Liberty Global CEO Discusses Q2 2011 Results - Earnings Call Transcript

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Liberty Global, Inc. (NASDAQ:LBTYA) Q2 2011 Earnings Call Transcript August 3, 2011 10:00 AM ET


Mike Fries - President and CEO

Bernie Dvorak - Co-CFO

Charlie Bracken - Co-CFO

Diederik Karsten - MD, European Broadband Business

Mauricio Ramos - President, Chile and Latin America

Balan Nair - CTO

Rick Westerman - IR, PR

Bob Leighton - SVP, Global Programming Business


James Ratcliffe - Barclays Capital

David Joyce - Miller Tabak

Jeff Wlodarczak - Pivotal Research Group

Jason Bazinet - Citi

Hugh McCaffrey - Goldman Sachs

Matthew Harrigan - Wunderlich Securities

Ben Swinburne - Morgan Stanley

Henrik Herbst with Credit Suisse


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 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 3, 2011.

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

Mike Fries

Thank you and hello everybody. Appreciate you joining us. I know it's a busy morning in our space. We've got a large number of people on the call with us from management as we normally do. I'll just introduce a few of those, who you'll likely hear from. Bernie Dvorak and Charlie Bracken our Co-CFOs are on; Diederik Karsten, Managing Director of our European Broadband Business; Mauricio Ramos runs Chile and Latin America; Balan Nair, our Chief Technology Officer; Rick Westerman, of course from IR and PR; and then Bob Leighton, he's our kind of Global Programming Business.

I'm going to turn back over to the operator and then we'll get started.


Thank you. Page 2 of the slides details the company’s Safe Harbor statements regarding forward-looking statements. Today’s presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the Company’s expectation with respect to its outlook for 2011 and future growth prospects, and other information and statements that are not historical facts.

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

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

Mike Fries

Thanks. And if we refine the art of no surprises and in that way the agenda will look just like all of our previous calls. As I usually do, I'll start on Slide 4 with a quick snapshot of the quarter and cover our operating, financial and strategic priorities.

I think the bottomline here is that we had a really good quarter, beginning with subscriber growth, which continues to be the best part of our story. We had 235,000 net new RGUs in the second quarter and 486,000 year-to-date. And those numbers are up meaningfully, between 30% and 40% over last year.

I think it's important to point out that all of our core operating regions, the Western Europe, Central and Eastern Europe and Chile performed well and are delivering more net adds in the first half of 2011, but then in the same period last year. We now serve 17.6 million unique customers, who in the aggregate subscribe to 28.3 million video, voice and broadband products from us.

I'll drill down on those numbers in a moment. I think the main point is that the demand for our digital television services, our superior broadband speeds and our triple-play bundles is very strong. As you might expect, our financial results reflect this trend. Our rebased operating cash flow was up 8%, our third consecutive quarter of improved growth. And rebased revenue was right where it's been for the last six quarters at mid-single digits.

Bernie is going to provide some more color, but you'll see pretty quickly that the engine, fuelling our performance is Western Europe, and in particular our largest market Germany. The $3.4 billion of consolidate cash, $4.6 billion of liquidity and a seven-year average debt maturity, our balance sheet remains in great shape.

Leverage is actually down a bit, as a result of retiring to in the money convert issues. But as we look at it, we're currently at 4.6 times gross and 3.6 times net, which is still right in our target range. Our buyback program is right on track and hit our guidance of $1 billion target by yearend, and we've got about I think less than $400 million remaining at this point.

And then finally just a few words on our M&A activity. Beginning with KBW, where it's been pretty widely reported that our acquisition has moved to a review stage in the German competition commission, something we actually expected. I'll just say that things are on schedule and we fully expect to seal the close in the fourth quarter.

We also announced a definitive agreement to sell Austar, for about 10 times operating cash flow. The deal requires both Australian regulatory approval and an IRS tax ruling. And if all goes as planned, we should complete that transaction in next year.

And sticking with the regulatory theme for a moment it's worth pointing out that overall, our regulatory position remains quite strong in Europe, especially at the EU level. Now, from time-to-time we encountered a few bumps in the road at the national level, which is something we've talked about for a long time.

In fact, some recent developments may have been scratching your head. For example, you probably read that the Dutch regulator has now concluded that the video market in Holland is healthy and competitive, and there is no need for further regulation of cable.

At the same time, the other regulators in a neighboring market with many of the same characteristics went the other direction. Of course, this is what we started in Holland. So we've seen this movie before, and I'm confident we'll reach in better ending to the story.

To recapping quickly, we're delivering an all-front solid growth shareholder friendly capital structure, improved M&A activity, including some further rebalancing of the geographic footprint, which would seal over 90% of our revenue and that of Europe.

With that as an intro, let me turn to Slide 5, where we presented our regular breakdown of subscriber growth by product. At the top, you'll see our broadband and voice net adds, both of which represented record second quarter for us at around 155,000 RGUs.

Our broadband business continues to benefit from our considerable speed advantage, especially in our larger markets. In Germany, for example, broadband growth was up 26% year-over-year. And in Netherlands, we're still grabbing market share with a 100% net adds in our footprint versus KPN. And Switzerland nearly doubled its broadband growth from last year, following the recent launch of new triple-play offers that have a speed of the five times that of Swisscom.

On the bottom left, you'll see our video losses for the quarter at 75,000, that's about a 30% improvement year-over-year and a 20% sequential improvement from the first quarter of this year. The number reflects among other things, significantly lower analog churn in our Central and Eastern European operations in particular remaining at, and the steady addition of digital video subscribers.

And then on the bottom right, you'll see total net adds for the quarter of 235,000. Again, that's up 39% from last year with all key operating region showing improvement.

Slide 6, you'll see one of the main drivers of our subscriber growth is a success of our bundles. And as I've said many times, the bundle is the product. And this slide provides an interesting look at our success year.

The chart on the left shows two performance metrics. The vertical bars represent what we call our advanced service subscriber base, which essentially just adds up our broadband, voice and digital TV RGUs, the sticky high ARPU services. You can see that over the last three years, we've nearly doubled this number from roughly 10 million to 20 million. And we're on a record pace still for this year.

The blue background on the chart shows our triple-play penetration, which has steadily risen over the last four years, from 11% to 23% today. The modest uptake in 2010, reflects the consolidation of Unitymedia in Germany, which is still in the early stages of bundling and still has great upside. But if you exclude Germany, 25% or one in four of our customers today, hit the full triple-play of services from us.

In the end, as the bundle drives RGU volume, but also ARPU expansion. And as a group, today we're at a little over $41 per household per month and that's up 6% year-over-year. Nowhere is all of this more true than in Germany, which has performed better than we anticipated, when we entered the market 18 months ago.

Slide 7, highlights some of this progress. The top left chart shows the ramp-up in subscriber growth, as we acquired the business. And the 208,000 RGUs acquired in the first half of this year compared to 175,000 in the second half of last year. And that's substantially from a reported result in the first half of 2010.

It's like three things driving this growth. First of all, we're still seeing raw organic demand for broadband in the German market, which has historically lagged behind countries like the Netherlands and Switzerland. While our data penetration is up from 7% to 11%, since the acquisitions, it's still far below our other LGI markets in Western Europe, which average over 30% penetration.

Secondly, our triple-play bundles are working with the customers. On the bottom-left you'll see our latest campaign, featuring a well-known German formula-one driver, Nick Heidfeld. And then lastly, we're driving home our broadband speed advantage compared to DSL. We estimate that we're now getting over 70% of the net adds on our footprint. Today over 35% of our German broadband customers are taking 32 Mbps or higher.

All of this translates into a really strong financial performance, including rebased revenue and operating cash-flow growth of 8% and 16% year-to-date, and operating cash flow margin more than 60%. So not surprisingly, the progress with Unity has validated our confidence in this market. And it reaffirms, on both the logic and enthusiasm we have to expand in the German market with the KBW acquisition.

And then finally on Slide 8, we provide a quick update on some of our key product initiatives. All of which demonstrates the pace, the quality of innovation in our shop today. On the video front, as I mentioned, lower analog churn and steady digital cable growth help bring our Q2 video losses to the lowest level in five years. But the upsell of digital TV is by far the most important part of that equation for us, from a revenue and ARPU perspective.

We are now 7.3 million digital cable RGUs. Taking our penetration to just under 50%, more than double where we were three years ago, which means on the flipside we've still got 8 million customers watching analog TV. More and more of whom, are going to find it increasingly hard to resist the ever growing number of HD channels, DVR packages that we're providing.

And just in case, that wasn't enough, we are making great progress on our multimedia home gateway, which we've talked about before several times. And which we continue to believe will be a game changer in our markets. We will start the launch for the platform in Netherlands next quarter, followed by Switzerland in 2012.

And then despite a very fragmented and nascent over the top environment, also something we've talked about in most of our markets. We're also on scheduled with our new online video platform, first in Holland, with dozens of stream linear channels and thousands of hours of on-demand content.

In our broadband business, it continues to be all about speed leadership. With the recent addition of Chile and Ireland, we now offer 100 megabit-plus services in 13 countries to over 22 million homes. Here's a recent stat and that will prove that for you, and improve the model for us anyhow.

65% of our European broadband customers taking internet speed of at least 20 Mbps today and that number continues to ramp. The Western Europe almost 90% of our UPC sales got the 20 Mbps or higher level. And in Switzerland, approximately 40% of our broadband sales, who have the 50 Mbps speed. In terms of mobile we're on track for a 4G network rollout in Chile, early next year. And we've signed wide ranging MNVO deal in the Netherlands and in Switzerland.

And then lastly, despite the strengths in the fist half, we're optimistic about our subscriber growth for the balance of 2011. And across our European markets we are busily mapping out the details of our fall campaigns, and gearing up to continue the momentum. And as you know, usually our fourth quarter is our strongest quarter.

So while the financing markets outside of the cable business are choppy. Our particular operations are very, very steady. I'll afford answering any questions you have about it. And now, I'm going to turn it over to Bernie to walk you through some financial slides.

Bernie Dvorak

Thanks, Mike, hello everyone. Slide 10, highlights our headline year-to-date results in terms of revenue and OCF growth. And compared to our first half 2010 results, our revenue increased by 16% or $706 million to slightly more than $5 billion. And our OCF expanded by 20% or $387 million to $2.35 billion.

Our growth in both metrics resulted from a combination of favorable FX. Organic growth driven by higher subscriber volumes to our advanced services and to lesser extent the impact of acquisitions, in particular with Germany included for six months in 2011 compared to roughly five months in that 2010 period.

In terms of FX, the U.S. dollar weakened about 6% to the euro, during the first six months of 2011 compared to last year with even greater depreciation against other currencies like the Swiss franc and the Australian dollar. As Mike mentioned earlier, our revenue in OCF results reflect rebased growth of 4% and 7%, and Western Europe was our best performing region, led by Ireland and Germany. And we will review that in more details shortly.

On the product side, broadband internet remains our fastest growing product. However, in absolute dollar terms, video accounts for the majority of our subscription revenue gains year-over-year, reflecting the positive impact from the continued immigration of analog to digital and upsell of our digital video base.

On average, the digital cable subscriber is still generating over 80% more ARPU than in analog cable sub. Our OCF margin at 46.5% for the six months is reflective of the enhanced scale in our business and our ability to successfully sell our customers more bundle products.

As compared to last year, our margin increased by 140 basis points, largely on the strength of Western Europe where we saw an uptick in every country led by Unitymedia's 420 basis point improvement. If you exclude the Unitymedia for both the 2011 and 2010 year-to-date periods our consolidated OCF margin still increased by 60 basis points. We remain on track to achieve our mid-single digit rebased revenue and OCF growth targets for 2011.

Moving to Slide 11, we'll take a closer look at our Q2 results by operating region. Our European cable remains our focus and a primary driver of value for us. In the second quarter we generated $2.1 billion of revenue and $1.1 billion of OCF, representing 4% rebased revenue growth and 9% rebased OCF growth.

The second quarter results were driven by strong performances from our Irish, German and Swiss operations. And additionally, Central and Eastern Europe reported flat rebased year-over-year OCF growth, which is improved as compared to our Q1 rebased results. And for the second quarter, our Chilean business posted $229 million in revenue and $87 million in OCF, which reflect rebased revenue growth of 6% and a rebased OCF decline of 4%.

So a solid topline growth for VTR, but as we expected the OCF decline resulted from cost associated with our 4G project, which you all know about. If you exclude the $7 million of incremental 4G costs in Q2, VTRs triple-play OCF growth would have been 4%. And that's a little below VTRs rebased revenue for the quarter, because we had a very strong quarter in terms of RGU additions in Chile, which contributed in part to higher customer acquisition and marketing cost.

And finally on Australia, our DTH business generated rebased revenue and OCF growth of 1% and 5%, which was an improvement from Austar's relatively flat results in the first quarter.

Overall, our Q2 results were strong, but our OCF performance is particularly notable, given our robust subscriber additions. And important to note, however, that as we look out to Q3, we expect to report lower rebased OCF growth due to several factors, including basing of our marketing spend as compared to last year's Q3; continued ramp in cost associated with our 4G project in Chile; cost related to the football rights, we recently acquired in Belgium; and difficult year-over-year comps in certain markets like Germany and Switzerland.

Slide 12, similar to prior quarters our Big 4 markets in Western Europe, consisting in Germany, Netherlands, Belgium and Switzerland. We're largely responsible for driving OCF performance in the quarter. As a reminder, these four countries account for roughly 70% of LGI's total operating cash flow.

The chart on the left summarizes our rebased OCF growth for Western Europe, which was 10% for Q2 2011 compared to 6% for the second quarter of last year. And the chart on the right looks at the Big 4 markets, which constitute a large part of the total Western Europe year-over-year growth.

Interesting to note that, three of the four markets posted higher rebased OCF in Q2, as compared to the respective Q1 growth rates. And once again our German operation performed extremely well with 37% growth in net adds year-over-year, which contributed to 18% rebased OCF growth in the quarter.

Our Dutch and Belgium operations, each posted 8% rebased OCF growth in the quarter, so solid results, given the amount of competition and maturity inherent in these businesses. Both operations have benefited from a disciplined cost focus, continued digital penetration and triple-play success is evidence by the fact that each operation has added over 300,000 advanced services in the last 12 months.

And our Swiss operation showed improvement over the last year's Q2, increasing net adds by over a 100% and achieving its best quarterly rebased OCF rate in two years of 7%. And not on the slide, as Ireland, which has stand out quarter, delivering rebased OCF growth of 27% in the quarter on the back of RGUs growth, as they have increased their RGUs base by over 10% or 80,000 RGUs in just the last year.

And Slide 13, shows CapEx and free cash flow performance. As the chart on the left highlights our capital expenditures for Q2 were $508 million or 19.4% of revenue as compared to 20% in Q2, 2010. This modest improvement was driven by our UPC broadband and VTR segments, which experienced year-over-year declines of a 150 basis points and 250 basis points respectfully.

This is a good result, given their growth and subscriber additions in the quarter, as compared to Q2 2010. If you exclude VTR's wireless CapEx in Q2 of $13 million, our ratio would have fallen from 19.4% to 18.9%. Although, we expect our Chilean 4G CapEx will ramp further in the second half of this year. On a year-to-date basis capital expenditures were $1billion or 20.2% versus 19.3%, largely as a result of spending at our Belgium operation, which resulted in more than 400 basis point increase year-over-year.

Moving to the right hand chart, our adjusted free-cash flow on a year-to-date basis increased 13% to $430 million compared to $382 million over the same period year. With Q2 adjusted free-cash flow of $165 million nearly doubling last years figure. For both, the three and six-month results, our adjusted free-cash flow improvement was driven by higher OCF, which is partially offset by higher CapEx and borrowing costs. In terms of second half of the year and similar to our free-cash flow phasing in prior years, we expect our adjusted free cash flow to be significantly weighted to the fourth quarter.

Slide 14, shows our leverage and liquidity situation. We finished Q2 with $23.7 billion of total debt and capital leased obligations, which represented a slight decline to our Q1 figures. And during the quarter, we eliminated nearly all of our outstanding convertible securities, including all of our UGC converts and 99.8% of our more recently issued LGI convertible notes.

We issued 50 million shares and paid $187 million in cash to retire these securities, eliminating approximately $1.4 billion principal amount of debt. And at June 30, we had $3.4 billion of cash, not including the $1.5 billion of cash held in escrow in connection with the pending KBW acquisition.

Our adjusted gross leverage ratio was 4.6 times, which nets off the $1.2 billion Sumitomo loan and our net leverage ratio was 3.6 times, which for our cash position includes our reported cash, as well as the KBW Escrowed Cash. And both of these ratios were down modestly from Q1 levels.

In terms of liquidity, we had a $4.6 billion consolidated position at June 30th, excluding our Escrowed Cash. This consisted of $915 million of cash at LGI parent and our non-operating subsidiaries, $2.5 billion of cash at our operating subs and $1.2 billion in maximum borrowing capacity under our credit facilities.

And subsequent to quarter-end, Telenet used approximately $1.3 billion of its $1.7 billion of cash, to make a $739 million of capital distribution of which we received about $370 million. And they repaid $580 million of term loans. Adjusting for both transactions, our quarter-end cash position would have been roughly $2.45 billion, of which $1.3 billion would have been at LGI and our non-operating subs.

And finally, our buyback strategy is in full force. Given that we are locked out of the market for about half of the second quarter, we resumed our program in earnest in July. And including what we have purchased year-to-date through July, plus the $187 million of incentive payments on our LGI convertible bonds, we have a little less than $400 million of stock to repurchase over the next five months.

So if you turn to Slide 15, in summary, we are encouraged by our overall performance in Q2 in the first half the year. This is particularly through of our RGU growth, which led by our German business was unusually strong during Q2, given the slowdown that we typically see heading into summer.

We are also excited about our fall marketing campaigns and the launch of new innovative products. Our capital structure is in great shape and our stock repurchase program is pacing to our $1 billion 2011 target. And finally, we are confirming all of our 2011 guidance targets today.

So with that operator, let's open up for questions.

Question-and-Answer Session


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

James Ratcliffe - Barclays Capital

First of all, I noticed a couple of (inaudible) has also started offering MVNO service. When you think about market like Germany or the Netherlands, where there is another cable operator, does it make sense to look at these MVNOs potentially as a cooperative effort with all the cable operators or sticking to your own platform?

And secondly, when you look at certainly financial markets at the moment, is there any change on what you're longer term view of the right target multiple for this business is?

Mike Fries

On the first question, regarding MVNO deals and the cooperation within markets, I'll tell you that we have a track record of already doing that. So in the Netherlands, where we have an MVNO signed. To get to the point we're at, we did cooperate with Ziggo in both securing spectrum and anticipating what we might do with that spectrum together.

And the basis of that cooperation obviously assisted us in acquiring the spectrum and achieving a relatively strong and full MVNO deal with Vodafone in that market. So I think your main question is, is there are scope and opportunity for cooperation among cable operators within a market, and I think the answer is, yes. I didn't follow the second question, you want to repeat that?

James Ratcliffe - Barclays Capital

Just given what we're seeing recently in financial markets, if any of this is changing your view of the appropriate long-term leverage for this business?

Mike Fries

Not really. I mean, you look at the average life of our debt and in fact that 85% of its due, and a low 16% I believe are longer. We're not experts in being able to forecast exactly where debt markets will be over the next five years, of course. But as we sit here today, our business is very stable. Our growth is steady and our balance sheet is de-risk and strong. So, no. We don't see any reason to amend our leverage targets or our fundamental strategy of levered equity growth at this stage of the game.


And we'll take our next question from David Joyce with Miller Tabak.

David Joyce - Miller Tabak

On this very strong Ireland growth, would you attribute that the net RGU growth year-over-year, is that from getting the broadband upgraded. And to understand correctly, there is still some more investment in that market you want to do. And if you could apply to that the notion that AIRCOM is looking out to get into the TV or the broadband product?

Mike Fries

Well I was just in Ireland, about ten days ago, meeting with the management team and going through the business. I can tell you that it's attributable to a number of things and I'll repeat some of the numbers that Bernie referenced.

We've just upped our budget, our forecast for the year in Ireland by 30% by the way, and mid-20 sort of EBITDA growth in the second quarter. I think reflects the fact that there is huge pent-up demand for broadband in this market that we are well through the rebuild, particularly in Dublin though there is some more to go.

And thirdly, we have a competitive environment there. That is I would say, not as dynamic as other markets we operate in. AIRCOM might be putting our press releases, but I think this is a company that is in serious financial trouble. So it's been certainly helpful for us to take advantage of their inability to respond or upgrade, and rebuild their networks.

When you're rolling out 20 Mbps, 35 Mbps, 50 Mbps, 100 Mbps broadband speeds and your competitor is dealing with an older copper network. I think that gives you tremendous momentum. The other thing I'd say is that our digital penetration in that market, I believe is close to, say north of 60%, maybe higher than that. And we're offering most of the great content in that marketplace.

And Sky, who we can beat, who does a very good job of helping the value and promote content in that market, not too dissimilar from the U.K. And so our ARPUs in this market are meaningfully higher, in fact the highest in Europe for us. And that gives us more room to drive cash flow as well.

So I think its combination of our success in rebuilding the pent-up demand for broadband. The fact that we have a competitor that is in an awkward moment. And the fact, that consumers know and understand and value the triple-play in particularly the value of digital television.

David Joyce - Miller Tabak

In fact, could just take on to that, I was wondering what the update would be on the Austar acquisition. I know there is still pending some regulatory approval?

Mike Fries

It's right the way you described it, pending regulatory approval. We're working through the concerns expressed by the local regulator there, and are diligently evaluating alternative ways of satisfying those concerns. And I don't think we're providing any further update, except that we're hopeful we can get that across the line.


We'll take our next question from Jeff Wlodarczak with Pivotal Research Group.

Jeff Wlodarczak - Pivotal Research Group

I wanted to spend a little more time on M&A. Mike, maybe you could talk about the Aussie regulator sort of peculiar logic against the Austar sale. Are your cable assets sort of off the table in terms of the sale?

Mike Fries

Your first question was at Austar or Aster?

Jeffrey Wlodarczak - Pivotal Research

I am actually talking about the Austar.

Mike Fries

The transaction in Australia, which we announced, and everybody I'm sure saw in mid-July to sell Austar to Foxtel at a pretty good multiple, has two major conditions to completion. One is, of course, approval by the ACCC competition commission there, and then IRS ruling. The ACCC has followed the timeframe that it's obligated the following, and issued a list of issues and were published a list of issues or concerns with transaction, which in my experience now running close to 17 years work in this market is part for the course.

It is typical for the ACCC to come out swinging, to have a long list of concerns. Many of which, is not all of it, don't necessarily reflect the sort of considered view of the market, but the rest of us might have. So I can go to through those individually, Jeff, if you think there's value out.

I'll just tell you that we're scratching our heads a little bit, as I said publicly. But we do believe that there is plenty of information and ammunition if you will to rebut those concerns. And we ought to know relatively quickly I think around mid-September where we stand with respect to that. But I'm not worried if that's where you're going.

I think this is exactly what I expected, and by the way, Foxtel and the folks at Telstra and News, expect in that a robust conversation with regulators about a transaction that bring the two pay-TV companies together. There isn't much more to say within that. I mean the concerns are unique to that marketplace, you don't relevance outside of Australia.

We involve mostly around access and supply of content, and the notion that we might someday compete with one another, which is highly unlikely. So those are the two main areas that we're focused on providing an information with and for. And I'm still very, very confident we'll get this deal done.

Jeffrey Wlodarczak - Pivotal Research

And then can you comment on your reaming in-cable assets potentially being off the table in terms of selling?

Mike Fries

We haven't really said much probably about that from the very, very beginning. So I suppose the transaction remains in that stage or that phase. We are always reviewing opportunistically the ability or the transactions that might allow us to rationalize markets. And certainly you would expect that's a market, given our operating history there, that we would be considering alternatives.

So I'll simply say that we continue to consider those alternatives. And when we have something that we can publicly disclose, you can bet we'll do it. But we have the right kind of discipline of on the buy side and we have the right kind of discipline on the rebalancing front. So I think all the activity that's happened or might be happening, I think you can take confidence that's it's going to be to the benefit of our shareholder.

Jeffrey Wlodarczak - Pivotal Research

And then one more. Can you provide any color on trends so far in the third quarter, in Switzerland in particular where you launched 50 Mbps at a modesty lower price?

Mike Fries

Diederik, do you want to hit that?

Diederik Karsten

The launch of that particular product happened in April. And the first results we've been seeing since May are encouraging. If you look at the Q2 sets and net adds, we have been doing better in internet, digital cable. So although we're moving forward the numbers itself are still kind of single digit (technical difficulty) obviously at the end of the day is to accelerate the growth.

But all steps are positive, and all positions have been well received. And so we believe that from that point of view we will end the year also with a better result than based on these new propositions than last year, those are the indications.

Mike Fries

Yes, I mean we've done 50,000 digital net adds year-to-date in Switzerland and pretty steadily improving voice and data net adds. And as Bernie mentioned, we're driving the EBITDA line. So I wouldn't suggest that Switzerland is cooking with gas, but I'll tell you the trajectory and the trend is right where we want to be, which is steady improvement quarter-over-quarter in a very important and large market for us. And the driver for that is in fact these new triple-play packs and the speed advantage we have over Cablecom, which started over with Swisscom, which is starting to show itself.


We'll take our next question Jason Bazinet with Citi.

Jason Bazinet - Citi

Just have a long-term question in the context of your equity shrink strategy. Can you just remind us, what limitations there are if any regarding repeat trading cash back to the U.S. to pursue your equity shrinking. And can you educate us in terms of what steps you can take to increase the balance of cash that you can repeat trade back to the U.S.?

Mike Fries

Sure, I'll let Charlie address that. I don't know that we've really said much publicly about the quantified for you publicly those limits. But the limits mostly have to do with repeat trading capital to the U.S. in a tax efficient manner. Do you want to address that, Charlie?

Well, I mean the limitations are as I described them. In principle, we have plenty of cash in the system, as we just described. But getting that cash up to the U.S. does require, well let me say it this way, if you get up tax efficiently it requires some maneuvering. And I'll tell you that without quantifying it for you that we have years, at least two to three years remaining of this kind of pace or buyback, before we have any particular issues.

And one thing I can assure you is, if and when we get close to hitting the limit, we will be coming up with some creative ways of expanding that limit. I can't tell you what they are yet, because we haven't put the technology to work. But certainly, we've got plenty ahead room, if you will, in terms of buyback capability.

So the question was around buyback limitations, and I just described that we have at least two plus year or two-and-a-half three years of this sort of pace of buyback capability before we get any sort of tax.

Charlie Bracken

And I think the other key point is the ability to raise money in the United State, necessarily our first choice or first price that we can raise capital in the United State against the assets in Europe, which obviously is money immediately in the States.

Mike Fries

It's a self-imposed limitation maybe put it that way, Jason.


And we'll take our next question from Hugh McCaffrey with Goldman Sachs.

Hugh McCaffrey - Goldman Sachs

I've got a couple of questions just around speed demand in Europe, so 65% of customers on over 20 Mbps services. In terms of the gross additions, what kind of demand are you seeing across the range of speed to the majority of demand towards a 100 Mbps or is it still at the sort of 30 Mbps level? And then I've got a follow-up on Germany.

Mike Fries

The speeds demands, and I might even mentioned a number along those lines. But I would say that the speed demands are principally at 20 or above. But they're in that sweet spot 20 to 30 let's say, 25 to 35.

I would say the demand that we're seeing in Switzerland for 45% are buying 50 Mbps or higher is unique, relative to our other markets. But that in principal, we're seeing demand. I would say in that 20 Mbps to 30 Mbps sweet spot, and that's where people see today anyway the kind of that price value and usage benefit that mean more or less across the board.

I think it was 90% of our sales at UPC or 20 Mbps or higher. So I'll tell you that very few people are buying 10 Mbps products from us. And we've shifted the entire market in the concept of broadband in our market to that 20 Mbps and higher level. And redefine what it means I think to have high speed internet. But principally if I had to break that 90% of sales down, I would say the vast majority of those are going to be at 20 Mbps to 30 Mbps.

Hugh McCaffrey - Goldman Sachs

And just kind of digging in a little bit on Germany. The triple-play the amount has been to very robust in that market? And can you just give it a bit of color in terms of which triple-play Tiers people are going for? Would it be reasonable to assume in the context of your answer that most people are going for the HD package of 32 Mbps?

Mike Fries

Do you want to provide some color on that, Diederik? The Slide that we showed you that has the 32 Mbps of product is probably our most popular with the digital TV package, the triple-play package and that speed that price vary is based on the promotion. But my recollection is that 32Mbps is a primary sweet spot. And Diederik do you want to add to that.

Diederik Karsten

That is correct. That's a best selling product. It's more or less like in the Netherlands we have the EUR45 25Mbps. So the next gaining popularity is the HD DVR books. And next to that, there is two zapper books. HD DVR is a relatively new phenomenon (inaudible). And every quarter we are gaining traction there. So (inaudible) that is a key source of growth in the next year to come for us. Does that answer your question?


And our next question comes from Matthew Harrigan with Wunderlich Securities.

Matthew Harrigan - Wunderlich Securities

Since Balan's on the call, could you update us on (inaudible) recommendation over the ITU? And what the implications are if a development kind of files like they would have speeds like files has right now. I know the physics of the copper, how they are and there's been a lot that's been aspirational for years. But I'd still like to get your thoughts on it, because it's been getting a fair amount of press. And then if we could also get your reforms or an engineers perspective on the Horizon Box, that would be great?

Balan Nair

I'll start with the Horizon Box, that program is on track for, as Mike pointed out a soft launch in the Netherlands in the fourth quarter. It is a pretty complex box with lots of software and hardware innovations that we're bringing. So lots of work there, but it's going good. Your other question on ITU grid, I didn't catch the whole question there?

Matthew Harrigan - Wunderlich Securities

Basically, the ITUs are looking at a new recommendation (G.FAS) it's trying to use copper for up to a little last 200 meters to get even much faster speed than you have right now, and they're almost comparable to FiOS in its present in co-ordination. I know that has been aspirational for years and kind of fits the guts as the copper are what they are.

But if you look at some typical journals, people are talking about it more and I know it hasn’t turned really hard now. But I think they're doing some pretty serious work on it. So I guess you can still reduce the question down to DT sector for the competition on the copper side, with relatively short loop blanks is kind of get a little bit more robust over a period of time, because you've got a huge amount of run rate related to what the telcos can you do right now?

Mike Fries

There's couple in the innovation there with respect to management.

Balan Nair

I think he is referring to vectoring.

Matthew Harrigan - Wunderlich Securities

That's part of it.

Balan Nair

Yes, anyway, we just think it just happens to you when you run a global company related to different places. My understanding of that, Matt, is while Telco's are promoting it, as a potential solution to having to spend the money to build fiber. In the end when you look at them straight in the eye, I don’t know that they fully believe in the solution. I think it maybe as a bandaid perhaps to respond to our broadband initiatives, but it’s not a long-term solution.

Certainly doesn’t appear to be one in eyes of regulators, having just return from Brussels couple of weeks ago, and participating in an EU roundtable with all of peers at Deutsche Telekom and Vodafone, and Telefonica, et cetera, et cetera, and having dinner with (inaudible). The word fiber for them is the critical piece of the puzzle, when it comes to Telco's. And I am not an engineer, I'll let Bob describe it more fully. But my business instinct is it's not yet being perceived as a fix or what appears to be a relatively significant price tag they face in terms of competing with us in building fibers.


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

Ben Swinburne - Morgan Stanley

Mike, could you talk a little bit more about the German opportunities, you look at KBW, I know it's a ways out? But the Unity growth is really impressive, particularly in the margin expansion. So I was just wondering if you could spend a little bit of time comparing the KBW opportunity to what you've been able to deliver in Unity or at Unity.

And then just on broadband in general, I'm wondering how you're sticking in your markets about selling broadband as a standalone product, if you think that sort of having a cheaper broadband option in the bundle, sort of incenting people in the bundle is always the right strategy? Or do you think about selling standalone data, given that it's such a profitable product? You've got a superiority issue over the telcos in most of your market. Is that an opportunity you think is worth exploiting as well?

Mike Fries

Well, in Germany, everybody knows we're in the regulatory review process there on the KBW deal. It's about a $4.5 billion transaction. I think when we reported it, the EBITDA multiple with synergies is about eight times 2011. And there are lots of obvious and important reasons to look at this transaction and try to complete this transaction.

And I believe that KBW is contiguous to Unitymedia's footprint and represents some of the best markets together with Unity in Germany in terms of economic growth, demographic profile, et cetera. The synergies are not insignificant, though we haven't publicly said what those synergies are. You can imagine they are not bad. And we have very good track record for achieving synergies in a market like this.

The size of the business when you put them together is pretty meaningful for us. You're looking at a business with roughly 12 million homes, something in the order of 6.5 million videos subs, at least 6.5 million, maybe even more than that, something in the order of 1.5 million voice and data subscribers, EUR1.5 billion of revenue and over EUR800 million of EBITDA.

So you're looking at a large profitable, contiguous network platform in Europe's strongest, fastest growing market where our product is being consumed at ever increasing speed and the pace that I haven't seen in our business for quite some time because of pent-up demand and because they get it. They get the fact that a bundle represents to them a huge economic opportunity in terms of getting these great products and services at decent prices and that the product and services we're offering are best-in-class, in fact good or better than anything they're going to get anywhere else in the world.

So there is lot of very basic logic in terms of the financial scale and the operational scale we'll achieve, but also, the market itself just represents one of the best opportunities I've seen anyway in 20 years in the business.

In terms of the broadband as a standalone opportunity versus being sold as the part of a bundle, every time we build a project on to a bundle, we deliver gross margin. Every time we're able to bolt a product on to a, let's say, broadband bundle, broadband-inspired bundle, we deliver a positive absolute gross margin to the platform. And we're all about delivering more gross margins.

So the long as we can achieve gross margins in voice in the 70s and gross margin in video, right now in the 80s, depending on the tier, it's hard for me to argue that we shouldn't be using broadband, as that's a killer app, as a means of selling more and more products and services. We don't see any slowdown in the demand for digital television. In fact, we had a great voice quarter in the demand for fixed voice when it sold as part of an aggressively priced and fast ARPU broadband bundle.

So nothing in our daily work we do, nothing in our numbers or results, indicates to us any slowdown in demand for that bundle. That doesn't mean that at some point we won't get creative and we won't find ways to pick the pocket of incumbent by restructuring a bundle or a package. We'll certainly be creative on that front and always have been creative on that front.

But today, having that 20 Mb, 30 Mb, 40 Mb, 50 Mb speeds as the lead product in a bundle and then providing a very compelling digital package for folks who want more TV, who want HD, who want a DVR is really the ticket and something that's working for us quite successfully.

It will be interesting when we roll out Horizon, our new box, because that will change the nature of the conversation. That will become the conversation for a while there where we're talking about revolutionizing the video experience in a home and leapfrogging people into the moment where all the content becomes seamlessly integrated and shared and accessible and with a very cool user interface, exactly where everybody we know wants, but has yet to see.

So we will have now two guns in our holster, so to speak, and we'll see how we market and package that. But I do believe that the bundle at this stage is really the valuable and the most efficient way to go.


And we'll take our final question today from Henrik Herbst with Credit Suisse.

Henrik Herbst with Credit Suisse

I was just wondering if you could please give us your current thoughts on the 800 Mhz special motion commenced in the Netherlands. It appears they could be interested in doing something with the cable operators. What your thoughts would be on that?

Mauricio Ramos

Like in many countries, we're evaluating what we call situational mobile opportunities, including assessing acquisition of spectrum. And interestingly, like Mike said before, we'll have the experience with acquiring it together with Ziggo the 2.6 gigahertz line. But the 800 Mhz is a different approach. It's a big ticket item.

So we're assessing carefully whether that would be something for us, because with the acquisition of the spectrum in this case, you'd get a liability to build out, and it's particularly to build out obligation where you would then start to turn into a mobile operator. And as you know, in the Netherlands, for example there are three big operators already active. And it's highly questionable whether we would like to be at number four even in combination with Ziggo.

And as Mike has said before, we look at the mobile opportunities on a case-by-case basis, but we also try to be cautious not to overdo it. So whether it's going to dig any material among spectrum, if there isn't an opportunity to also exploit it and without understanding the subsequent obligations, because it's not about spectrum, but it's also about the build out of the network.


And that was our final question for today.

Mike Fries

Thanks, everybody, for joining us. It's now officially August. So hopefully you've got great plans to relax and enjoy the summer. We will be speaking to you at the end of our third quarter and look forward to that. So thanks very much for joining us.


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 website at There you can also find a copy of today's presentation materials.

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