our new service deployments particularly in Central and Eastern Europe, where we are still mostly at single digit penetrations of VoIP and digital TV.

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

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

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

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

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

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

At quarter end, we had cash of $1.85 billion, which includes $485 million of restricted cash. The decrease of $660 million from December 31st is due mainly to stock buybacks that we've talked about a couple of times now.

Our gross leverage was 4.4 at March 31st, a reduction from 4.8 times a quarter ago. This is all due to the OCF growth we generated in the first quarter. I think that reductions displays how dramatically our leverage shrinks in the absence of any new debt financings.

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

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

Question and Answer

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Jeffrey Wlodarczak from Wachovia. Please go ahead. Sir, your line is open, please go ahead with your question.

Jeffrey Wlodarczak - Wachovia Securities

I'm sorry about that. Good morning. Revenue growth has slowed for four consecutive quarters to 6% in the first quarter. it's clearly getting more competitive in certain markets. Just to make sure I understand looking at the balance of '08, is it mainly sort of digital DVR HD or D that gives you comfort you can see an acceleration towards the 7% or 9% full year guidance? Then also do you expect to see an acceleration in Western European RGUs of the plus 5% in Q1 and is that also very reliant on sort of advanced TV services or is that like a bundling price combo? Thanks.

Michael T. Fries - President and Chief Executive Officer

Well, thanks Jeff. I'll take a quick crack that. I think that... we've addressed in the call here the key variables impacting revenue growth and those are principally expected ARPU compression in Voice and Data as we bundle aggressively, as we continue to penetrate those markets and as frankly some of the Voice usage tapers off a bit, which I think everybody in our business is feeling. So some extent it's an ARPU issue and to some extent, it is a volume issue principally in the low-end analog TV business. So our game plan, if you look at those two variables, is to continue to drive volume in Voice and Data and as a result of improving our product portfolio, as a result of maintaining what we think is a huge speed advantage in these markets and taking advantage of the fact that Europeans consume more bandwidth than the U.S. consumers by recently large margin. We think the attractiveness of 3.0 product whether you start at 15 megs or a higher is going to be a game changer as I've said and allow us to really make an impact.

I will also say that as we look at individual markets, the percentage of customers that we have on the old classic expensive and relatively slow tiers are diminishing rapidly. So to some extent, the change in mix of our customers in broadband is nearing the end. In Holland for example I believe it's now less than 10% of our customers would be in that category of expensive classic products. So the markets evolving rapidly and if that happens, I think you start to near a point where a natural bottom evolves in ARPUs for data in particular. And the last thing I would say is there are some specific impacts on revenue this year. Romania, despite the improvement in Video growth and RGU growth, still has, what we would describe as a hangover effect from the impacts of 2007, which we talked about quite a bit. So because we sort of rebased the product pricing, we're going to see some unfavorable results there. And in other markets, like Hungary and Austria, there are unique factors that I can assure you Gene and team are focused on immediately.

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

On the Western European RGU front, the biggest impact we can have on Western European RGU results is to continue to launch digital. Because we grow voice and data subs very, very nicely and positive voice and data results in every market and I think with the exception of possibly, Austria, the real name of the game is to let digital do what we know it can do, which is make people fallback in love with TV, reduce that churn figure and drive ARPU. And it's still early days for us. I mean I said that at the outset, I'll repeat it. We are 25%, 26%, 27% penetrated and even lower in Europe. And we now have all products launched on a common platform for the most part, all markets launched in a common platform and the key products making the difference. So, we're pretty encouraged by what we'll see in the second half of this year, last two-thirds of the year especially from those digital services.

Jeffrey Wlodarczak - Wachovia Securities

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

Michael T. Fries - President and Chief Executive Officer

Well, I let Balan take a crack at that. I mean, we think at the end of '09 we should have DOCSIS 3.0 rolled out virtually everywhere. But we're going to be careful and deliberate. We'll start in Holland, we believe, this quarter but remember for us the DOCSIS 3.0 issue is a lot less about technology. We think it works, vendors are supporting us, so far where we've trailed it and are rolling out, it seems to scale. CPE and pricing, PP pricing is coming down. For us, it's as much as anything yet a business model question. What we're going to charge for it, how we're going to... how is it going to impact the tiers we already have in the marketplace and how do we make a meaningful difference in market share without disrupting the general ARPU environment. So, to the bigger lead-time here not the technology, I think it's really the business model but I don't know Balan you want to discuss that quickly?

Balan Nair - Senior Vice President and Chief Technology Officer

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

Jeffrey Wlodarczak - Wachovia Securities

All right. Thank you.

Operator

Our next question comes from Vijay Jayant from Lehman Brothers. Please go ahead.

Vijay Jayant - Lehman Brothers

Hi, Mike. Just continuing on the same theme. Obviously, I think the continuing... probably the concern on the stock is that with decelerating revenue growth, can you keep doing, obviously 14% to 16% EBITDA growth. And so, on the basis of that, can you sort of talk about what are sort of the relative margin because there is also sort of a mix shift happening from analog to voice and data even though there is ARPU pressure on that. So, can you address that? And you also mentioned that you are not under investing, obviously, and you are spending on SG&A, [inaudible] basis points drop between revenue growth and EBITDA growth. Can you sort of talk about what SG&A on a rebased basis grew, what your other efficiencies sort of declined the other costs? Any color on that will be helpful. Thanks.

Michael T. Fries - President and Chief Executive Officer

Yes. On the second point, if you... we slice these numbers every month. So we know exactly where we're realizing efficiencies, cutting costs and spending money and I think to simplify for you, the most meaningful variable there is sales and marketing costs and we are not, I don't think in any market, reducing those costs either as a percentage of revenue or an absolute term. In fact, I think I recall that in Europe alone I think our sales and marketing costs were up something in the order 15% year-over-year. And as Gene indicated, we're adding more sales, our gross sales exceeded last year and exceeded our budget. So we don't think it's an issue around selling the products and we think we are investing sufficient capital in marketing the products, designing the products, and getting the products in the field. As you look at top line, that should be your main concern and I can tell you that's not what we're doing. Where we are scaling is principally on G&A. I think we took a good hard look at how many people we have and how many people have tasted around this business and we determined that we can be more efficient here on general and administrative cost and those costs are typically down year-over-year, possibly flat but in the third category, which we more general operating expenses are perhaps up marginally. So the savings in G&A are offset by the increase in OpEx but in sales and marketing, which I would separate from there, we believe we are in most cases spending an appropriate amount of funding. Now as year goes on, we might take some of this cash flow that we are overachieving, if you will, relative to the budget and reinvest that in sales and marketing and we work on these things dynamically. But I do think that vast majority of our efficiencies are coming from areas that are not revenue... that do not impact revenue in a way that I think people have expressed to concern. And that is something that we think helps sustain the kind of EBITDA growth we're achieving, our operating cash flow growth we're achieving when you look at it.

So, what I said probably the best answer, Vijay, as we said we're still very confident about our operating cash flow guidance of 14% to 16% and that really reflects how we understand the dynamics in our business and may be lastly I'll said that we are seeing some gross margin improvement. One of the thing that's flowing through here but we don't report it that clearly, perhaps is our gross margins are higher than we expected for a couple of reasons. One, principally as voice usage declined we are seeing higher margins in our voice product. So generally speaking, I think almost everywhere, our voice gross margins are higher than we expected. So we are making a little bit up... making some of it up in gross margin... better gross margin delivery and we are making some of it up in looking at those sorts of administrative and general administrative costs that don't allow you or don't impact your ability to drive revenue.

Vijay Jayant - Lehman Brothers

Thanks.

Michael T. Fries - President and Chief Executive Officer

Yes.

Operator

Our next question comes from David Joyce from Miller Tabak and Company. Please go ahead.

David Joyce - Miller Tabak Roberts Securities

Thank you. I was wondering if you could give us some color on how the economic situation might be impacting either on the levels of tiers that consumers might be taking or any deceleration that might be affecting, for example if people are choosing DSL over cable just to be price sensitive? And also help me with add revenue has been in the total media? Thanks.

Michael T. Fries - President and Chief Executive Officer

Well, on the first point I know, perhaps, Gene, talked to that add revenue in Telemedia. I think the first point, we have not seen, particular in Europe, meaningful impact from economic factors and I am not going to lecture on European economies per se, but I'll say that relative to the U.S. there are some big differences. That's not a lot of new home growth. So we're not seeing quite frankly, a decline in new home growth and we have never been meaningfully depended on new home growth. People don't move as frequently in many of these markets and as you can our products are priced reasonably low to begin with. Our average customer is generating $45 a month, not $100. So in principal I think, we start with some advantages relative to the U.S. in a economy that's in a different position and dynamics and variables that drive our subscriber base that are quite different. And some of the economies we are in are growing very well and above average, like Central and Eastern Europe and other markets. And lastly we were diversified. So what happens in Western Europe doesn't mean that's happening in Chile, Central and Eastern Europe, Australia and Japan. So the benefit of being geographically diversified is that, I think we will... if any particular areas become affected we ought to see that perhaps balance out somewhere else. Shane, you want to comment on advertising in Chello?

Shane O'Neill - Senior Vice President, Chief Strategy Officer, and President, Chellomedia

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

David Joyce - Miller Tabak Roberts Securities

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

Michael T. Fries - President and Chief Executive Officer

Do you want to address that, Balan?

Balan Nair - Senior Vice President and Chief Technology Officer

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

W. Gene Musselman - President and Chief Operating Officer, UPC Broadband

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

David Joyce - Miller Tabak Roberts Securities

Okay, thank you.

Operator

Our next question comes from David Kestenbaum from Morgan Joseph. Please go ahead.

David Kestenbaum - Morgan Joseph & Co.

Yes, thanks. Looking at the rebased growth slide, it's clear that you be see lag the other markets but structurally is there any reason that you couldn't, if you did everything right to get UPC close at least to J:COM? Is that the goal, a realistic goal with the type of revenue growth or not?

Michael T. Fries - President and Chief Executive Officer

I' am not going to give you insight into how we budgeted for the group. But UPC is a reasonably large part of our revenue base. Obviously you can figure out that on your own. But I do think that certainly if the major market operation impacting our total results and if we believe that the range or perhaps even the bound in the range may be a more reasonable goal. And clearly we think we can improve revenue in that market due the course of the year.

David Kestenbaum - Morgan Joseph & Co.

Okay.

Michael T. Fries - President and Chief Executive Officer

And by definition we do believe that... I think I'll say that the second quarter, remember one of the things to point out here is we had a very strong first quarter last year. And so some of these numbers are being impacted by an extraordinary first quarter. We didn't have a particularly strong second quarter last year. So growth rates are just that, what's the denominator and what's the numerator. Both of those things change through the course of the year. Right.

David Kestenbaum - Morgan Joseph & Co.

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

Michael T. Fries - President and Chief Executive Officer

Well what I said is we are starting to see very small signs that sellers really are starting to consider their options through the course of the next 12 months and whereas if the phone wasn't ringing at all six months ago, people are starting to have dialogues. So, much of that is dependent up on financial markets and I would let Charlie spend a minute on where sees the markets that we principally operate in and then Charlie if you want to provide some color on that quickly.

Charles H.R. Bracken - Senior Vice President, Co-Chief Financial Officer

I think it was... maybe Shane or [inaudible] recover pretty strongly. I mean, in general it looks like there is improving sentiment in the high-yield markets. I was just pretty healthy [inaudible] acquisition and also as we try and maintain our four to five times leverage status. So, we are not there yet, but we certainly see their trading off secondary market and we are pretty optimistic that the markets may open in the second half of the year.

Michael T. Fries - President and Chief Executive Officer

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

David Kestenbaum - Morgan Joseph & Co.

Okay. Thanks.

Michael T. Fries - President and Chief Executive Officer

Yes.

Operator

Our next question comes from Frank Knowles from New Street Research. Please go ahead.

Frank Knowles - New Street Research

Yes. I have a couple of more detailed questions based on some of the comments Gene made in Europe. Firstly on the DOCSIS 3.0 rollout, you mentioned that CapEx for that was within your CapEx framework. I just wanted to clarify, does that... is that just a sort of CMTS CapEx for getting the networks DOCSIS 3.0 ready or does it also include some budgeting for CPE cost and possibly node splitting and so on if you actually get a lot of usage at the highest speed levels? And then the second point was on high definition. You mentioned that you're working with Phillips high-definition TV sales and there's... the Olympics might be a driver but there's a lot of HD sets already out there in Europe and the World Cup, two years ago was supposed to be a big driver and that didn't really happen. So, I wonder what's changed to make you think that now is the time that consumers are actually going to be willing to pay more for HD in Europe since they haven't so far?

Michael T. Fries - President and Chief Executive Officer

Maybe I'll take a crack at HD question, you guys work on the CapEx related question. I think the issue with HD is as I have said in the past is bit of a chicken and egg. And the question that should be relevant for us as operators is when will that tipping point be reached. The one of the thing is that is undeniable is that I think we heard from... we had a form, just an internal form couple of weeks back and we had some of them from Sony in there. I believe the numbers you gave where they should be somewhere in the order of 40 million TV sets sold in EU this year and more than 60% of those as a number he was hedging originally he said it was a higher number would be HD capable sets is turning in Europe. There's already somewhere in the order of 30 million HD sets and that is perhaps the most important component of the chicken and egg equation is getting folks to purchase these sets. And then secondly having operators like us dedicating bandwidth to HD and what I see more broadly from this view is that more and more broadcasters, more and more programmers and more and more events are starting to become available on HD and this will feed on itself, this will build where will we hit that two tipping point to be determined. But the trajectory is undeniable and that's something we're playing into heavily especially as to maintain low-end customers for whom the alternative provider has none of this. So, Gene, you... or Balan you want to talk about CapEx?

W. Gene Musselman - President and Chief Operating Officer, UPC Broadband

Let me just give you an example on the HDTV market specific where we're working both with Philips. HDTV penetration in The Netherlands now is of, I think, around 25%, 30% in the latest forecast that I saw it was 40% by end of the year. So, as Mike indicated, the number of HDTV sets or the penetration is growing rapidly. In addition to that, it's largely content. For the first time, we're able to get significant content to drive HDTV. For example, in The Netherlands, we have Discovery, we have National Geo, we have the History Channel, BBC, adding Bloom MGM, Eurosport. We have our own channels Film 1 and Sport 1 available in HD and in addition to that we will be broadcasting the summer Olympics. So these are driver channels, if you will. So in The Netherlands, in particular we are heavily focused right now on getting our campaign out and really starting to promote HD and in addition to that we have now just introduced the HD, DVR in the Netherlands and in the process of building it up also in Hungary and Poland. In those markets, we're also starting to see the development of a content propitiation. We expect the DOCSIS 3.0, I believe for the most part that we have the CapEx both short-term and long-term fully covered in our budget and our long-range plan, we'll be updating it over the next couple of months. But, that would include the upgrades and node splitting the CPE [inaudible] works in order to roll Euro [ph] DOCSIS 3.0 rollout.

Balan Nair - Senior Vice President and Chief Technology Officer

And if I can add on that Gene on DOCSIS 3.0, I would say that the reason there's no significant capital increases would be couple of three things. One, CMTS is, I think existing CMTS. So what we're doing is swapping on a couple of cards. So we're not wholesaling, replacing a whole bunch of CMTS is not there. CMTS we have primarily Cisco 10ks, the [inaudible] and those are fully upgradeable. On the node splits, there's a difference between D-bandwidth and consumed bandwidth so even though we are increasing D-bandwidth, the consumption does not necessarily increase as well and therefore it's just because you are rolling out DOCSIS 3.0. It doesn't mean you're going to trigger a whole bunch of node splits.

W. Gene Musselman - President and Chief Operating Officer, UPC Broadband

We're already done a lot of node splits over the past several years. So, it positions us pretty well at this point in order to [inaudible] DOCSIS out. As Balan said without having to do a lot of splitting going forward.

Frank Knowles - New Street Research

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

W. Gene Musselman - President and Chief Operating Officer, UPC Broadband

No, we offer four packs above including the entry-level digital offering. And for HD there is an incremental nine-year-old charge. except for if you purchase the box from Philips, then there is a reduction in those packages by approximately 5 year or so.

Frank Knowles - New Street Research

Thank you.

W. Gene Musselman - President and Chief Operating Officer, UPC Broadband

You're welcome.

Michael T. Fries - President and Chief Executive Officer

We've time for one more question operator?

Operator

Yes and Last question would be from Gregory Kolb from Janco Partners Incorporated. Please go ahead.

Gregory Kolb - Janco Partners Incorporated

Hi, thanks for taking my question. I just wanted, maybe you could expand a little more just on Austria and the Czech Republic and the unique challenge they were facing?

Michael T. Fries - President and Chief Executive Officer

Well, I mean we think we touched on some of them and they vary by market, I mean I'll let Gene to provide the details. In Austria, it is a very different than Czech Republic. In Austria, on the broadband side, we are seeing some certainly some impact from mobile data cards which has been launched by, I would say in the third or fourth mobile players in the market mostly. What we would argue is relatively low speed product of 7 megs that delivers even less than that. But it's having impact in the certain [inaudible] markets in particular where we offer [inaudible] DSL and where we might have a slight soft under-valued [ph] with more expensive product but it's something we have addressed and its impacting.

And also... also we've seen some impacting nicely on the B-to-B side, some it systemic, others just underperformance. So, B-to-B and Offnet DSL in my view account for most of the revenue in OCF impact in Austria. The core cable business is performing reasonably well. And in the Czech republic is an inverse problem. We took some rate increases at the beginning of the year and we held firm on those. So, some of the churns we are seeing in the Czech, we are just absorbing here in the first quarter with the real benefit coming from rate increase and rest of all out of digital. So, [inaudible] but that's typically the two big factors there, different in each market, but also ones we think we are coping with and understand.

W. Gene Musselman - President and Chief Operating Officer, UPC Broadband

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

Michael T. Fries - President and Chief Executive Officer

So I think maybe, operator, I will just wrap it up here and you can do your little speech, but from our point of view, as the conclusion slide said, we are hitting our OCF goals, or exceeding our OCF goals. No question about it. We're not getting there by sacrificing anything that we believe is revenue generating or strategically important to this business. We will assure you that every quarter if necessary. Advanced services, which are the bread and butter of opportunity, digital TV in particular but voice and data, those units are moving. So the volume side of the business in the critical advanced services area is working. Where we have challenges, we understand our business extremely well. We have articulated those challenges and in some instances. They are market specific and you can be sure we are approaching those markets and those challenges everyday in a way we believe we will be ultimately successful. And I guess I'd lastly say, we are thankful to have finally delivered these results since we are no longer in a black-out period and you can expect us to be continue to be opportunistic and aggressive with equity. With that appreciate your attendance and operator I guess you have a concluding statement.

Operator

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

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Source: Liberty Global, Inc. Q1 2008 Earnings Call Transcript

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