Liberty Global, Inc. Q2 2008 Earnings Call Transcript

Aug. 6.08 | About: Liberty Global, (LBTYA)

Liberty Global, Inc. (NASDAQ:LBTYA)

Q2 2008 Earnings Call Transcript

August 06, 2008, 2:00 PM ET

Executives

Mike Fries – President and CEO

Gene Musselman – President & COO, UPC Broadband

Mauricio Ramos – President, Liberty Global Latin America and CEO, VTR Global SA

Miranda Curtis – President, Liberty Global Japan

Bernie Dvorak – SVP and Co-CFO (Principal Accounting Officer)

Analysts

Vijay Jayant – Lehman Brothers

David Kestenbaum – Morgan Joseph

David Gober – Morgan Stanley

Alan Gould – Natixis

Paul Kagan – PK Worldmedia

Camille McLeod Salmo [ph] – Forces Investments [ph]

Operator

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

At this time, all participants are in a listen-only mode. Today's formal presentation materials can be found under the Investor Relations section of Liberty Global's website at www.lgi.com. Following today's formal presentation, instructions will be given for a question-and-answer session. As a reminder, this conference call is being recorded on this date, August 6, 2008.

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

Mike Fries

Thank you and welcome everybody to our second quarter call. I'll do some quick introductions, we have online with us today Gene Musselman, President and COO of UPC; Mauricio Ramos, President of VTR in Chile; Miranda Curtis, President of Liberty Global Japan and Graham Hollis; Bernard Dvorak and Charlie Bracken, our Co-CFOs. We have Shane O'Neill, our Chief Strategy Officer; Liz Markowski, our General Counsel; and Rick Westerman, who you all know. And I think, before we get rolling here, the operator is going to do quick remarks.

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 and future growth prospects, its expectations regarding competition and M&A activity and other statements that are not historical facts.

These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these statements. These risks and uncertainties include those details from time to time in Liberty Global's filings with the Securities and Exchange Commission, including its most recently filed forms 10-K and 10-Q. Liberty Global disclaims any obligation to update or revise any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based.

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

Mike Fries

Thank you. So our agenda will follow our typical path here. I'll do some highlights briefly, I'll turnover to Gene and Mauricio and Miranda to give you some color on their respective regions and Bernie is going to wrap with financials and then we will get to your questions.

The operator said we are talking from slides. So, I'm going to start on slide 4, hope you all have that with the big picture, so to speak. And first of all I think we have a lot of good things to talk about this quarter. I'm going to begin at the top with our growth in value added services. We've talked a lot about the two key drivers for us in the past year, consistent subscriber additions in voice and data, and ARPU growth supported by our digital TV rollout. And if you follow the results of our domestic peer group, you probably you would have noticed that they reported pretty good numbers in these two areas and I think we can certainly include that in our highlights as well.

For the quarter, we added 320,000 voice and data RGUs, that's inline with our second quarter last year and 336,000 digital TV add, that's a record for us. So our growth remained strong and consistent in this high ARPU, high margin products. The one area of subscriber weakness continues to be low-end analog TV costumers in Europe, a topic we discuss and analyzed with you often and we'll do it again today, and Gene will address the issues and what we're doing about them. The impact of these two conflicting trends partly explains why we would describe our financial results as stable for the quarter and year-to-date.

On the positive side, operating cash flow year-to-date of $2.26 billion is up 14% rebased for foreign exchange and M&A, inline with our expectations and actually pushing operating cash flow margins to another high point of 42.2%. Revenue of $5.34 billion on the other hand is up 6% year-to-date, which is below our guidance and explained largely again by a few markets in Europe which we will run through. The last point I'll make here is that the other key value drivers in our business are working and they are working well.

Certainly our free cash flow of $318 million in the quarter and $445 million year-date is a highlight. That ladder figure is up fivefold from the first of last year. And despite all the rumors lately, we continue to remain disciplined on the M&A front. And the bottom line is that most sellers either are reading the newspapers or talking to other banks because price expectations simply haven't budged. I'm not sure how long that can last, and so we will wait patiently on the right deal and at the right price.

Having said that, we did make two sizable infill transactions in Japan and Belgium. J:COM will increase its ownership in STM, the last of its unconsolidated managed franchises with nearly 200,000 RGUs. And Telenet agreed to buy Interkabel, the business in Flanders which will add around 800,000 TV customers and give it nearly 100% of Dutch speaking Belgium. Both deals are smart and highly creative transactions that we closed this year.

And then lastly, (inaudible) we remain the largest buyers of our stock here, with $800 million purchased in the second quarter and $1.6 billion year-to-date and now over $5.2 billions since we started, this shouldn't surprise anybody. We're clearly positive and bullish on our business going forward and if we liked it 12 months ago, you can imagine we love it today.

In fact, if you just hold our current trading multiple into next year, in other words no improvement in market sentiment, our stock should trade up meaningfully and I suspect many of you have already figured that out. And that is certainly one reason why we just added another $500 million to our authorized buyback capital.

Let me turn to some operational updates starting on slide 5, and you'll see there year-to-date rebates growth rates were essentially all of our markets. Now, we normally don't disclose this level of detail but we made an exception here to make a point, and that point is that the vast majority of our markets are performing pretty well. Well, a few countries in Europe have negatively impacted results.

If you look at the chart of the top left, you'll see rebates revenue growth rates. And with a quick visual glance, you can just see that most of our operations are performing at or above our group result of 6%, while three markets in particular Hungary, Austria, and Romania on the right have underperformed year-to-date. In fact, if you exclude these three markets, our rebates revenue growth year-to-date would be about – would be over 7%, and you could see virtually the same trend in terms of operating cash flow growth at the bottom left. All the three of our markets are generating solid double digit growth rates, four in fact are north of 20%. But again, the group result of 14% year-to-date has been negatively impacted by the same three countries, Austria, Hungary, and Romania. If you back them, our year-to-date OCF growth will be closer to 17% rebate.

I'll make two key points here. First of all, as you can imagine, we're intensely focused on each of these three markets and Gene is going to walk us through recent initiatives and results there. I'll simply say that in each case, we're dealing with unique competitive challenges mostly from low-end service providers and a combination of product innovation like DOCSIS 3.0 and digital TV launches as well as responsive bundling and packaging offers will largely solve the problems and are already showing an impact.

Second point relates to our guidance. While we're currently seeing and expect to continue to see improvement in revenue growth in the second half of the year in Europe, we think it's prudent to lower our 2008 guidance ranges for both revenue and OCF by 1 percentage point each. So our new revenue growth range is now 6% to 8%, rather than 7% to 9%. And OCF growth is now expected to be 13% to 15%, rather than 14% to 16%. Nobody likes to lower guidance here, but these are still great numbers for our industry. In the case of OCF growth, clearly the best in class, and we will as always strive to outperform these expectations which I like the sound of a lot better.

The purpose of my next two slides is simply to reinforce the points I made a moment ago about the key drivers of operating growth for us today and going forward. So slide 6, shows our subscriber growth trends and our regular seasonality in fact over the last five quarters. As you would have seen from our release, we ended June 30 with $24.7 million total RGUs, and today over 60% of those RGUs or $15.2 million represent advanced services, so digital TV, voice and broadband services, and that's up $2.8 million in the last 12 months, all organic.

Now, certainly one major component of that is our relatively consistent voice and data growth on a same store basis. And as the chart on the top of the slide illustrates, you'll see that telephony in the quarter – telephony and adds in the quarter are 3% over last year to 166,000, while data additions of 154,000 were largely in line with last year. And with penetration rates of just under 17% and 22%, we've got some real headroom in these products and our sales and net add results reflect that.

At the bottom right, you'll see the net video losses I referenced earlier of 71,000 resulting largely from low-end analog TV competition in a few key European markets, which Gene will talk about in a second. I'll just reinforce the point. The real bright spot for us in the video segment is digital TV, the second half of that one-two punch I spoke about driving our growth.

And my last slide, number 7, shows the progress we are making in digital which has been pretty considerable. And I mentioned earlier, Q2 was a record quarter for digital cable adds, 336,000 for the three months, that's an increase of 74% over last year and an even higher number than we did in our fourth quarter which is always our strongest. Most of the second quarter increase came out of Europe, where digital is now launched in every market.

In terms of digital cable penetration, you can see we stand at 30% on a global basis which is up almost 50% from a year ago. On the left, you can see Japan leads the pack at 73% penetration, but the rest of our regions are starting to accelerate from a lower base. As a result, we still have lots of runway in terms of incremental penetration here as you can see on the chart and we're starting to see the expected uplift in ARPU just about everywhere.

In fact, ARPU per costumer, a key measure for us, is up across each of our core region, anywhere from 8% to 10%, as a result of our growth in voice and data, and the penetration of digital cable as well as our success in bundling. Today, 36% of our costumer base or nearly 6 million costumers out of 16 million have taken a bundle and that number grows every quarter.

Before I turn it over to Gene, I'll just conclude with a few thoughts. Despite competition, we are performing inarguably the most important part of our business, high ARPU and high margin products like voice, and data, and digital, and that's what will drive our growth in the medium to long term. We certainly have some challenges, but it's important to realize that those challenges are typically isolated to specific and unique markets. And as you can imagine, we're addressing those everyday.

And the other key components of our equity growth story are intact and accelerating like free cash flow and now even our heightened interest in treating our own acuity – using that free cash flow and existing debt capacity. (inaudible) we had our annual summer retreat last month and I'll just say that the team, folks on this call and others are pretty pumped. We feel we've got great tactical solutions for near term challenges. We feel we've got untapped potential with DOCSIS 3.0 and digital TV, and clearly we have improving operating and free cash flow profile, so we're focused and very optimistic here.

And with that, Gene, I'll turn it over to you for an update on UPC.

Gene Musselman

Thank you Mike. Turning to UPC Broadband, that's slide 8 for those of you that have a deck, I'd like to draw your attention to the highlights for the second quarter. If you look at the top right chart, it illustrates as Mike noted that digital cable has been pivotal to our results this year, as we now offer digital across all ten of our markets. In April and May, Hungary and Poland were successfully launched, and combined have generated 59,000 digital cable adds in Q2. In the Netherlands, we added 29,000 subscribers in Q2, making it the highest digital growth quarter since the migration from the Push strategy to the Pull strategy going back to 2006.

Additionally, we've continued to roll out enhanced digital services across our footprint in Q2, specifically High Def and DVR. With more than 425,000 subscriptions, now over one quarter of our digital subscribers take High Def or DVR. These enhanced services have been instrumental in driving digital cable revenues, which are up more than 40% year on year. At this point, I'd like to emphasize that we are very focused on using High Def TV to exploit the competitive advantage that we have compared to DSL based video products. We think High Def is a meaningful differentiator for us and we can see momentum building around High Def in those markets where we've launched.

Generally speaking, we're realizing considerable growth across all of our advanced services. In Q2 '08, we organically added 331,000 advanced RGUs, 76% higher than Q2 '07. Growth was driven by 179,000 digital, 67,000 data and 85,000 voice adds. Data adds were largely stable with Central and Eastern Europe compensating for slower growth in our more mature Western European markets. Also, our voice business continues to grow steadily as costumers gravitate to our unlimited calling plan.

Moving to the lower chart, you can see that we continue to achieve meaningful OCF growth at the UPC level, with a 34% lift on a reported basis and 13% growth when rebased for acquisitions and foreign exchange. Supporting this growth, OCF margins remained very strong with all systems ranging from 51% to 58%, with the exception of Romania and Ireland.

Looking at revenue in Q2, revenue was depressed by ARPU pressures, slower B2B growth and analog losses in most of our competitive markets, which I'll address in just a few minutes. On the other hand, it should be said that we have seen an uptick in revenue for the past three months, positioning us I think for a better second half.

Just briefly, I'd like to take a moment to provide you with an update on our more completive markets. Austria, Hungary, and Romania continue to be our most challenging, especially in Romania where '07 RGU loses combined with deep discounting and aggressive pricing have impacted ARPU in our overall Q2 and first half results. In both Romania and Hungary, low price CATV competition has forced us to introduce low priced tiers and to discount prices for a significant part of our analog base, negatively impacting our 2008 financials. However, we expect to see improvements as churn reduces and digital is rapidly rolled out across both countries.

Let me give you a little bit more detail on each of these three countries. In Hungary, we've seen positive RGU growth in each of the first two quarters. We've seen 140% increase in our advanced service adds in the first half of this year, with over 100,000 RGUs added year-to-date. Meanwhile, we have significantly reduced our video losses with only 12,000 year-to-date compared to a 37,000 loss in the first half of 2007. Also, in Hungary, our digital rollout is off to a great start with strong DVR and HDTV take up, reaching 37% of our DTV subscriber base by the end of Q2.

In Romania, as discussed in the past, we made a decision to fight back the low end competition by introducing a CATV loyalty program, which in return for a one or two year commitment by our subscribers results in up to 33% discount on CATV monthly fees. On the other hand, this has had a negative impact on Romania's Q2 financials, as you saw from the slide Mike showed you earlier. However, I am pleased to report that the loyalty program is having the intended effect, that its churn has decreased and video losses has been significantly reduced this year compared to last. We lost 23,000 video RGUs in Romania year-to-date compared to 67,000 last year.

Finally, we're encouraged by costumer facing and operational improvements. Having just completed the conversion of the legacy billing system to Darby, this will enable Romania to further realize savings and drive operating margins towards the desired 50% level. This is one of the two countries that are operating below 50%. So, we can expect better performance in Romania in future quarters I think based upon these actions.

Moving to Austria, the competition there has come from mobile broadband more than video. Although Austria did experience an increase of video churn during the first three months of '08, this was primarily related to the EUR50 [ph] rate increase that we took in January. In Q2, we actually saw a 39% decline in CATV churn versus Q1. So, we're seeing the diminishing effect of that rate increase.

To address the mobile competition, Austria has just recently introduced a new three-play package that has reduced data churn by 29% vis-à-vis Q1, and has resulted in a 27% increase in sales in Q2 versus Q1. Also in Q2, Austria realized digital adds – record digital adds as they introduced new digital pricing after completing the migration to our common digital platform that we have rolled out in almost all the countries at this point. The result has been an increase in Austria's digital subscriber base of nearly 80% since January 2008, and now we have over 100,000 digital RGUs. Also, Austria posted a solid quarter for voice addition, registering 10,000 organic adds in Q2.

Lastly, just a few words on the Netherlands, this is UPC's largest market as you know. In the Netherlands, we have soft launched EuroDOCSIS 3.0 and we're preparing for Q3 commercial rollout, which will have mega speed products, that is 60 to 120 megabits initially to our data portfolio. This is truly a revolutionary step increase in data speeds and will dramatically improve the competitiveness of our data product. We expect to have 3.0 products launched in most if not all of our markets by the end of next year.

In closing, we remain confident that our product leadership strategies, the expansion of digital, and the planned rollout of EuroDOCSIS 3.0 positions us strongly in our markets, and that we're poised for improved revenue growth for the remainder of the year and into 2009.

At this point, I'd like to turn the call over to Mauricio. Mauricio?

Mauricio Ramos

Thank you, Gene. I'm on slide 9 on VTR and we had another good quarter with good operational and financial results. To start, we would begin first by showing you where VTR sits today in terms of national market shares in our three core products. In the video market in Chile, as you may know, VTR is the largest player with approximately 70% market share. This is roughly as of the end of last year, but since our network does not cover the entire country, we do expect to lose some market share over time.

It is important however to point out that we continue to grow our video customer base (inaudible) every year because PTV penetration in Chile remains at only about 35% and the market continues to expand. Last year for example, we added well over 40,000 video subscribers and this year so far, we have added 18,000 video subscribers so far.

In terms of the residential voice business, we have nearly 25% market share again on a nationwide basis, although our network does not cover the entire nation. So, if you look just at the VTR cable footprint, our market share doubled out much higher.

As many of you may know, VTR was one, perhaps not the first cable company in the world to offer residential point services, and that's what explains these high market shares. This product has been a steady engine of growth for us over the year and we think it has good mix going forward.

Finally, on broadband Internet, our national market share is approximately 47%. But again if you were to look at our footprint alone, that figure will be over 60%. So we feel pretty good about our market share position in Chilean market and that trickles of course into our second quarter results. Specifically with regards to those results in the second quarter, we added 84,000 organic value added services. Those were aided by record digital additions of 46,000, our highest quarter so far, which were of course more than double the number of digital adds we had in Q2 of last year.

On the financial front, we grew rebased revenue by 13% and rebased OCF by 23%, both figures against the second quarter of 2007. The OCF line continues to see the benefits of top line growths and contained costs. Our top line growth of 13%, which I just mentioned, benefit from volume growth and from rate adjustments. We continue to see the cost benefits of more focused and preventive network maintenance and better customer service platforms, both of which of course help to reduce expensive (inaudible).

Indeed, if you were to focus on our OCF conversion ratio, for the quarter, it was 70% which is in line with Q1 of this year and consistent with the same 70% conversion ratio that we had obtained for all of 2007. Therefore, the financial trend remains the same, as revenue growth we contained rather than cut back costs, and that's basically how we're driving better OCF margins. We attained for this quarter a 42% OCF margin and that's 360 bps gain over the second quarter of 2007.

That's it for the financial and operating highlights. As in prior calls, we would also like to briefly provide an update on the status of our key strategic initiatives. Our bundling strategy remains as you know a central aspect of our activity, with a bundling ratio of almost two times, 1.98 exactly. At the end of the quarter, 58% of our subscriber base now takes two or three products from us. Over 40% of that base now takes three services from us and an additional 18% takes two products from us. As you may recall, we continue to market our flagship triple-play product, but we are now placing emphasis on the bundle of Internet on telephony, as that is where you see the highest growth residing today. And as a result of these efforts, our two-play costumers are now up 22% from a year ago and now make about 18% of our subscriber base, which I just mentioned.

As always, it is important to know that costumer acquisition, not just bundling, remains healthy as well. We have added 25,000 new costumers so far this year, a number that is in line with the number of new costumers that we had added at this point of time – for the time last year. Our digital strategy also seems to be working. Digital penetration of VTR is now 31% of our video subscriber base. That's up from the 26% number at the end of June 1 and we expect the number to continue to increase steadily as the strategy unfolds. This will mean that with critical digital mass now being reached, we will soon begin reinforcing the marketing of our unique and differentiating DUT [ph] service.

During 2Q, we also added two additional differentiating elements toward digital offering on top of the DVR product, which we have launched back in 2007. During Q2 indeed we launched our second HD channel maintaining our HD leadership in the ,marketplace and we'll also launched the first vertical retail TV channel in Chile with the largest local retailer. This is a revenue share model, which allows us to test this promising waters in a risk efficient manner.

Wrapping up, it was overall a very good quarter for VTR, particularly in an increasingly competitive marketplace for all our product lines. Our strategy as a result remains unchanged for now and we continue to be focused on digital migration, targeted bundling and scaling our growth to level OCF growth.

And with that, I will turn it over to Miranda for J:COM.

Miranda Curtis

Thank you, Mauricio. J:COM continues to deliver steady growth, with most of the gain in high end, high value sector of the market, as you can see from the data, 160 meg rollout. As the slide shows, that delivered the strongest quarterly data at J:COM for the past three years. J:COM has successfully launched the largest DOCSIS 3.0 rollout in the world and has now deployed the 160 meg product in all of its regions.

Fully 26% of J:COM's data adds this quarter were 160 megs where it's available, comfortably exceeding our own expectations. And the real benefit of this product is that it appeals to a high end costumer, who is typically not particularly price sensitive. At the same time, J:COM is trialing [ph] targeted at the low end of the high speed data range in order to expand its costumer base.

And the key factor to keep in mind is that despite all the noise about competition, J:COM continues to grow its bundled rate, continues to grow its ARPU, while it's already low churn continues to decline. As far as digital is concerned, with digital penetration already at 73%, we foresee some slowdown in digital growth as the company prepares for the final push to achieve full digitalization, which will be completed well before the Japanese Government's own objective of full digitalization by the end of 2011.

We expect to see continuing growth meanwhile in J:COM's VoD, in the rollout of new HD channels and in the take-up of HD DVRs. J:COM remains the unquestionable Japanese market leader in the rollout HD services and set-top boxes, well ahead of all other distribution platforms.

On the M&A front, as Mike mentioned, the long awaited FCN CV21 merger transaction will serve as a catalyst to strengthen J:COM's position in the key region of Kyushu adding almost 200,000 RGUs and another 500,000 (inaudible) to J:COM's consolidated footprint.

We do still believe J:COM has more to do to improve growth on the net add front and we continue to work with J:COM management on the implementation of new sales and marketing strategies to achieve that aim.

On the financial front, in terms of financial performance, J:COM realized Q2 rebased revenue and OCF growth of 7% and 9%, respectively. Keep in mind that Q2 OCF is generally weaker due in part to seasonal and annual factors which Bernie will discuss in a moment.

Looking to the second half for J:COM, we will continue to grow the J:COM flagship 160 meg product and will leverage the J:COM HD market leadership to fuel net adds. And from a financial perspective, we'll be particularly focused on J:COM's cost containment along with running the business as efficiently as possible.

With that, I'll pass over to Bernie to walk you through the financial results for the quarter.

Bernie Dvorak

Thanks, Miranda. Slide 12 shows our financial highlights for the second quarter. Revenue totaled $2.73 billion, an increase of 25% over Q2 2007 on a reported basis. And similar to recent quarters, favorable currency movements were a large contributor to reported revenue growth while acquisitions played only a minor role. On a rebased basis, revenue growth was 6% in Q2, similar to Q1 with markets like Poland and Chile generating double digit rebased top line growth in the quarter.

OCF came in at $1.15 billion, an increase of 34% over the prior year, resulting primarily from FX and organic growth. And for the quarter, we achieved rebased growth of 13%. I'll get into more segment detail on the next slide. OCF margins as Mike talked about were 42.3% in Q2, an increase of 280 basis points from Q2 of last year and slightly above Q1 margins. We continue to realize year-over-year increases in margin as a result of our operating leverage and focused on controlling corporate overhead and cost savings from acquisition integration.

Lastly, our OCF conversion was 88% for the quarter compared to 61% in last year's Q2, which essentially means that for every dollar of incremental revenue growth, $0.88 fell to the OCF line.

If you turn to the slide 13, this gives a breakdown of OCF for our reportable segments. As I said earlier, rebased OCF for the quarter grew at 13% to $1.15 billion and stands at 14% for the year. Our top performing markets in terms of Q2 rebased OCF were Ireland, Poland, Chile, and Australia, all with growth rates in excess of 20%.

UPC realized 13% rebased growth for both Q2 and year-to-date, reporting OCF of $547 million and $1.1 billion. OCF performance continues to be negatively impacted by Austria, Hungary, and Romania in 2008 as previously discussed. And sequentially to Q1 2008, UPC's Western Europe, OCF was fairly consistent in terms of rebased OCF growth at Central and Eastern Europe due largely to Hungary and Romania reported much lower rebased growth in Q2 versus Q1, 5% in Q2 versus 9% in Q1.

Telenet grew OCF at 11% in Q2 to $190 million and stands at 12% year to date, primarily due to various efficiencies and process improvement projects. So, overall good results in Belgium for the quarter. J:COM reported $276 million of OCF representing 9% rebased growth. And on a local currency basis, as Miranda mentioned, J:COM experienced a sequential decline in their OCF from Q1 to Q2, resulting primarily from higher costs related to new hires and salary increases, which kick in on April 1st, and higher costs related to their golf network which is seasonal as they have costs related to the summer PGA and LPGA events, and costs from the launch of Channel Gengo [ph] which is a new channel.

VTR delivered another quarter of 20% plus OCF growth, achieving rebased growth of 23% and they experienced a reacceleration in OCF in Q2 2008 as compared to Q1 2008 supported in part by recent price increases.

Slide 14 shows free cash flow results. Cash from operating activities in the quarter was $879 million, an increase of 80% over Q2 2007. Year-to-date cash from operating activities was $1.53 billion, up 45% from the first half of 2007.

CapEx in Q2 was $562 million or 21% of sales. Year-to-date CapEx represents 20% of sales. The breakdown of CapEx has remained consistent with prior quarters. On a year-to-date basis, 58% of our CapEx spend has been successful with based [ph] 23% was deployed to upgrades and line extensions, with remainder primarily used for support. The end result was that Q2 '08 free cash flow of $318 million meaningfully suppressed our Q2 '07 level of $42 million and brings the year-to-date free cash flow to $445 million, an increase of 350% over the first six months of 2007.

I do want to point out that free cash flow in the second and fourth quarters are typically the strongest of the year due to the timing of our cash interest and tax payments, which are generally weighted towards the first and third quarters.

In addition, we also typically generate favorable working capital swings in Q4 due to customers in certain European markets that prepaid for a full year of service, for example in Switzerland. As we move forward, we expect free cash flow growth will become a more significant component of our overall growth strategy.

Last slide in our financial section shows a snapshot of our balance sheet. Total debt increased $1.4 billion since December 31, 2007 and $300 million in the second quarter alone. The increase is mainly a result of FX and to a lesser extent incremental borrowings. We continue to maintain relatively low cost of borrowings with a weighted average interest rate of approximately 5.6%. We've also limited near term maturities as less than 2% of our total debt including capital leases is due within the next 12 months.

Lastly, we are extensively hedged on currencies and interest rates. We recently enhanced our hedging program which had previously been executed on a rolling basis for certain higher yielding currencies to a program locking in rates and swaps to our debt maturity on all currencies. Our cash position including restricted cash of $1.7 billion decreased by approximately $830 million year to date and $160 million since the end of the first quarter. The decrease since Q4 of 2007 is largely attributable to our stock repurchase programs partly offset by FX, cash derived from borrowings, and free cash flow.

At quarter end, we had $420 million in cash at LGI and non-operating subs, $790 million at our subsidiaries, as well as aggregate unused borrowing capacity without regard to covenant compliance of $2.6 billion. And of this borrowing availability, approximately $1.2 billion is available at UPC upon reporting of Q2 results. The key takeaway here is that, while we've experienced an increase in net debt, our resulting gross leverage ratio has continued to decline as we have de-levered through OCF growth. We currently have a gross debt leverage ratio of 4.3 times, which is near the low end of our 4 to 5 times target. And expect us to be opportunistic capital raisers if there's a turnaround in the debt markets, especially with our equity trading at these depressed levels.

So, last item, in conclusion, our suite of advanced services continue to resonate with our customers. We've been able to maintain combined data and voice adds in excess of 300,000 for the last 11 quarters, and we are encouraged by digital acceptance in our new markets as well as some recent pick up in countries that previously had rolled out digital. Digital video will be a key driver for us as we look out the next few years and drive towards more mass market acceptance and exploit our HD advantage. As we see it, the sequential decline in revenue growth over the last several quarters at UPC appears to be stabilizing and we are looking for revenue improvements in Europe and for LGI overall, in terms of top line growth in the second half of the year.

And finally in terms of our equity, we will continue to be active purchasers and have the necessary liquidity to do that. In our eyes, there is no better place to invest our cash than our own stock, especially when we are trading at historical low evaluations. Obviously, our Board is fully supportive of this, authorizing an additional $500 million plan as mentioned earlier.

So, with that, operator, I think we're ready to open it up for questions.

Question-and-Answer Session

Operator

Thank you so much. (Operator instructions) And our first question comes from Vijay Jayant from Lehman Brothers.

Vijay Jayant – Lehman Brothers

Hi guys. Mike, given this country data that you showed on revenue and OCF growth on rebates basis, and the initiatives Gene talked about in really the three markets that are the laggers [ph], can you sort of guess how long will it probably take to sort of get those markets back to sort of your normalized growth rate? Is it one quarter out or is it six to nine months out? Second is, obviously you talked about the whole digital rollout in Europe and I'm sure you are probably getting some lift on HD growth from the soccer championship thing in June and the Olympics starting next week, can you sort of talk about any life – the magnitude of lift you can probably see in the second half of the year from those kind of things? Thanks.

Mike Fries

Sure, thanks Vijay. I think on the individual countries that we spent sometime talking about in our relatively lengthy remarks this morning, Gene laid out the basic plan and the basic action items that we're taking. And in each case I think he showed and demonstrated some pretty positive development scope. We're not in the position today to tell you, Vijay, is it one quarter or is it two or three quarters. I can simply say that we're optimistic about the actions we're taking today and we are seeing benefit. And clearly as I think Gene and Bernie mentioned, we expect the second half of this year at UPC to be slightly more positive than the first half in terms of revenue growth. One big factor coming from the very markets and the very initiatives that Gene describe as well as the other thing he just mentioned, in particular the killer apps and digital which are starting to pick up pretty meaningfully in just about all of our markets. As you know HD, Japan is all HD and has seen good development of HD content throughout the last – really since it's been launched and we now have the DVRs in all but two of our markets and we'll have Romania in the last and Slovenia in the last two markets launch in the forth quarter. We now have HD and/or HD DVRs in all but three of our markets and the other three will happen in the end of this year.

So, we've essentially got the products in place and I think while we haven't reached a tipping point in HD in every case, it is starting to take hold, whether it's the Olympics or European soccer or other major sporting event. Every month, we've seen new and more HD content becoming available in our markets. Broadcasters are starting to realize specially state owned broadcaster that HD is a critical part of their business model. And fortunately across Europe, we're actually charging for HD today either in the form of a set-top fee or in a monthly programming fees. So it's not for us a loss leader, it's truly a revenue source and one that's unique in our market. As we said many times, phone companies are largely restricted at least in most of our countries to ADSL2+ and relatively limited bandwidth, and the ability to compete with us on HD we think is going to be difficult. So that we, as Gene said, expect to be the HD leader in just about every country we operate in, and I don’t believe we've seen most of the benefit from that because clearly we just don’t have enough digital subs. As that digital sub base evolves, HD and DVR and the revenue we generate from those products will make a big impact.

Vijay Jayant – Lehman Brothers

Mike, if can ask another follow up, (inaudible) put out some form of a notice recently suggesting that it might consider sort of reselling analog video in the Netherlands. Can you sort of talk about what that means (inaudible) what does that you have to do with that and if there's any business implications if that ever happened? Thanks.

Mike Fries

Sure, this is in Holland, one of the regulatory agencies there has issued I guess it's – I am not sure exactly what is described (inaudible), they did the same thing three years ago Vijay, and virtually the same thing, and the EU at that point in time concluded that there was sufficient competition in the market in Holland not to approve that particular request by OPTA [ph]. I can tell you that if there was video competition three years ago, there sure is heck more competition today. So we're a bit befuddled to be honest about this approach. It seems to be KPN driven, why wouldn’t they, although KPN themselves do not – if this were ever to become law would not benefit from it, they would not be allowed to access any of the networks. It's intended to be for third party resellers who would have the ability to bundle an analog TV product into their products but not without – I mean I believe the wholesale rates and things of that nature haven’t necessarily been finalized and they would have to secure their own broadcasting rights. So, we're a bit confused by it and this happens just about every two or three years in the Dutch market. And at this point, we are saying when about what it means to us on any kind of practical or near term basis.

Vijay Jayant – Lehman Brothers

Thank you.

Mike Fries

Yes.

Operator

Thank you so much. And our next question comes from David Kestenbaum with Morgan Joseph.

David Kestenbaum – Morgan Joseph

Okay, thanks. Mike, you talked a lot about the shortfall being related to competitive issues. Can you just talk about how much you think is related to economic issues? And as the economy gets better, do you think you can get back to the type of guidance, 7% to 9% type of rebased growth that you would forecast this year (inaudible)?

Mike Fries

Yes, I mean I think it's – and I'll let others speak as well, I do think that we are not immune to what's happening around the world and certainly in this market from an economic point of view. I will say however that we aren't seeing any as much direct impact from the economic development here as you might expect. There are a couple of instances, for example, in Hungary where we've seen some inflation. So, we do think that costumers are perhaps becoming more price sensitive, no question about that. But we don't think that in the long run or even if this sustains, it will have a meaningful impact over our products. I mean, I'll state what all of our peers say, which is this is relatively recession resistant products and services, broadband and TV and voice are generally not the products and services that people get rid off, if they're feeling economic constraints. They might as I've just said be more price sensitive, and so we have to be cognizant of that and I think deal with that where we can. But I don't think we're losing any direct sales. Sales in Europe in fact year to date are ahead of last year and ahead of budget. So, it's not impacting our sales as far as we can tell and I think perhaps (inaudible) perhaps even Chile a little bit, we may have some modest impact from household discretionary income, but we're not seeing that as the major driver here.

David Kestenbaum – Morgan Joseph

Okay. And can you compare and contrast Poland where you're doing really well compared to some of the other Eastern European markets, what are you doing differently in that market?

Mike Fries

Well, I'll just say a couple and then let Gene do it, I mean, the benefits we're seeing in Poland have come from years of rebuild where we spend considerable time and money rebuilding networks that were prior to this one way and didn't have to buy products. So, it's a low penetration base off newly rebuilt networks in a market that seems to have great appetite for broadband and the bundle. Gene, you want to add to that?

Gene Musselman

I guess the only thing I would add Mike is that, I mean to differentiate between Hungary and Romania, for example, in Poland, there is less competition, primarily TPSA, the incumbent, along with the overbuild situation in some of the major cities like Warsaw and (inaudible). But that overbuild situation has been there since the very beginning. So, it really hasn't gotten any worse. In fact of anything, it's probably moderated. I think the major difference is that we have – we continue to do a large amount of upgrades in Poland and that allows you to introduce the new services which of course then drives the ARPU and the revenue, and they (inaudible). And if you look at particularly Hungary and Romania to some extent, there we have completed a large portion of the rebuilds and we just don't have the same upside opportunity via the introduction of new services. So, there we are more heavily penetrated with those services.

Mike Fries

It seemed to be slightly more maybe perhaps a bit more sophisticated consumer base there and we launched the DVR there and went right out the door. And I think Gene, something like 80% of our sales people were picking up DVR. So, it just seems to be partially because there's some satellite competitors who are pushing the technology quite as well, it seems to be more sophisticated costumer base.

David Kestenbaum – Morgan Joseph

Fair enough.

Operator

Thank you so much. Our next question will come from David Gober with Morgan Stanley.

David Gober – Morgan Stanley

Thanks guys. Gene, I was wondering if you could give us a couple of the early takeaways from the soft launch of DOCSIS 3.0 in the Netherlands, and also if you guys could talk a little bit more generally about your strategy on DOCSIS 3.0 and how you view that in term of – is it a product that you are going to upgrade the top tier subs all to DOCSIS 3.0 or is it something that you sell as an incrementally ARPU driver, is it really the ARPU driver, so is it a penetration driver?

Mike Fries

I think it's both, and as you get your thoughts together on Holland, it is a penetration driver, a retention tool and an ARPU driver. I mean, clearly you take a market like Holland where on average we are generating EUR20 to EUR21 a month from a relatively large broadband base. Clearly, when we start launching 30, 60, 90, 120 meg products, we don't anticipate ARPU there eroding. We expect to gravitate people to higher tiers at competitive prices in a way that our competitors certainly can't do.

And so, it is in our minds a volume growth tool, as well as, a means of putting a floor under ARPU and then driving ARPU over time. Bandwidth consumption – increase of bandwidth consumption everywhere in the world, but particularly in Europe. More so than the U.S. in fact, it has been a foregone conclusion. And you are either in that space with a game-changing technology or you are not, and we think we're going to be first out the door with this type of product and service, and it will have a meaningful impact on perhaps the single biggest area we focused on in our broadband business and that's ARPU erosion from people switching to cheaper and yester out [ph] products, so we're pretty confident that this is going to be something we roll out in all the markets in Europe at when and where needed, certainly on a phase basis. But cost efficiently, CapEx efficient and in the manner that's kind of have an impact on both volume and ARPU.

Gene Musselman

Yes, just to add to that and focus more on in your question. We have been field traveling, I guess the EuroDOCSIS 3.0 since July and at this point, we've expanded the field trial to two communities. I think at this point, we have a couple a hundred of boxes out in the field and the good news is that we have not experienced any technical issues and as you know, EuroDOCSIS 3.0 is a major leap forward in technology in anytime it's rolled out, such a technology you can experience some fairly significant problems. We've been lacking and we have not. We've had a few configuration issues of legacy boxes and homes, a few wiring problems. But at this point, everything is looking relatively good. So we'll continue the rollout in the Netherlands and start scaling and hopefully move forward to a full commercial rollout. We're initially targeting areas where there are some fibers to the home over bills that's taking place here in Netherlands. The target for this year is to pack somewhere between 400 and a million homes. I know it's quite arranged but that is the target at this point with making EuroDOCSIS ready for service in those homes past. The initial rollout will be utilizing cable modems instead of the EMTAs. For example, we won't have some of the – let's call it the equipment that we need until later in the next year. So our focus in the Netherlands initially is to protect those areas where there is a fiber and where we have higher ARPU subscribers and then depending upon the competitive situation, we will adjust speed of the rollout of EuroDOCSIS in the Netherlands throughout '09. It's our intention to rollout EuroDOCSIS to as much of the plant across all over markets as we can next year and I suspect by the end of '09 that a large portion of our plant will be EuroDOCSIS 3.0 ready whether we introduce the higher mega-type speeds in all of those markets will of course be driven by the competitive situation. Does that answering your question?

David Gober – Morgan Stanley

Yes, it does. Thanks, guys.

Operator

Thank you so much. (Operator instructions) Next, we will go to Alan Gould with Natixis.

Alan Gould – Natixis

Good morning. First question is from Miranda. Miranda, Japan's bagged a quarter [ph] of the reported EBITDA. You are done 10% rebase to OCF growth for the first half of the year. The company has targeted 13% to 15%. Are there any structural issues or reasons why Japan would be having a lower growth rate than the rest of the company?

Miranda Curtis

I think what was seeing, as Bernie mentioned, some factors related to programming costs which of course elements that are being introduced reflects the first time in this year's numbers. I think Bernie mentioned some of it. Some of the businesses like golf network are very susceptible to seasonal programming costs, it seems like the PGA Tours, and we've also have seen some rate hikes. But we're actually working very closely with the management to contain any areas where we were seeing cost increasing out. And we're very optimistic but as the U South [ph] marketing strategy has come into place, and as we can see the take off of the value-added services that we described earlier on, that we will start to see this OCF numbers come back on track. So, there is noting fundamental or structural in the market that we think should concern you.

Michael Fries

I will answer at the end of that. We took the board as we do every summer; we take them every summer to a foreign market for a board meeting. We spend a fair amount of time in the country talking to politicians and we're meeting with management and we will be getting an in-depth view of that market. We went to Japan in June and I would simply say that the board came a way as did we all with a very positive, in fact even more positive than when we arrived, view of this particular asset and it's steady straight-forward and consistent growth, as well as the ability to accelerate that growth. Partially, given some of the changes happening the macro environment, particular the requirement for digital conversion, and that's only a few years off here and the government realizing that the cable TV sector and J:COM in particular, represent a very important component in that digital conversion which we are trying to achieve. So I can tell you that we are more bullish today than we were a year ago, even six months ago. We (inaudible) board as well on this particular business, its ability to continue to penetrate from a relatively low penetration level in its core product and services, and its ability to compete against the folks out there. It's up against day to day entity in particular. So we're pretty bullish.

Alan Gould – Natixis

When is [ph] digital conversion in Japan?

Michael Fries

I think it is 2011.

Miranda Curtis

The open mandate is 2011. But J:COM will be fully digital significantly before that, sometime around the winter of 2009.

Alan Gould – Natixis

Okay. I have one follow-up technical question. What is the cost to upgrade to DOCSIS 3.0 and what do you need to have a 160-megabit service? Do you just need enough channels available to bond the channels to do, go to 160 megabits?

Michael Fries

Yes, I don’t know how much we've said publicly, in principle, we're looking at in Europe for example, roughly $20 here give or take for home past, and if you are 2.0 which we are largely now across Europe, the upgrade is more like a card swap and not that meaningful. We're not giving you – I'm not going to give today absolute CapEx figures because we're still fine-tuning those next year, but I would tell you that it is a not a meaningful increase in our CapEx component over the 18 months, two-year time frame that we'd roll this product out. Each market is different but in principle, it's just channel bonding and the beauty of our business in Japan and Europe is we have very high capacity networks with very small, at least in the case of Europe, very small analog packages. And of course, Japan will be all digital shortly. And that, because we have small analog packages, we have tons of bandwidth available to bond, whether it's 408 [ph] or whatever we think we'll need over time. And that's something that perhaps the thing which (inaudible) a bid from U.S. guys who in some cases might not have sufficient channel capacity, even others might. But we don’t see any issue, any structural rebuild or large scale rebuild required to achieve continued speed improvement with DOCSIS 3.0.

Alan Gould – Natixis

Thank you.

Michael Fries

Yes.

Operator

Thank you so much. Our next question will come from Paul Kagan with PK Worldmedia.

Paul Kagan – PK Worldmedia

Thanks. Hi, Mike.

Michael Fries

Hey, Paul.

Paul Kagan – PK Worldmedia

I got a question about your program of buyback. Can you tell us the average price that you paid for the stock you bought back?

Michael Fries

Yes, I think we probably can. It's approximately $30, since we started on the $5.2 billion level.

Paul Kagan – PK Worldmedia

The comments you made about, it’s the best use of our capital. I wonder if you could expand on that a little bit. Some people would say, well, you've got a growing business around the world and you could do more technology and keep looking for more revenue and new applications instead of applying so much money to the stock, so…

Michael Fries

I think the key response to that is we are free cash flow positive and generative in our core operating markets, so we generate excess cash over and above our CapEx programs, our R&D and our innovation program. So if we needed to spend more capital in the individual operations, it would come from that $445 million we generated year-to-date if we thought it was necessary. The vast majority of our buybacks are coming from the debt capacity we have built into our business and our ability to continue to add to that debt capacity through operating cash flow growth. So I would say we probably haven’t spent $1 on buyback that could otherwise or should otherwise have been spent in the operating business because we're generating free cash and the vast majority of the money we're using to buy back stock is coming from generous debt capacity that evolves from our cash flow growth.

Paul Kagan – PK Worldmedia

I'm fascinated by the situation because of the times we are in. Most people can't borrow money and also other companies in the field are relatively inexpensive compared historically. So, how does this play against possible acquisitions at a time that would seem to be really good for acquisitions?

Michael Fries

Well, as I've noted in my remarks in somewhat of counting sheep [ph] fashion, we haven't seen the sort of compression in private multiples, the topic you've known about and written about for 20, 30 years; we have not seen a compression in private multiples in the markets that we're evaluating or the assets that we are considering and that's good news, bad news, right. It's good news because somebody thinks these businesses are still worth 8, 9, 10, 11 times and there aren't going to rid of them; those are generally smart money. It's not great news because we're all hopeful of great opportunity to extend and grow at cheap multiples and when you can't borrow at eight times debt to EBITDA, that equity makes it difficult to generate a meaningful return. So it's combination of sellers I think hanging on to private market multiples and banks and lenders not getting up to the levels we had historically seen in the 7, 8 times leverage multiples and that gap is being funded with equity which is making the IRRs a bit lower than we would hope. So something has to give, debt capacity or private market multiples on the exit. But, today, we just haven’t seen that and so we are not the type of company to sit on cash and burn a whole in our pocket. Our stock represents the highest rate of return based on what we know and we know our company very well and what we think we can achieve over the next two to three years. And so we'll continue to put that to work and that's the business we're in. I think or hope for over time that perhaps some of these assets will unfold, will become available, but we've always said that there are no must-have deals in our future and the core operating business we represent today is the business we think can grow and prosper on the footprint we have.

Paul Kagan – PK Worldmedia

Okay, one other question, if I could. You mentioned a few minutes back about, or Gene did, targeting areas with fiber to the home overbuilds, that's a telco overbuild isn't it?

Michael Fries

In some cases, it is. In case of Holland, it's a private company that the telco has invested in. One other Telco in our footprints, Swisscom, has talked about fiber builds. I think it's safe to say that they are very few and far between in Europe, but that doesn’t mean to say they won't over time develop in certain pockets where we might see some fiber development. That's one of the things we have to be cautious of as we rollout these mega-speeds and as we start to completely change the paradigm and the price-value relationship, we want to do it sufficiently to generate consumer interest and be farther ahead of our competitors, but we don’t necessarily want to stimulate three or four or five- fiber builds. Although I'll tell you, even if the telcos we compete with did start fiber building, it will take years to complete, cost billions of dollars and in our opinion be very – we will be out way ahead of that. And so while we certainly are cognizant of that today, we've got a pretty wide open field and we are going to take advantage of it.

Paul Kagan – PK Worldmedia

Okay, thank you.

Operator

Thank you so much. And our final question today will come from Camille McLeod Salmo [ph] from Forces Investments [ph].

Camille McLeod Salmo – Forces Investments

Hi, I just wondered if you could give of a bit more color about Ireland and your building of the networks that compete with AIRCOM [ph].

Michael Fries

Sure, Gene, you want to deal with that?

Gene Musselman

Yes. By the end of this year, we will have completely upgraded the plant except for Dublin itself. So the entire countryside will be upgraded. The focus then shifts to Dublin itself and we anticipate that we will complete the rebuild of Dublin sometime late '09, maybe somewhat into 2010. We're progressing a little bit slower in Dublin than what we'd like because there our cable plant is attached to façade of buildings. It's aerial, but aerial is normally attached to telephone poles. In this case, it is actually attached to the facade of houses. So, one of the issues that we have with respect to replacement of cable and upgrading of amplifiers and changing out passes and those things is getting permissions to enter private property and to make those upgrades, and that has been slower than we anticipated in some cases. On the other hand, where we have upgraded the plant, which is everywhere except Dublin, we're very optimistic about the uptake that we're seeing in the advanced services. As you know, Ireland is basically a duopoly, us and AIRCOM, and there's just a huge appetite for telephony and data services. So we're highly motivated to move the Dublin upgrade as rapidly as we can and after the end of this year, we will be 100% focused on it.

Camille McLeod Salmo – Forces Investments

Thank you.

Operator

Thank you so much and that is all the time that we have for questions. At this time, I would like to turn the call back over to the speakers for any closing comments.

Michael Fries

Well, thanks everybody. We went a bit over but our remarks were tad long. We felt that was necessary. Thank you for your sticking with us those that have and the others here, as a management team we couldn't be more optimistic and focused on this business. We have individually and collectively a long history and I would say a successful history dealing with the adversity externally and internally and we don't see the sort of challenges in front of us as too difficult or too burdensome. We're actually very positive and we look forward to talking to you in November on our third quarter results and wish you all a relaxing and restful rest of your summer. Thanks again.

Operator

Ladies and gentlemen, this concludes Liberty Global's investor call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global's web site at www.lgi.com. There, you can also find a copy of today's presentation material. Thank you so much and have a wonderful day.

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!