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Liberty Global, Inc. (NASDAQ:LBTYA)

Q3 2012 Earnings Call

November 5, 2012 9:30 AM ET

Executives

Michael Fries - President and Chief Executive Officer

Charles Bracken - Executive Vice President and Co-Chief Financial Officer (and Principal Financial Officer)

Bernie Dvorak - Executive Vice President and Co-Chief Financial Officer (and Principal Accounting Officer)

Diederik Karsten -Executive Vice President, European Broadband Operations

Balan Nair - Executive Vice President and Chief Technology Officer

Mauricio Ramos - President, Liberty Global Latin America

Rick Westerman - Senior Vice President of Investor Relations and Corporate Communications

Analysts

James Ratcliffe - Barclays

Jeff Wlodarczak - Pivotal Research

Ben Swinburne - Morgan Stanley Smith Barney

Matthew Harrigan - Wunderlich Securities

Will Milner - Arete Research

Vijay Jayant - ISI Group

Tim Hamby - Janco Partners

Operator

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. (Operator Instructions) I would now like to turn the conference call over to Mr. Mike Fries, President and CEO of Liberty Global.

Michael Fries

Welcome everybody, and thanks for joining us today. I want to make a couple of quick introductions before we do the Safe Harbor and get into the call. I have with me, as usual, Charlie Bracken and Bernie Dvorak, our co-CFOs; Diederik Karsten, who runs our European Cable Operations; Balan Nair, Chief Technology Officer; Mauricio Ramos, who oversees VTR Chile; and of course Rick Westerman, you all know, in the IR Department. There are a few other folks on the call, and if necessary, we'll hear from them as well.

The agenda is as we've done in the past. I will do a quick overview. Charlie will run through the numbers today. And then, we'll get to your questions. So before I do that, let me turn it back to the operator, for the Safe Harbor.

Operator

Thank you. Page 2 of the slides 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 the company's expectations with respect to its outlook for 2012; and future growth prospects and any other information and statements that are not historical facts. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements.

These risks include those detailed from time-to-time in Liberty Global's filings with the Securities and Exchange Commission, including its most recently filed Forms 10-K and 10-Q. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectation 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 Fries

As usual, there are some slides on our website, hope you've had a chance to access those and we will be speaking from those today. I am going to start on Slide 4 with a snapshot of our third quarter operating results.

Beginning with our subscriber growth of 320,000 RGUs for the three months. As most of you know, the third quarter is typically slower for us, but this is actually our second best Q3 for net adds, and we're now over 1.1 billion organic RGUs for the year, bringing our total video, voice and broadband base to 34.1 million.

By far the most exciting development in the quarter was our long awaited launch of Horizon, in the Netherlands. And I am pleased to announce that the wait was worth it. Early adoption of Horizon, both the gateway and the online service has far exceeded our expectations in internal forecast. And I'll give you some more of that in a moment.

The third quarter was also our strongest this year from a financial point of view. Obviously, we continue to see the benefit of last 12 months, where we've averaged nearly 380,000 net RGU adds per quarter. In the last nine months in which we've added over 2.1 million advanced services, including digital TVs subscriptions, which is a record for us. As you expect this volume growth together with some selective price increases helped with the Q3 revenue of $2.5 billion or 6% rebased growth.

Property and cash flow was also strong for the quarter, with fee-based growth of 5% to $1.2 billion in total OCF for the period. You've probably done the math, but translates into an OCF margin for the three months of 48.6%. And if you exclude VTR's 4G wireless projects number, which I'll update you on just a minute, our rebased OCF growth would have actually been 7% for the quarter.

Charlie is going to dig into the numbers in much more detail, but I get the punch line, which is that we are confirming all of our 2012 guidance targets to date. I'll just make three quick points in the capital structure. First, we ended September with roughly $5.5 billion of total liquidity, including consolidated cash of $3.3 billion, $2.1 billion of which was upstairs at the LGI parent level.

Second, we continue to have great access to the capital markets, and completing $2.5 billion in long-term debt financings in the quarter at an average interest rates in the mid-to-low 6s, well below our average cost of debt capital today. And third, we continue to invest in our own equity, with $620 million of stock repurchased through September 30, and $1 billion targeted by yearend. That will bring our total stock repurchases to over $9 billion, since we launched our Liberty Equity growth strategy.

And then, finally, just a few words on announced Telenet transaction. As we described in our press release of October 29, which I'd encourage you to review if you haven't, and we are moving forward with our €35 tender offer to the minority shareholders of Telenet, and have weighed the 95% condition, which means we'll close on any and all shares tendered at that price.

Now, having been investors in Telenet since 2004, and a majority control shareholder for last five year, we feel we have a pretty good understanding of the company's risks and opportunities, and are convinced that this is an extremely attractive price from essentially any evaluation perspective. A full prospectus laying out all the details for shareholders will be filed very soon, and we look forward to completing this transaction in December.

With that, let me jump into a few more operating updates starting on Slide 5, where the chart illustrates a dramatic increase in subscriber growth that we've experienced over the last four years. The bar show total net adds for the first nine months of the year going back in 2009, and it's a pretty good visual from our opinion.

Now, we've generated 50% compound annual growth in net adds through that period, from 342,000 in 2009 to over 1.1 million through September of this year. Now, obviously some of that RGU growth, especially in the last two years, is attributable to key acquisitions like Germany, but even excluding Germany, the balance of our European operations have added over 25% more subs this year than in 2011. Markets like Ireland, and Switzerland, and Belgium, and Western Europe, Hungary, and Romanian and Central Europe continue to perform well.

Two markets in particular underperformed in the quarter. In the Netherlands, we had a more difficult three months due in part to increasing competition and the impact of a price increase on our triple-play bundles. Despite that, our Dutch finance results for the quarter were very strong. And in Poland we continue to work for the integration of the Aster acquisition. If you look at this year from a product perspective, 1.1 million net adds year-to-date, break down into 660,000 new broadband subs, 730,000 new voice customers and the net loss of 260,000 video homes.

And despite the video loss, which was negatively impacted b a couple of markets, our video revenue continues to be a significant contributor to growth, as result of converting over 700,000 analog TV customers to digital cable homes this year alone. And remember, each of these customers generate higher revenue and gross margin for us. In fact, even though we've tasked through the 50% digital penetration level, we still have nearly 9 million analog TV subscribers, which is just one of many reasons that we have put so much energy and focus on our new Horizon platform.

And that's a nice segue to Slide 6, where we touch on our September launch of horizon in Holland. As I mentioned just a moment ago, we've been blown away by the market's reaction to Horizon, and I'm not just referring to positive comments from consumers and bloggers and techno files. Since the official launch eight weeks ago and a marketing kick off five weeks ago. We've already sold over 50,000 subscriptions, 80% of which are already online and usually through a self-install.

Just to put that number in a perspective, we exceeded our yearend target of 40,000 sales, just about halfway through this process, and should more than double that number by yearend. Horizon has always been for us, a plan to do three things: one, generating incremental ARPU; two, attract new homes to our platform; and three, reduce churn. Its elegant and intuitive user interface, its ability to connect cable content, the PCs, and iPad's and smartphones and the way it integrates apps and web-based content are all in our opinion sort of killer futures.

But the Horizon TV online portal and the iPad app are perhaps the most impressive. To date there are over 150,000 iTune downloads and over 125,000 Horizon TV online users. On average, roughly 30,000 households everyday are watching one of 80 linear channels or 6,000 hours of on-demand content, and over 3 million streams were delivered in October.

Interestingly, 50% of customers have used the integrated widgets or onscreen apps like Youtube, and the point here I guess is, it's working. Our customers have no reason to consider an over-the-top video provider or KPN for that matter. As you'd expect, we've re-ramped our product and pricing plans in Holland, and now Horizon headlines are most popular bundle, the 50 megabit broadband speeds for €55, and incremental €5 above our old triple-play bundle price.

So we estimate, the payback including the start-up fee to be around 12 months for new customers. And we're on track to launch Horizon in Switzerland later this year, with a full scale commercial rollout in early January, followed by Ireland and Germany later 2013. We just had the head of CISCO's video division and to meet with our board last week, and he confirmed what we already knew. Horizon is where the industry is headed and we're certainly thankful and glad to be there already.

Slide 7 gives you a quick update on our key mobile initiatives in Europe and Chile. We've always been clear and that are mobile strategy is situational, meaning the approach will vary based upon a whole range of factors, including our scale in the market, fee availability of spectrum or MVNO relationships, the competitive landscape, et cetera.

Today, we have over 600,000 mobile subs and we continue to pursue that same basic tailored approach. In six of our European markets, the Netherlands, Germany, Switzerland, Poland, Hungry and Austria, we have signed what we call full MVNO contracts and are building a centralized core network infrastructure in IT system to support these operations.

Four markets have already launched in advance of this platform, the Netherlands, Germany, Hungry and Poland, and we're already serving 200,000 mobiles subs. In Chile, our MNO operation is in full swing. In just six months we're approaching 100,000 subscribers. Our ARPUs are above the industry average, 75% of our postpaid subs are cable customers and our churn and customer satisfaction are extremely good.

It's a competitive market, but our network is best-in-class and we offer features others can't, like rollover minutes and rollover bits, unlimited calls within our mobile network and unlimited calls between VTRs fixed and mobile customers. So we feel very positive about our prospects in Chile. And of course, in Belgium, Telenet has been operating mobile for some time now. And management has recently switch gears with a more aggressive rate plan for existing customers, which has accelerated sales there and generating 66,000 net adds in the quarter.

The success of all these mobile products relies on some version of the bundle, which represents nearly all of our gross adds these days, and is the backbone to each of our fall campaigns, I feel which are captured on Slide 8. In Germany we continue to press the broadband speed advantage and has resulted in 70% to 80% market share of net adds on footprint. Our 50 megabit broadband offer is roughly three times faster than VTR's comparable package, and includes 85 digital channels, 13 HD channels and flat rate phone services all for €35 and usually with the €5 discount in the first 12 months.

In Switzerland, our top deal as we call it, includes a 100 megabit broadband speed, five times faster than a comparable bundle by Swisscom, Wi-Fi modem, 115 channels of which 25 are HD and an HD-DVR for a little over 100 Swiss franks. In both of these markets, we're expecting Horizon to supercharge demand for our bundled offers and drive incremental ARPU as it has done in Netherlands.

To date 45% or 8.8 million of our customers take two or more products from us, that's up from 7 million a year ago. And pretty much all of that growth is in the triple-play segment, which is up 35% year-over-year. And while we're pleased with that result, we can't lose side of the fact that we have 10.8 million customers, who are one product households and represent a great opportunity for RGU and revenue growth in years to come.

So another quarter of strong financial an operating growth, supported by continued innovation with products like Horizon, anchored with a strong balance sheet and a disciplined approach to capital allocation and particular around M&A.

With that, I will turn it over to Charlie.

Charles Bracken

Thanks, Mike, and hello everybody. I'm carrying on now from Slide 10. To give you a big picture, we increased our full year revenue by 7% to $7.6 billion, and we increased our OCF assembly by 7% to $3.6 billion for the nine months ended September 30, compared to last year. Our year-on-year growth was largely driven by a combination of acquisitions, particularly Kabel Baden-Wurttemberg and our strong growth in organic RGU adds over the last 12 months, which was $1.5 million.

As was the case through the first half of the year, FX continues to be a headwind for us in terms of our reporting in dollars, as the dollar strengthened against euro over the nine months on average, by approximately 10% relative to last year. So rebased growth, adjusting to neutralized FX and M&A was 6% year-on-year revenue and 4% for OCF, with both metrics driven by performance in Western Europe.

Our OCF growth has continued to be adversely impacted by costs associated with our Chilean wireless business. And adjusting for the incremental impact of VTR mobile, our rebased OCF growth for the nine months was increased from 4% to 5%. Finally, our OCF margin for the nine months 2012 period was 47.7%, including 48.6%, but the Q3 period impact which were up modestly year-on-year.

Slide 11, looks at our third quarter results by region. We delivered consolidated revenue in OCF of $2.52 billion and $1.22 billion respectively in Q3, and that reflects rebased growth of 6% of revenue and 5% in OCF. Our rebased revenue growth for Q3 was our best quarterly result in two years and our rebased OCF growth was our best result since Q2 of 2011. And again, adjusting for the rebased OCF deficit of our Chilean wireless business of roughly $50 million, our total rebased OCF growth of LGI for the quarter would have been 7%.

Our European broadband operations excluding Telenet generate to $1.7 billion of revenue and slightly over $900 million OCF, reflecting 6% rebased growth in both revenue and OCF. And this strong performance is due in part to the best growth of the year in Germany and the Netherlands.

Moving to Belgium, Telenet reported another solid quarter with 6% rebased revenue and 8% rebased OCF growths. Although, Q3 year-over-year revenue growth which is lowest of the year, OCF was actually its highest due in part to a lapping of the costs associated with football rights in Belgium.

Outside Europe, VTR reported revenue of $241 million and OCF of $82 million in the third quarter. Although, Chilean market remains quite competitive, we manage to deliver our best rebased results so far at this year. We achieved rebased revenue growth of 7% and a rebased OCF decline of 7% for Q3. But backing out the incremental wireless impact, VTR would have experienced double-digit tripe-play OCF growth.

Overall, we remain comfortable confirming our mid-single digit rebased growth targets for both revenue and OCF for the full year. And more specifically, we expect coming towards the high-end of our 4% to 6% range on revenue and toward the low-end of that range on OCF.

Turning to Slide 12, we highlight OCF growth in what we call our big four. Germany, Belgium, the Netherlands and Switzerland, accounted for roughly 75% of LGI's consolidated OCF in the quarter. On the bottom of chart, show our rebased OCF growths for Q3 versus the comparable prior period last year.

Beginning the upper-left, the German story remains intact and is our strongest performer as well as our largest market, generating $341 million of OCF in the quarter or nearly 30% of LGI's total. The 12% rebased growth in Q3 was our best result since Q2 of 2011, and is been driven by the positive impact of KBW and the strong volume gains that we have generated in the last year. For example, year-to-date, we've added more than 550,000 RGU's in Germany alone. And these RGU's will provide our German business a continued momentum, and we expect to see increased synergy benefits in the coming quarters.

We've only discussed Telenet's growth, so moving to the bottom-left. Our Dutch business posted rebased OCF growth of 6%, which is down modestly from the 7% than we posted in Q3, 2011. With that being said, our Q3 2012 result reflects our highest total since a year ago. Our results were positively impacted a triple-play price increase on the base, it also adversely impacted our RGU sales volumes in what is typically a seasonally slow period for us. But overall, financial results are very good, despite aggressive competition from KPN.

And on the bottom-right, Switzerland has rebounded nicely, an increased rebased OCF growth from 2% in Q3 of 2011 to 4% in Q3 of 2012. And our Swiss rebased growth have been 4% or higher for the last four quarters, and this improvement from last year has been driven 67,000 organic additions in the last 12 months with 32,000 in Q3 of 2012, which was our best quarter in more than five years.

Slide 13, provides our year-to-date capital expenditures measured as a percentage of revenue and adjusted free cash-flow results. Our cash CapEx totaled $457 million for Q3 and $1.45 billion for first nine months for 2012. This translates into CapEx as a percentage of revenue by 18% for the three months period and 19% for the nine months period.

Now, these are down modestly year-over-year from 19% for Q3 2011 and 20% for the year-to-date 2011 period. The decrease is due principally to our working capital efforts around vendor financing and capital leases, which increased year-over-year by $37 million for Q3 and $112 million for the year-to-date period.

If we look at total property and equipment additions, which includes CapEx on an accrued basis and/or vendor financing and capital lease additions, we were flat at 21% for both Q3 2011 and 2012, and higher by a 110 basis points for the 2012 nine months period at 22% as compared to 21% for the corresponding 2011 period.

Turning to the right-hand side of the slide, our adjusted free cash flow, which primarily removes the impact of mobile initiative in Chile is $440 million year-to-date, including a negative $26 million in Q3. And this compares to $423 million for the 2011 year-to-date period, including $31 million in Q3 2011.

Now for each of the Q3 and year-to-date 2012 period, our growth has been adversely impacted by the FX headwinds due to a strengthening U.S. dollar, as well has higher levels of borrowings. And as you've seen in prior years, we expect strong free cash flow generation in the fourth quarter and with that confirming our mid-teens adjusted free cash flow growth targets for the full year.

Slide 14, summarizes our leverage and cash position at September 30. We are very opportunistic in the third quarter as we capitalize on a strong bond market and raised incremental capital at Unitymedia, Kabel Baden-Wurttemberg, UPC Holding and Telenet. In the aggregate we issued bonds and maturities of 10 to 12 years and a total principal value of roughly $2.5 billion, and the average coupon of this debt was just over 6%, it's very attractive from our perspective.

These financings contributed to an increase of $2.6 billion in our debt and $1.4 billion in our cash from our levels at June 30. So as a result we finished the quarter with $26.5 billion of debt and $3.3 billion of cash. After adjusting for our Sumitomo loan, this translates into leverage ratios of 5.2 times gross and 4.5 times net. That compares to the Q2 levels of 4.8 and 4.4 times respectively.

Moving to the right corner of the slide, our consolidated liquidity position totaled $5.5 billion at Q3, up from $4 billion in the second quarter, and our $3.3 billion of cash consisted of $2.1 billion at LGI and $1.2 billion at operating subsidiaries, primarily Telenet. In addition we had $2.2 billion of maximum borrowing capacity under our revolving lines.

So given our liquidity position, our expected free cash flow generation in Q4 and the loan that we put in place in October, which is secured by our shares in Telenet, we are comfortable that we have the cash to fund a full buyout of the Telenet minorities and complete our $1 billion share repurchase target for 2012.

So turning to Slide 15, which is the conclusions. As our Q3 results highlight, we have good momentum going into the fourth quarter and 2013 in terms of revenue and OCF growth. We are confirming all of our guidance targets, including a more active buyback in Q4. As Mike discussed, Horizon is a game changer, and we think we'll have a very positive impact throughout our European operations. And it certainly strengthen our competitive positioning in the Dutch markets, and we continue to be excited about our products offers across all our markets during the full selling season in Europe, especially in Germany.

And this completes our prepared remarks today. So, operator, can we begin the Q&A please.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question James Ratcliffe with Barclays.

James Ratcliffe - Barclays

Two if I could. First of all, Charlie, on debt structure you mentioned again that you're fully hedged on FX and rates, are you comfortable with that position, given clearly it had some cash flow impacts and would you be comfortable with having a little less than 100% hedging on that front, if it rolled overall that cost? And secondly, on the video side, you mentioned you lost a contract in Germany. I mean how do we think about, is there more of that to come largely to the process? And also, as said that you've launched some pre-video products in Switzerland and Austria, what's behind that and how do we think about how extensive this could be?

Charles Bracken

So I think on the debt side, as you know we won a relatively high level of leverage that were very comfortable with that and we’ve written it through a number of cycles. I think we generally will continue to be very conservative around interest rates making sure that we have fixed rates or caps to limit the risk on an increase in our interest expense.

That said, there are a number of things that we've been looking at to improve and optimize the cost of our debt. And we continue to work away refinancing and taking advantage of fact that a lot of our debt trades at a more time to price than it was originally issued at. So I think there's certainly upside of an interest expense number, but I don't think we're going to fundamentally change the kind of net fixed caps nature of our debt, because I think it's prudent to take away that risk. And the second one you have is on, was it vendor financing, did I hear?

Michael Fries

It's about this video subs in particular around Germany. And I'd say that we did we did lose 26,000 video subs in Germany in the quarter, I would say most of that was attributable to some rate increases we took in order to harmonize video rates between KBW and Unity, and that we think is largely behind us. Only roughly 6,000 of the 26,000 in Germany was related to a housing contract.

We try not to give too much detail around, where we are on the remedies in that market. Except I will tell you that we anticipate doing much better than budgeted in terms of customer retention and our ability to work through, in particular the remedy that requires us to open up our contracts on those 300,000 plus homes.

So that's sort of anecdotal, James. But I do feel like, if we were pressed for details, we're in pretty good shape, half the contracts we've already renewed. We've got the rest of them in our sight. We've lost a handful, a couple three. And we're doing the best we can to try to retain as many of those remaining as possible, and we feel very good about that.

Diederik, you want to board here, do you want to talk about the Swiss unencryption?

Diederik Karsten

With regards to Switzerland, we did announced an unencrypting, the digital signal, which we said as of January consumers can get the, let's say, a new basic package without a need to buy a device other than maybe converted to a digital, which we will provide of no charge. And we do that to further our strengthen, I'd say, our position competitively and also to gradually open up capacity to kind of create from a CapEx point of view some room to maneuver and to free up data or capacity for data.

We expect that it's seen as a step-forward, it was well regarded, well received and as a quid pro quo also from the regulator. We were allowed to further increase or benefit, increase our rate for the video product in 2013 by 90 Swiss cents, Rappen, they call it, 2014, 60 cents that is a good result. So it's win-win for consumers also for the regulator and for us. That said, that would be my answer.

Operator

And our next question comes from Jeff Wlodarczak with Pivotal Research.

Jeff Wlodarczak - Pivotal Research

Also can you comment some more on the Telenet situation. It seems like you've effectively raised guidance a couple of times since your €35 offer, it seems also they've gotten far more aggressively around their mobile strategy without talking with the board, which I think you've guys have been a bit more surely not as aggressive as their sort of intention is, Ramos, if you can comment on that?

And then specifically on Germany, any update you can provide on the negotiations with the broadcasters on those the feed-in fees? And then in Germany DT just signed those bulk discount, wholesale deals to resellers. Do you think you're going to get a sizeable number of retailers participating in that, and do you think that discount is going to go towards lower in market pricing?

Michael Fries

I'll take the Telenet one, Diederik, and why don't you think through the German question. On Telenet, listen I think Jeff, appreciate your question. I know you're pretty prudent to what's going on. My strong preference here is to let the perspective speak for itself. There will be a document, and we've already filed our draft with the FSMA and within a week or so, a full perspective should be produced, which is going to have more enough information and background regarding assumptions and valuations and all that good stuff.

So my preference is not to really get into it on this call, but primarily let give everybody a chance to read what's going in through the process and our views, which are very clearly I think and comprehensively laid out in that document. Diederik, do you want to talk about Germany?

Diederik Karsten

With respect to the wholesale resell, let's say, the topic in Germany, we know that in July the F&A allowed Deutsche and NetCologne a deal, since they made a change in their rights also to other operators, is that what the question was?

Jeff Wlodarczak - Pivotal Research

Yes. That's right.

Diederik Karsten

Overall, obviously we see this as a negative, the outcome. But we're also assessing the impact it would at this stage, say that it's expected to be immaterial since, for example, NetCologne, they have a fiber network already. DT is also using the same infrastructure. So we don't expect that demand to really change.

Michael Fries

On the feed-in fees, Jeff, I think the issue there is also, there I say it, a bit immaterial. The feed-in fees in question reflect less than 1.5% of our total revenue in Germany. It's pretty small number in the scheme of things. Having said that, it's an issue we intend to pursue vigorously. KDG has been much more vocal about it than we have, and much more aggressive about it that we have.

And to some extent we draft behind them. But rest assured, we're vigilant, and we intend to protect our rights. But it is in the end, I think something like 1.4% of our total revenue. With our revenue growth there, not really the most important point, it's more of a philosophical issue, and we believe very strongly we're in the right on and we'll pursue those rights to the end.

Jeff Wlodarczak - Pivotal Research

And if I can ask one follow-up Mike, if you can give us any color on trends so far in the fourth quarter that would be helpful?

Michael Fries

Sure. Well, I will you this, if you look at the third quarter market-by-market and month-by-month, and in almost every case, we were trending up through the third quarter. September was our best month, pretty much across the board in all markets, in all products. And October was very good as well. So we anticipate, as you know, the fourth quarter being our strongest quarter of the year, and at least if September and October are any indication from a trend point of view, we'll feel good about that.

Operator

And we'll take our next question from Ben Swinburne with Morgan Stanley Smith Barney.

Ben Swinburne - Morgan Stanley Smith Barney

I just wanted to follow-up on a couple of points in the open remarks, maybe for Charlie in Germany. You mentioned expecting more KBWs or synergies, I'm assuming KBW, synergies as you movie to next couple of quarters. Any way for us to quantify that either in percentage terms, how much you've captured versus how much is ahead of you?

And then same kind of question on the Chilean wireless business, you've got another quarter behind you, I'm just curious if you have line of slight to profitability in that business now, if you want to discuss for us?

Charles Bracken

I think on the synergies, well, we've got a lot of what I will call the near-term synergies, but we still have quite a lot of network-based and IT-based synergies to realize. And Diederik will give more kind of detail about that and where we are there.

In terms of Chilean business, I think it's a premature for us to give you kind guidance on that business. Clearly, the faster that business grows, in the short-term we get more losses, I think, as Mike indicated just had a pretty good start. But it's just a bit too early for us to give you a kind of clear roadmap. But the business is performing very well and we are pleasantly surprised by the demand for the products.

Michael Fries

Just a couple of additional points, Ben, in Germany, the synergies really are intended to hit in 2013. And we'd had a lot of really good perk this year in terms putting the businesses together, harmonizing rates, getting the teams aligned. And there has been some actually OpEx synergies or negative synergies as you do that. But through 2013, on an annual basis, when we expect those who really start kicking in, and I'm sure was to talk about those in the next year.

And in Chile, I'm proud of the team down there. They're expecting to have a pretty large sub-base in for Chile by the end of the year. And then we're more or less have hit there EBITDA and free-cash flow targets. And going into 2013, the trends look good. I think we've learned a ton in terms of launching our own business on top of our own cable networks. The most that we've learned that if you can position it right, built it right and market it right, your cable customers are very, very happy to buy mobile from you. The nice thing in Chile is we have good margins. We have great control over the network, and the product because it's our spectrum. And in the key areas our network show. It's been a good project so far and we're happy with the result.

Ben Swinburne - Morgan Stanley Smith Barney

Can I seek one Horizon question, for you Mike, anything that's surprised so far as you've gone to market, I know it's too early, you mentioned self-installs which is surprise to me, something I was just obsessed there. Any surprises operationally on the technology front? And how quickly does the cost curve sort of kick in? I know, you're sort of the first one globally out with this kind of hybrid high and high-end set-tops, so you probably had to bear the brunt of some development cost? How quickly do you share to see those benefits?

Michael Fries

I would say, just couple of things surprised me. Certainly the ability to have so many customers self-install was not what we expected. Our demand was so robust, we had a default in the self-installs and the operating team in Holland just did an unbelievable job of getting that implemented quickly and effectively, as you know to the point we're now that vast majority of our installs are self-install and are going well.

We had some call volume spikes, but you'd more or less expect that. That was volume driven. And, again, as I said, we've exceeded our full year budget, something like six, seven weeks into it. I was impressed to learn that 95% of Horizon customers are opting in to our privacy deal assets where we are recommended content to them, power the search engine with their references, and there has been very little, if any, resistance to that which I think is very positive thing for our ability to make that product even more substantial and interesting going forward.

We were the number one app download until the new iOS software came out, unfortunately, and that really was for us, not a surprise, because some people would use it, but we were definitely been surprised by the diversity of usage. So smartphones, PC's and iPads are pretty well balanced in terms of access to the content.

And I'm really excited with the over-the-top, if you will version of Horizon where you can watch anyone of 80-linear channels, and interestingly the vast majority of viewership is up those linear channels. Imagine if you could watch ESPN or any one of the networks in any part of your house, just pick-up your iPad and dial in, I mean the linear television, is obviously, 95% of viewership today, any how.

It's not surprising that linear television on the iPad is still a very attractive feature. And we're able to do that in Holland, unlike any over-the-top provider there or in the U.S. We'll do the same thing in Switzerland. So having that linear content over-the-top for us has been a really positive thing, and usage has been higher than we had expected which is terrific.

Couples of glitches here and there, but Balan and his team have done a fantastic job. The box is stable, platform is stable, things are working well and we've got every few months here, we have a new additions and new updates and new features rolling out, which is really very positive.

What was your second question?

Ben Swinburne - Morgan Stanley Smith Barney

It's on the cost side.

Michael Fries

We have some built-in cost reductions in the box itself, so the box will reduce in price by contract with Samsung. And we'll at some point talk to multiple vendors about that box. But when you look at the payback, it's pretty good. And in Switzerland, we'll be even probably a bit more aggressive on the incremental ARPU from Horizon.

So we do anticipate very, very short payback period with new customers. And we've been very good about collecting install and buying fees for existing and new customers. So we didn't invest as much in this as you might think.

Our partners meaning Intel, Samsung and NDS collectively have multiples more invested in the product than we do. But that's how the partnership was designed. And we are hopeful that they will be able to take the parts that they worked on and monetize them in their ecosystem. And we'll get some benefits from that as well in the long run. So it's trending in a very favorable way. And I think we couldn't be happier with the results.

Operator

And we'll take our next question from Matthew Harrigan with Wunderlich Securities.

Matthew Harrigan - Wunderlich Securities

At SCTE in Orlando there were some consultancies that were talking about 15x increase in mobile data traffic over the next five years. So can you begin to address that on an LTE network, even though you need the coverage? So obviously a lot of technical issues in sort of setting up these heterogeneous networks where you can use your advance Wi-Fi to handle in a very limited range, but you can do things that are high usage in these dense areas. Are you being approach by companies in various markets to work with them? I know it's a pretty complicated technical process and you haven't wanted to go full bore on Wi-Fi outside the home, I'd just be curious?

And then secondly DT while being very not in the game almost on fiber, you certainly getting more aggressive on some of the more advance XDSL technologies, have some fairly decent headline speed. Is that anything that gives you any incremental pause on the German market where right now at least you'd assume to continue to just wrack it up on RGU adds every quarter?

Michael Fries

Bernie, you want to address the mobile Wi-Fi portion?

Bernie Dvorak

So we will be launching early next year. Our second SSID on all of our Wi-Fi modems, all of our modems eMTAs, and what does that means? That means that every home that has this modem will enable Wi-Fi access to folks that are within the range. So essentially, we are building an ultra Wi-Fi network without actually building an ultra Wi-Fi network. We've not struck any partnerships with any mobile operators on actually moving traffic on today's Wi-Fi network. It is going to be open to all subscribers. So it's a way to give our subscribers and added value.

Now, with the MNOs, we are working on number of contracts to build backhaul for them to be at base stations. But it is a separate discussion all together. On DT and XDSL, there are number of different technologies on DSL that would improve DSL speeds, but the laws of physics being what it is, most of all these technologies are very effective up to a certain distance limitation. So beyond about 1,000 meters, almost all of these technologies start to fall, go back to the traditional DSL types speeds. So from that sense, I think you'll see cable has a much more ubiquitous footprint than DSL. And all of these technologies by the way will have speeds faster than that.

Michael Fries

Yes. In Germany, I'll let Diederik, fill in here little bit too, But I mean as you do know DT has been relatively slow on the fiber. We think something less than 2% to 3% of the entire German market has any fiber-to-the-home at all. VDSL which might what you're referencing is more prevalent with roughly a third maybe, little more of the market has VDSL which gives them upwards a 40 megabyte type product speed.

What they do from here I think is very much cat and mouse game between DT, its shareholders, the government and regulators. When and how these things will evolve is anybody's guess. There's a lot of discussion around DSL vectoring and what impact that might have on the regulatory of framework that's in place. so lot of posturing and lot of dancing around.

In the meantime, we just keep selling the product. We do expect that at some point these things will get sorted out. And in the meantime, we're just going to grab as much market share as we can. And fortunately for us, we've got DOCSIS 3.0 and at some point DOCSIS 3.1, and I don't know how much speed we think consumers will needed in long run, but we have no problem fulfilling that demand. And we feel pretty strong from a competitive position.

Matthew Harrigan - Wunderlich Securities

Balan made the point on 1,000 year issue and the physics of the copper, but beyond with the correct your VDSL, that GDOT Fast protocol that was almost, talking about your BPON and FiOS speeds if you were close enough, is that still developing or is that the way it is kind of dead in the water in your estimation.

Balan Nair

There will be technologies that, enables you to get to in the 500 mix base, but it's really very, very short distances, couple of 100 meters type of distances. But also remember if you had to do that, there is something called a bundled group in the copper infrastructure. You have change out almost all the service in that group of copper pairs, with the same technology which means you have to go back everybody on it, has to be moved on to this technology. It's not trivial both from a cost and operational perspective.

And it's also tricky from a regulatory point of view, if you're referring to vectoring itself, because the main operator has to control the last mile which I think is problem, both technologically, economically and potentially operationally for anybody who is utilizing that network today. So it's without meaningful challenge, but at some point we believe something will get sorted out.

Operator

And we'll take our next question from Will Milner with Arete Research.

Will Milner - Arete Research

I just want to comeback to Telenet, I appreciate you said you wants to wait for the perspective. I just want to understand really though, why remove 95% acceptance threshold. It sort of suggests, you're happy to sit at an ownership level below 95% for a time, but clearly than you weren't have achieved the objective of accessing Telenet's free cash flow. So I wondered if you could just comment on that and discussed that.

And the second question I have is on Holland, just you've obviously suffered RGU losses for the first time, and we've seen clearly in commentary that platy commentary that KPN has become more aggressive promotionally, and it make sense I guess the KPN's continue to be more aggressive. So wondered if you can just talk about how you're seeing KPN promotions trend over the next 12 months in the context of Horizon?

Charles Bracken

Sure, I will take the Telenet question and Diederik you can grab for the Holland question. Listen we have been investors in Telenet for 8 years, and we expect to be owners in whatever capacity of Telenet for the next eight years. And while initially we had thought a condition of 95% made sense, at this point we're happy to own more and improve and strengthen our control position in the company.

Should be surprising and just the way this thing is unfolded was a natural and normal step for us. And when we think it is consistent with the shareholder want to think. Significant number shareholders, if not all the shareholders will see this as a very fair price in the context of historical evaluation multiples, operating performance, comparables any measure of metric you want to look at and it seems like the right thing to do the way that condition, and those share was take advantage of it. Diederik you want to hit the Holland point.

Diederik Karsten

I think if you talk about KPN, you also talk about, let's say the summer period where we indeed saw them coming after cable aggressively from there, and I'd say was over too. But it was a mix of few things. They completed some product upgrades, the IPTV. And had to follow us in offering higher speeds, where they had been our follower for, might say, three years. They tried to close the gap. And that this with the 30 and 40 meg product.

But on our own side, I mean, don't forget this was our pre-Horizon quarter where we obviously didn't, let's say spend all our marketing dollars just before Horizon arise. But from that point of view, it was a soft period. We try to also kind of make up for it. In September, we try regained that speed differential versus KPN, so we think that both with Horizon and some other, I'd say, corrections in the portfolio, we're still regaining ground versus KPN.

But something else I'd like to highlight, although, you'd have to ask is that they are currently at a quest to I'd say regain net adds at the low end of the market. We do not necessarily believe that that is our point of view, a healthy commercial strategy because one would argue that this goes against healthy margin points. So you will see us remaining disciplined in further reactions to their quest of almost buying low end net adds, as we speak they do that via exploitation of their B brand being called Telfort. So it hurts, but it hurts KPN as well from a margin point of view. It's an excessively expensive operation to get.

Charles Bracken

EBITDA last year-over-year, it's hard to see how that's sustainable.

Will Milner - Arete Research

Can I just have one quick follow-up, on the fully swapped borrowing cost, which fell again to I think 7.5%, and I know you've been cautious about extrapolating that. But I wonder if we can think about that being a new level, or sustain will be lower level of your hedging costs?

Charles Bracken

I can't think of that as a new level, and I think this turning today's rates, this month or so I think that it will work through 2013.

Operator

And will take our next question from Vijay Jayant with ISI Group.

Vijay Jayant - ISI Group

Mike, just wanted to talk about business services, other category, in aggregate you gave some numbers on your on your SOHO subscriber count but can you sort of talk about how big it is and how fast it's growing, and where will be opportunities is in terms of the runway ahead?

Michael Fries

Sure, I would say on balance B-to-B is one of our fastest growing revenue streams, I think it grew 8% or something trending. And that of course includes two major components. We're growing our SOHO revenue stream closer to 35% to 50%. And so the SOHO base which is for us a massive opportunity, that we're going to quantify for you just right here, but its millions of SOHOs we believe are accessible and available to us. And that opportunity is one we're exploiting very aggressively today, as you can see from the numbers, and we'll start reporting those numbers.

And you have to measure that against a larger-to-medium enterprise business that is very competitive, one in which we face extreme competition from incumbents, in particular, who see the enterprise business as one of their two coveted revenue streams along with mobiles. So it seems to us that we need to continue shifting to the small-medium enterprise and SOHO market which we've done.

That we have, for example, in Germany next year a budget for B-to-B that goes from a zero number to a very relatively substantial number, as we rollout B-to-B there for the first time. And I think overall it is, clearly going to be a revenue stream worth watching, and one that we're all focused on, everyone of us on this call, on realizing and will be an above average grower relative to our guidance, if you will, for years to come. And Diederik you want add any thing to that.

Diederik Karsten

You're absolutely right. To say, for example Switzerland and The Netherlands are kind of front runners there. And with SOHO being the fastest growing segment, we are I would say, leveraging the strength of our network where it is our high speed data products, combined with voice which are making the inroad, where the addition of digital TV is a new product.

Also for kind of somewhat more professional environments, we try to also stay away and avoid high CapEx related one-off projects for overly large customers. We burned our fingers in past on that. And so I'd say, apart from a good revenue grower, it's also going to be an efficient CapEx strategy which will contemplate. That's what I would, Mike. Thanks.

Operator

And we'll take our next question from Tim Hamby with Janco Partners.

Tim Hamby - Janco Partners

First question is kind of follow-up on the Horizon question earlier, are there any surprises as you've seen there enough to change more of your strategy going forward? And then I just want to get a brief your take on the opportunities that you see available on the rollout of more of a cloud based user-interface there?

Balan Nair

We are already rolling out and are preparing to rollout Horizon on a cloud-based UI format. And everything we leaned on a daily basis gets incorporated into the next rollout which is Switzerland. So that's a long, long list of things, but I wouldn't say there is very few surprises. But Balan why don't you address those to?

Balan Nair

So the strategy for Horizon, as Mike indicated, we've made tweaks here and there, but nothing significant. But we are committed to The Netherlands. We're going to roll it out in Switzerland, then followed by Ireland and Germany. In addition to that, we've also started work on moving the Horizon UI into the cloud. And that work is fully funded and engineering teams are working on it. We expect probably by the end of next year, we would have something.

Operator

Actually it's all the time we do have for questions-and-answers.

Michael Fries

Terrific, well, listen everybody, thanks for joining us, again. We hope you have terrific fall and winter and holidays and all of that good stuff. We look forward to coming back to with our yearend results now in February, and appreciate your support. We'll talk to you soon. Thanks very much.

Operator

Ladies and gentlemen, this concludes Liberty Global's Q3 2012 Investor Call. As a reminder a replay of the call will be available in the Investor Relations section of Liberty Global's website at www.lgi.com. There you can also find the copy of today's presentation materials.

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