Liberty Global Inc. CEO ADVISORY CORP SPO bought 6000000 shares on 11-12-2009 at $21.38
BUSINESS OVERVIEW
General Development of Business
Liberty Global, Inc. (LGI) is an international provider of video, voice and broadband internet services, with consolidated broadband communications and/or direct-to-home (DTH) satellite operations at December 31, 2008, in 15 countries, primarily in Europe, Japan and Chile. Through our indirect wholly-owned subsidiary, UPC Holding BV (UPC Holding), we provide video, voice and broadband internet services in 10 European countries and in Chile. The European broadband communications operations of UPC Broadband Holding BV, a subsidiary of UPC Holding (UPC Broadband Holding), are collectively referred to as the UPC Broadband Division. UPC Broadband Holding’s broadband communication operations in Chile are provided through VTR Global Com S.A. (VTR). Through our 50.6% indirect majority ownership interest in Telenet Group Holding NV (Telenet), we provide broadband communications services in Belgium. Through our indirect 37.8% controlling ownership interest in Jupiter Telecommunications Co., Ltd. (J:COM), we provide broadband communications services in Japan. Through our 54.0% indirect majority owned subsidiary, Austar United Communications Limited (Austar), we provide DTH satellite services in Australia. We also have (1) consolidated broadband communications operations in Puerto Rico and (2) consolidated interests in certain programming businesses in Europe, Japan (through J:COM) and Argentina. Our consolidated programming interests in Europe are primarily held through Chellomedia BV (Chellomedia), which owns or manages investments in various businesses, primarily in Europe. Certain of Chellomedia’s subsidiaries and affiliates provide programming services to our broadband communications operations, primarily in Europe.
In the following text, the terms “we”, “our”, “our company”, and “us” may refer, as the context requires, to LGI and its predecessors and subsidiaries.
Unless indicated otherwise, convenience translations into U.S. dollars are calculated as of December 31, 2008, and operational data, including subscriber statistics and ownership percentages, are as of December 31, 2008.
Recent Developments
Acquisitions
Mediatti. On December 25, 2008, the shareholders of Mediatti Communications, Inc. (Mediatti), a provider of cable television and broadband internet services in Japan, including our subsidiary Liberty Japan MC, LLC (Liberty Japan MC), sold all of the issued and outstanding shares of Mediatti to J:COM for cash consideration (before direct acquisition costs) of ¥28,350.6 million ($310.5 million at the transaction date) of which Liberty Japan MC received ¥12,887.0 million ($141.1 million at the transaction date). Our indirect majority-owned subsidiary, LGI/Sumisho Super Media LLC (Super Media) owns a controlling interest in J:COM. See “ Operations — Asia/Pacific — Jupiter Telecommunications Co. Ltd. ” below. On the day preceding the sale of Mediatti to J:COM, we purchased Sumitomo Corporation’s (Sumitomo) entire 4.8% interest in Liberty Japan MC for ¥615.8 million ($6.8 million at the transaction date), resulting in Liberty Japan MC becoming our indirect wholly-owned subsidiary.
Interkabel Acquisition. On October 1, 2008, pursuant to an agreement with four associations of municipalities in Belgium (referred to as the pure intercommunales or PICs) executed on June 28, 2008 (the 2008 PICs Agreement), Telenet acquired from the PICs certain cable television assets (Interkabel), including (1) substantially all of the rights that Telenet did not already hold to use the broadband communications network owned by the PICs (the Telenet PICs Network) and (2) the analog and digital television activities of the PICs, including the entire subscriber base (together with the acquisition of the rights to use the Telenet PICs Network, the Interkabel Acquisition). In connection with the Interkabel Acquisition, (1) Telenet paid net cash consideration of €224.9 million ($315.9 million at the transaction date) before working capital adjustments and direct acquisition costs and (2) entered into a long-term lease of the Telenet PICs Network. The €224.9 million of cash consideration includes €8.3 million ($11.6 million at the transaction date) representing compensation to the PICs for the acquisition of certain equipment and other rights, net of compensation to Telenet for the transfer of certain liabilities to Telenet. In
addition, the PICs paid Telenet cash of €27.0 million ($37.9 million at the transaction date) during the fourth quarter of 2008 in connection with certain working capital adjustments. Telenet borrowed an additional €85.0 million ($124.2 million at the transaction date) under the Telenet senior credit facility in September 2008 to fund a portion of the €224.9 million of net cash consideration paid to the PICs. The remaining net cash consideration was funded by existing cash and cash equivalent balances.
For information on the long-term lease and other provisions of the 2008 PICs Agreement see “ Operations — Europe — Liberty Global Europe — Telenet (Belgium) ” below and note 4 to our consolidated financial statements included in Part II of this report. For information concerning the litigation related to the Interkabel Acquisition, see note 20 to our consolidated financial statements included in Part II of this report.
Spektrum. On September 1, 2008, Chellomedia Programming BV, a wholly-owned subsidiary of Chellomedia, acquired 100% of the ownership interests in Spektrum-TV Zrt and Ceska programova spolecnost s.r.o. (together, Spektrum) for cash consideration of $94.2 million, before considering cash acquired, post-closing working capital adjustments and direct acquisition costs. Spektrum operates a documentary channel in the Czech Republic, Slovakia and Hungary.
For additional information on the foregoing acquisitions, see note 4 to our consolidated financial statements included in Part II of this report. In addition, during 2008, we completed various other smaller acquisitions in the normal course of business.
Financings
UPC Broadband Holding Bank Facility Refinancing Transactions. In August and September 2008, UPC Holding’s subsidiaries, UPC Financing Partnership and UPC Broadband Holding, as the Borrowers, entered into two additional facility accession agreements (Facility O and Facility P, respectively) pursuant to UPC Broadband Holding’s senior secured credit agreement (as amended and restated, the UPC Broadband Holding Bank Facility). Facility O is an additional term loan facility comprised of (1) a HUF 5,962.5 million ($31.3 million) sub-tranche and (2) a PLN 115.1 million ($38.7 million) sub-tranche. Both sub-tranches were drawn in full in August 2008. Facility P is an additional term loan facility in the principal amount of $521.2 million, of which only $511.5 million was received due to the failure of one of the lenders to fund a $9.7 million commitment. The lenders under LGI’s $215.0 million Senior Revolving Facility Agreement (the LGI Credit Facility) rolled their commitments into Facility P, and the LGI Credit Facility was cancelled. Certain of the lenders under Facility I, a €250.0 million ($348.8 million) repayable and redrawable term loan facility under the UPC Broadband Holding Bank Facility, have novated €202.0 million ($281.8 million) of their undrawn commitments to Liberty Global Europe BV, which is a direct subsidiary of UPC Broadband Holding, and have entered into Facility P. The remaining third-party lenders under Facility I remain committed to lend their €48.0 million ($67.0 million) share of Facility I. Facility P was drawn on September 12, 2008. The proceeds of Facilities O and P have been applied towards general corporate and working capital purposes.
Telenet Credit Facility Amendment. Effective May 23, 2008, Telenet’s senior credit facility (the Telenet Credit Facility) was amended to (1) include an increased basket for permitted financial indebtedness incurred pursuant to finance leases, (2) include a new definition of “Interkabel Acquisition”, (3) carve-out indebtedness incurred under the network lease entered into in connection with the Interkabel Acquisition up to a maximum aggregate amount of €195.0 million ($272.1 million) from the definition of Total Debt (as defined in the Telenet Credit Facility) and (4) extend the availability period for the €225.0 million ($313.9 million) Term Loan B2 Facility from July 31, 2008 to June 30, 2009. Furthermore, the margins for the respective facilities were confirmed as follows: (1) the applicable margin for the €530.0 million ($739.5 million) Term Loan A Facility is 2.25% per annum over EURIBOR, (2) the applicable margin for the €307.5 million ($429.0 million) Term Loan B1 Facility and Term Loan B2 Facility is 2.50% per annum over EURIBOR, (3) the applicable margin for the €1,062.5 million ($1,482.5 million) Term Loan C Facility is 2.75% per annum over EURIBOR and (4) the applicable margin for the €175.0 million ($244.2 million) Revolving Facility is 2.125% per annum over EURIBOR.
For a further description of the terms of the above financings and certain other transactions affecting our consolidated debt in 2008, see note 10 to our consolidated financial statements included in Part II of this report.
Stock Repurchases
Pursuant to our various stock repurchase programs, we repurchased during 2008 a total of 39,065,387 shares of LGI Series A common stock at a weighted average price of $30.24 per share and 35,084,656 shares of LGI Series C common stock at a weighted average price of $29.52 per share, for an aggregate cash purchase price of $2,217.1 million, including direct acquisition costs. At December 31, 2008, we were authorized under our current stock repurchase program to acquire an additional $94.8 million of LGI Series A and Series C common stock through open market transactions or privately negotiated transactions, which may include derivative transactions. The timing of the repurchase of shares pursuant to this program is dependent on a variety of factors, including market conditions. This program may be suspended or discontinued at any time. At February 23, 2009, the remaining amount authorized under this program was $1.0 million.
Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent that statements in this Annual Report are not recitations of historical fact, such statements constitute forward-looking statements, which, by definition, involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In particular, statements under Item 1. Business , Item 2. Properties , Item 3. Legal Proceedings , Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk contain forward-looking statements, including statements regarding business, product, acquisition, disposition and finance strategies, our capital expenditure priorities, subscriber growth and retention rates, competitive and economic factors, the maturity of our markets, anticipated cost increases, liquidity, credit risk and target leverage levels. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. In evaluating these statements, you should consider the risks and uncertainties discussed under Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk , as well as the following list of some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events:
The broadband communications services industries are changing rapidly and, therefore, the forward-looking statements of expectations, plans and intent in this Annual Report are subject to a significant degree of risk. These forward-looking statements and the above-described risks, uncertainties and other factors speak only as of the date of this Annual Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
Financial Information About Operating Segments
Financial information about our reportable segments appears in note 21 to our consolidated financial statements included in Part II of this report.
Narrative Description of Business
Overview
Broadband Distribution
We offer a variety of broadband services over our cable television systems, including video, broadband internet and telephony. Available service offerings depend on the bandwidth capacity of our systems and whether they have been upgraded for two-way communications. In select markets, we also offer video services through DTH or through multi-channel multipoint (microwave) distribution systems (MMDS). Our analog video service offerings include basic programming and in some markets expanded basic programming. We tailor both our basic channel line-up and our additional channel offerings to each system according to culture, demographics, programming
preferences and local regulation. Our digital video service offerings include basic and premium programming and, in most markets, incremental product and service offerings such as enhanced pay-per-view programming, including video-on-demand (VoD) and near-video-on-demand (NVoD), digital video recorders (DVR) and high definition (HD) television services. We offer broadband internet services in all of our broadband communications markets. Our residential subscribers generally access the internet via cable modems connected to their personal computers at various speeds depending on the tier of service selected. We determine pricing for each different tier of internet service through analysis of speed, data limits, market conditions and other factors.
We offer telephony services in all of our broadband communications markets. In Austria, Belgium, Chile, Hungary, Japan and the Netherlands, we provide circuit-switched telephony services and voice-over-internet-proto col (VoIP) telephony services. Telephony services in the remaining markets are provided using VoIP technology. In select markets, including Australia, we also offer mobile telephony services using third-party networks.
We operate our broadband distribution businesses in Europe through the UPC Broadband Division of Liberty Global Europe, NV. (Liberty Global Europe), the parent company of UPC Holding, and through Liberty Global Europe’s indirect subsidiary, Telenet; in Japan through J:COM, a subsidiary of Super Media; and in the Americas through VTR and Liberty Cablevision of Puerto Rico Ltd. (Liberty Puerto Rico); and our satellite distribution business in Australia through Austar. Each of Liberty Global Europe, UPC Holding, Telenet, J:COM, Super Media, VTR, Liberty Puerto Rico and Austar is a consolidated subsidiary. Except as otherwise noted, we refer to Liberty Puerto Rico and the countries of South America collectively as the Americas.
The following table presents certain operating data, as of December 31, 2008, with respect to the broadband communications and DTH systems of our subsidiaries in Europe, Japan, the Americas and Australia. This table reflects 100% of the operational data applicable to each subsidiary regardless of our ownership percentage.
(1) Homes Passed are homes that can be connected to our networks without further extending the distribution plant, except for DTH and MMDS homes. Our Homes Passed counts are based on census data that can change based on either revisions to the data or from new census results. With the exception of Austar, we do not count homes passed for DTH. With respect to Austar, we count all homes in the areas that Austar is authorized to serve as Homes Passed. With respect to MMDS, one MMDS customer is equal to one Home Passed. Due to the fact that we do not own the partner networks (defined below) used by Cablecom Holdings GmbH (Cablecom) in Switzerland (see note 13) or the unbundled loop and shared access network used by one of our Austrian subsidiaries, UPC Austria GmbH (Austria GmbH), we do not report homes passed for Cablecom’s partner networks or the unbundled loop and shared access network used by Austria GmbH.
(2) Two-way Homes Passed are Homes Passed by our networks where customers can request and receive the installation of a two-way addressable set-top converter, cable modem, transceiver and/or voice port which, in most cases, allows for the provision of video and internet services and, in some cases, telephony services. Due to the fact that we do not own the partner networks used by Cablecom in Switzerland or the unbundled loop and shared access network used by Austria GmbH, we do not report two-way homes passed for Cablecom’s partner networks or the unbundled loop and shared access network used by Austria GmbH.
(3) Customer Relationships are the number of customers who receive at least one of our video, internet or voice services that we count as Revenue Generating Units (RGUs), without regard to which, or to how many, services they subscribe. To the extent that RGU counts include equivalent billing unit (EBU) adjustments, we reflect corresponding adjustments to our Customer Relationship counts. Customer Relationships generally are counted on a unique premise basis. Accordingly, if an individual receives our services in two premises (e.g. primary home and vacation home), that individual will count as two Customer Relationships. We exclude mobile customers from Customer Relationships.
(4) An RGU is separately an Analog Cable Subscriber, Digital Cable Subscriber, DTH Subscriber, MMDS Subscriber, Internet Subscriber or Telephony Subscriber. A home, residential multiple dwelling unit or commercial unit may contain one or more RGUs. For example, if a residential customer in our Austrian system subscribed to our digital cable service, telephony service and broadband internet service, the customer would constitute three RGUs. Total RGUs is the sum of Analog Cable, Digital Cable, DTH, MMDS, Internet and Telephony Subscribers. RGUs generally are counted on a unique premise basis such that a given premise does not count as more than one RGU for any given service. On the other hand, if an individual receives our service in two premises (e.g., a primary home and a vacation home), that individual will count as two RGUs. Non-paying subscribers are counted as subscribers during their free promotional service period. Some of these subscribers may choose to disconnect after their free service period. Services offered without charge on a permanent basis (e.g. VIP subscribers, free service to employees) are not counted as RGUs.
(5) Analog Cable Subscriber is a home, residential multiple dwelling unit or commercial unit that receives our analog cable service over our broadband network. In Europe, we have approximately 535,300 “lifeline” customers that are counted on a per connection basis, representing the least expensive regulated tier of basic cable service, with only a few channels.
(6) Digital Cable Subscriber is a home, residential multiple dwelling unit or commercial unit that receives our digital cable service over our broadband network or through a partner network. We count a subscriber with one or more digital converter boxes that receives our digital cable service as just one subscriber. A Digital Cable Subscriber is not counted as an Analog Cable Subscriber. As we migrate customers from analog to digital cable services, we report a decrease in our Analog Cable Subscribers equal to the increase in our Digital Cable Subscribers. Individuals who receive digital cable service through a purchased digital set-top box but do not pay a monthly digital service fee are only counted as Digital Cable Subscribers to the extent we can verify that such individuals are subscribing to our analog cable service. We include this group of subscribers in Telenet’s and Cablecom’s Digital Cable Subscribers. Subscribers to digital cable services provided by Cablecom over partner networks receive analog cable services from the partner networks as opposed to Cablecom.
(7) DTH Subscriber is a home, residential multiple dwelling unit or commercial unit that receives our video programming broadcast directly via a geosynchronous satellite.
(8) MMDS Subscriber is a home, residential multiple dwelling unit or commercial unit that receives our video programming via MMDS.
(9) Internet Homes Serviceable is a home, residential multiple dwelling unit or commercial unit that can be connected to our networks, or a partner network with which we have a service agreement, where customers can request and receive broadband internet services. With respect to Austria GmbH, we do not report as Internet Homes Serviceable those homes served either over an unbundled loop or over a shared access network.
(10) Internet Subscriber is a home, residential multiple dwelling unit or commercial unit that receives internet services over our networks, or that we service through a partner network. Our Internet Subscribers in Austria include 84,400 residential digital subscriber line (DSL) subscribers of Austria GmbH that are not serviced over our networks. Our Internet Subscribers do not include customers that receive services from dial-up connections.
(11) Telephony Homes Serviceable is a home, residential multiple dwelling unit or commercial unit that can be connected to our networks, or a partner network with which we have a service agreement, where customers can request and receive voice services. With respect to Austria GmbH, we do not report as Telephony Homes Serviceable those homes served over an unbundled loop rather than our network.
(12) Telephony Subscriber is a home, residential multiple dwelling unit or commercial unit that receives voice services over our networks, or that we service through a partner network. Telephony Subscribers exclude mobile telephony subscribers. Our Telephony Subscribers in Austria include 38,500 residential subscribers of Austria GmbH that are not serviced over our networks.
(13) Pursuant to service agreements, Cablecom offers digital cable, broadband internet and telephony services over networks owned by third-party cable operators (partner networks). A partner network RGU is only recognized if Cablecom has a direct billing relationship with the customer. Homes Serviceable for partner networks represent the estimated number of homes that are technologically capable of receiving the applicable service within the geographic regions covered by Cablecom’s service agreements. Internet and Telephony Homes Serviceable with respect to partner networks have been estimated by Cablecom. These estimates may change in future periods as more accurate information becomes available. Cablecom’s partner network information generally is presented one quarter in arrears such that information included in our December 31, 2008 subscriber table is based on September 30, 2008 data. In our December 31, 2008 subscriber table, Cablecom’s partner networks account for 78,900 Customer Relationships, 112,600 RGUs, 45,500 Digital Cable Subscribers, 190,000 Internet Homes Serviceable, 188,000 Telephony Homes Serviceable, 40,900 Internet Subscribers, and 26,200 Telephony Subscribers. In addition, partner networks account for 373,800 digital cable homes serviceable that are not included in Homes Passed or Two-way Homes Passed in our December 31, 2008 subscriber table.
Additional General Notes to Table:
With respect to Chile, Japan and Puerto Rico, residential multiple dwelling units with a discounted pricing structure for video, broadband internet or telephony services are counted on an EBU basis. With respect to commercial establishments, such as bars, hotels and hospitals, to which we provide video and other services primarily for the patrons of such establishments, the subscriber count is generally calculated on an EBU basis by our subsidiaries (with the exception of Telenet, which counts commercial establishments on a per connection basis). EBU is calculated by dividing the bulk price charged to accounts in an area by the most prevalent price charged to non-bulk residential customers in that market for the comparable tier of service. Telenet leases a portion of its network under a long-term capital lease arrangement. This table includes operating statistics for Telenet’s owned and leased networks. On a business-to-business basis, certain of our subsidiaries provide data, telephony and other services to businesses, primarily in the Netherlands, Switzerland, Austria, Ireland, Belgium and Romania. We generally do not count customers of these services as subscribers, customers or RGUs.
While we take appropriate steps to ensure that subscriber statistics are presented on a consistent and accurate basis at any given balance sheet date, the variability from country to country in (1) the nature and pricing of products and services, (2) the distribution platform, (3) billing systems, (4) bad debt collection experience and (5) other
factors add complexity to the subscriber counting process. We periodically review our subscriber counting policies and underlying systems to improve the accuracy and consistency of the data reported. Accordingly, we may from time to time make appropriate adjustments to our subscriber statistics based on those reviews.
Subscriber information for acquired entities is preliminary and subject to adjustment until we have completed our review of such information and determined that it is presented in accordance with our policies.
Programming Services
We own programming networks that provide video programming channels to multi-channel distribution systems owned by us and by third parties. We also represent programming networks owned by others. Our programming networks distribute their services through a number of distribution technologies, principally cable television and DTH. Programming services may be delivered to subscribers as part of a video distributor’s basic package of programming services for a fixed monthly fee, or may be delivered as a “premium” programming service for an additional monthly charge or on a VoD or pay-per-view basis. Whether a programming service is on a basic or premium tier, the programmer generally enters into separate affiliation agreements, providing for terms of one or more years, with those distributors that agree to carry the service. Basic programming services generally derive their revenue from per-subscriber license fees received from distributors and the sale of advertising time on their networks or, in the case of shopping channels, retail sales. Premium services generally do not sell advertising and primarily generate their revenue from per subscriber license fees. Programming providers generally have two sources of content: (1) rights to productions that are purchased from various independent producers and distributors, and (2) original productions filmed for the programming provider by internal personnel or third-party contractors. We operate our programming businesses in Europe principally through our subsidiary Chellomedia; in Japan principally through our subsidiary J:COM; and in the Americas principally through our subsidiary Pramer S.C.A. We also own joint venture interests in MGM Networks Latin America, LLC, a programming business that serves the Americas, and in XYZ Networks Pty Ltd. (XYZ Networks), a programming business in Australia.
Operations
Europe — Liberty Global Europe
Our European operations are conducted through our wholly-owned subsidiary, Liberty Global Europe, which provides video, voice and broadband internet services in 11 countries in Europe. Liberty Global Europe’s operations are currently organized into the UPC Broadband Division, Telenet and the Chellomedia Division. Through the UPC Broadband Division and Telenet, Liberty Global Europe provides video, broadband internet, and fixed line and mobile telephony services. In terms of video subscribers, Liberty Global Europe operates the largest cable network in each of Austria, Belgium, Czech Republic, Hungary, Ireland, Poland, Slovakia, Slovenia and Switzerland and the second largest cable network in the Netherlands and in Romania. For information concerning the Chellomedia Division, see “ Chellomedia ” below.
Provided below is country-specific information with respect to the broadband communications services of our UPC Broadband Division and Telenet.
The Netherlands
The UPC Broadband Division’s operations in the Netherlands, which we refer to as UPC Netherlands, are located in six broad regional clusters, including the major cities of Amsterdam and Rotterdam. Its cable networks are 96% upgraded to two-way capability, and almost all of its cable homes passed are served by a network with a bandwidth of at least 860 MHz. UPC Netherlands makes its digital video, broadband internet and fixed line telephony services available to over 90% of its homes passed.
For its analog cable customers, UPC Netherlands offers a basic service of approximately 30 video channels and approximately 40 radio channels, depending on a customer’s location. For its digital cable customers, UPC Netherlands offers two digital cable packages in either a standard definition (SD) version or an HD version. Its digital entry level service currently includes 50 video channels and over 70 radio channels (including the channels in its basic analog service). For an additional monthly charge, the digital subscriber may upgrade to a digital basic tier subscription. The digital basic tier includes all the channels of the digital entry level service, plus an extra channel package of approximately 40 general entertainment, sports, movies, documentary, music and ethnic channels. Both digital cable packages include an electronic program guide, interactive services and the functionality for VoD service. The VoD service includes both subscription-based VoD and transaction-based VoD. The subscription-based VoD service includes various programming, such as Grey’s Anatomy, Desperate Housewives and Sex and the City . Digital cable customers may also subscribe to premium channels, such as Film 1, Sport 1 NL and the premium football league channel, Eredivisie Live , alone or in combination, for additional monthly charges. Eredivisie Live is also available on a pay-per-view basis. A customer also has the option for an incremental monthly charge to upgrade the digital box to one with DVR functionality. UPC Netherlands introduced digital boxes with HD DVR functionality for an incremental monthly charge in April 2008 and currently offers up to eight HD channels, depending on the digital service selected.
UPC Netherlands offers six tiers of broadband internet service with download speeds ranging from 384 Kbps to 120 Mbps, including UPC Fiber Power, an ultra high-speed internet service with download speeds of either 60 Mbps or 120 Mbps. UPC Fiber Power, which UPC Netherlands launched in September 2008, is based on Euro DOCSIS 3.0 technology. UPC Netherlands is one of the first companies in Europe to offer this ultra high-speed internet service. As of December 31, 2008, UPC Fiber Power is available to approximately 40% of UPC Netherland’s two-way homes passed and is expected to be available to all two-way homes passed by year end 2009. Multi-feature telephony services are also available from UPC Netherlands through either circuit-switched telephony or VoIP. Of UPC Netherlands’ total customers (excluding mobile customers), 9% subscribe to two services (double-play customers) and 26% subscribe to three services (triple-play customers) offered by UPC Netherlands (video, broadband internet and telephony).
UPC Netherlands offers mobile service to all consumers in the Netherlands. The product is a pre-paid mobile offering. UPC Netherlands is operating as a mobile virtual network operator, reselling leased network capacity.
In addition, UPC Netherlands offers a range of voice, broadband internet, private data networks and customized network services to business customers primarily in its core metropolitan networks.
Switzerland
The UPC Broadband Division’s operations in Switzerland are operated by Cablecom and are located in three regional clusters, including the major cities of Bern, Zürich, Lausanne and Geneva. Cablecom’s cable networks are 72% upgraded to two-way capability and 77% of its cable homes passed are served by a network with a bandwidth of at least 650 MHz. Cablecom makes its digital video, broadband internet and fixed line telephony services available to over 80% of its homes passed.
For its analog cable customers, Cablecom offers a basic service of approximately 40 video channels and approximately 45 radio channels. For 64% of its analog cable subscribers, Cablecom maintains billing relationships with landlords or housing associations, which typically provide analog cable service for an entire building and do not terminate service each time there is a change of tenant in the landlord’s or housing association’s premises.
For its digital cable customers, Cablecom offers a digital cable package of over 100 video channels and over 100 radio channels (including the channels in its basic analog service), a range of additional pay television programming in a variety of foreign language program packages and the functionality for NVoD services. The channel package includes general entertainment, sports, movies and ethnic channels. Cablecom offers digital boxes with DVR functionality and/or HD functionality to its customers for an incremental monthly charge and it currently offers six HD channels. Cablecom introduced digital boxes with HD DVR functionality in November 2008, and under current promotional pricing provides these boxes for free for the first two months.
CEO BACKGROUND
Named Executive Officer Salary Cash
Performance Award Long-Term
Incentive Awards 2008 2007 2006 2008 2007 2006 2008 2007 2006
Michael T. Fries 4.8 % 3.8 % 13.9 % 8.0 % 6.6 % 24.6 % 86.4 % 89.5 % 61.3 %
Charles H.R. Bracken(1) 6.3 % 5.6 % 16.9 % 8.1 % 7.6 % 26.0 % 84.8 % 86.1 % 55.2 %
Bernard G. Dvorak 6.4 % 5.4 % 21.2 % 11.3 % 9.7 % 39.7 % 82.1 % 84.7 % 38.3 %
W. Gene Musselman(2) 4.6 % 4.3 % 12.3 % 5.3 % 6.9 % 20.3 % 67.6 % 77.6 % 43.1 %
Shane O’Neill(1) 6.3 % 5.0 % 13.9 % 8.5 % 7.7 % 24.0 % 84.2 % 86.6 % 50.9 %
MANAGEMENT DISCUSSION FROM LATEST 10K
We are an international provider of video, voice and broadband internet services with consolidated broadband communications and/or DTH satellite operations at December 31, 2008 in 15 countries, primarily in Europe, Japan and Chile. Through our indirect wholly-owned subsidiary UPC Holding, we provide video, voice and broadband internet services in 10 European countries and in Chile. The European broadband communications operations of UPC Broadband Holding, a subsidiary of UPC Holding, are collectively referred to as the UPC Broadband Division. UPC Broadband Holding’s broadband communications operations in Chile are provided through VTR. Through our indirect majority ownership interest in Telenet (50.6% at December 31, 2008), we provide broadband communications services in Belgium. Through our indirect controlling ownership interest in J:COM (37.8% at December 31, 2008), we provide broadband communications services in Japan. Through our indirect majority ownership interest in Austar (54.0% at December 31, 2008), we provide DTH satellite services in Australia. We also have (i) consolidated broadband communications operations in Puerto Rico and (ii) consolidated interests in certain programming businesses in Europe, Japan (through J:COM) and Argentina. Our consolidated programming interests in Europe are primarily held through Chellomedia, which owns or manages investments in various businesses, primarily in Europe. Certain of Chellomedia’s subsidiaries and affiliates provide programming services to certain of our broadband communications operations, primarily in Europe.
As further described in note 4 to our consolidated financial statements, we have completed a number of transactions that impact the comparability of our 2008, 2007 and 2006 results of operations. Certain of the more significant of these transactions are listed below:
In addition to the transactions listed above, J:COM acquired Mediatti on December 25, 2008 and we completed a number of less significant acquisitions in Europe and Japan during 2008, 2007 and 2006.
As further discussed in note 5 to our consolidated financial statements, our consolidated financial statements have been reclassified to present UPC Norway, UPC Sweden, UPC France and PT Norway as discontinued operations. Accordingly, in the following discussion and analysis, the operating statistics, results of operations and cash flows that we present and discuss are those of our continuing operations.
From a strategic perspective, we are seeking to build broadband communications and video programming businesses that have strong prospects for future growth in revenue and operating cash flow (as defined in note 21 to our consolidated financial statements). As discussed further under Liquidity and Capital Resources — Capitalization below, we also seek to maintain our debt at levels that provide for attractive equity returns without assuming undue risk.
From an operational perspective, we focus on achieving organic revenue and customer growth in our broadband communications operations by developing and marketing bundled entertainment and information and communications services, and extending and upgrading the quality of our networks where appropriate. As we use the term, organic growth excludes foreign currency translation effects and acquisitions. While we seek to obtain new customers, we also seek to maximize the average revenue we receive from each household by increasing the penetration of our digital cable, broadband internet and telephony services with existing customers through product bundling and upselling, or by migrating analog cable customers to digital cable services that include various incremental service offerings, such as video-on-demand, digital video recorders and high definition programming. We plan to continue to employ this strategy to achieve organic revenue and customer growth.
Through our subsidiaries and affiliates, we are the largest international broadband communications operator in terms of subscribers. At December 31, 2008, our consolidated subsidiaries owned and operated networks that passed 34,275,100 homes and served 26,453,800 revenue generating units (RGUs), consisting of 15,608,200 video subscribers, 6,201,300 broadband internet subscribers and 4,644,300 telephony subscribers.
Including the effects of acquisitions, we added a total of 2,419,100 RGUs during 2008. Excluding the effects of acquisitions (RGUs added on the acquisition date), but including post-acquisition RGU additions, we added 1,048,300 RGUs during 2008, as compared to 1,445,800 RGUs that were added on an organic basis during 2007. Our organic RGU growth during 2008 is attributable to the growth of our digital telephony services, which added 654,700 RGUs and our broadband internet services, which added 628,700 RGUs. We experienced a net organic decline of 235,100 video RGUs during 2008, as decreases in our analog cable RGUs of 1,730,300 and our multi-channel multi-point (microwave) distribution system (MMDS) video RGUs of 20,300 were not fully offset by increases in our digital cable RGUs of 1,405,300 and our DTH video RGUs of 110,200.
We are experiencing significant competition in all of our broadband communications markets, particularly in the Netherlands, Austria, Romania, Hungary, the Czech Republic and other parts of Europe. This significant competition has contributed to:
In general, our ability to increase or maintain the fees we receive for our services is limited by competitive, and to a lesser degree, regulatory factors. In this regard, many of our broadband communications markets experienced declines in ARPU from internet and telephony services during 2008, as compared to 2007. These declines were mitigated somewhat by the impact of increased digital cable RGUs and other improvements in our RGU mix and the implementation of rate increases for analog cable and, to a lesser extent, other product offerings in certain markets.
We believe that we will continue to be challenged to maintain or improve recent historical organic revenue and RGU growth rates in future periods as we expect that competition will continue to grow and that the markets for certain of our service offerings will continue to mature. Although we actively monitor and respond to competition in each of our markets, no assurance can be given that our efforts to improve our competitive position will be successful, and accordingly, that we will be able to reverse negative trends such as those described above. For additional information concerning the significant revenue trends of our reportable segments, see Discussion and Analysis of our Reportable Segments below.
Due largely to the recent disruption in the worldwide credit and equity markets, we are facing difficult economic environments in most of the countries in which we operate. These economic environments could make it (i) more difficult to attract new subscribers, (ii) more likely that certain of our subscribers will downgrade or disconnect their services and (iii) more difficult to maintain ARPUs at existing levels. Accordingly, our ability to increase, or in certain cases, maintain the revenue, RGUs, operating cash flow and liquidity of our operating segments could be adversely affected to the extent that relevant economic environments remain weak or decline further. We currently are unable to predict the extent of any of these potential adverse effects.
During 2008, we were able to control our operating and SG&A expenses such that we experienced expansion in the operating cash flow margins (operating cash flow divided by revenue) of each of our reportable segments, as compared to the operating cash flow margins we achieved during the corresponding 2007 period. In light of the significant cost reductions and efficiencies that have already been achieved by our operating segments and the competitive and economic factors mentioned above, we expect (i) the pace of our operating cash flow margin expansion to slow in 2009, as compared to 2008, and (ii) the operating cash flows of most of our reportable segments to grow at lower organic rates in 2009, as compared to 2008. No assurance can be given that we will be able to maintain or continue to expand the operating cash flow margins of our operating segments. For additional information, see the discussion of the operating and SG&A expenses and the operating cash flow margins of our reportable segments under Discussion and Analysis of our Reportable Segments below.
The video, broadband internet and telephony businesses in which we operate are capital intensive. Significant capital expenditures are required to add customers to our networks, including expenditures for equipment and labor costs. As noted above, we expect that the percentage of revenue represented by our aggregate capital expenditures and capital lease additions will decline over the next few years, due primarily to our belief that the capital required to upgrade our broadband communications networks will decline over this time frame. No assurance can be given that actual results will not differ materially from our expectations as factors outside of our control, such as significant increases in competition, the introduction of new technologies or adverse regulatory initiatives, could cause us to decide to undertake previously unplanned upgrades of our broadband communications networks in the impacted markets. In addition, no assurance can be given that our future upgrades will generate a positive return or that we will have adequate capital available to finance such future upgrades. If we are unable to, or elect not to, pay for costs associated with adding new customers, expanding or upgrading our networks or making our other planned or unplanned capital expenditures, our growth could be limited and our competitive position could be harmed.
Our analog video service offerings include basic programming and, in some markets, expanded basic programming. We tailor both our basic channel line-up and our additional channel offerings to each system according to culture, demographics, programming preferences and local regulation. Our digital video service offerings include basic and premium programming and, in most markets, incremental product and service offerings such as enhanced pay-per-view programming (including video-on-demand and near video-on-demand), digital video recorders and high definition television services.
We offer broadband internet services in all of our broadband communications markets. Our residential subscribers generally access the internet via cable modems connected to their personal computers at various speeds depending on the tier of service selected. We determine pricing for each different tier of broadband internet service through analysis of speed, data limits, market conditions and other factors. We began offering ultra high-speed internet services in Japan in 2007 and the Netherlands in 2008, with download speeds ranging up to 160 Mbps in Japan and up to 120 Mbps in the Netherlands. We expect to expand the availability of ultra high-speed internet services during 2009.
We offer voice-over-internet-proto col, or “VoIP” telephony services in all of our broadband communications markets. In Austria, Belgium, Chile, Hungary, Japan and the Netherlands, we also provide circuit-switched telephony services. Telephony services in the remaining markets are provided using VoIP technology. In select markets, including Australia, we also offer mobile telephony services using third-party networks.
Results of Operations
As noted under Overview above, the comparability of our operating results during 2008, 2007 and 2006 is affected by acquisitions. In the following discussion, we quantify the impact of acquisitions on our operating results. The acquisition impact represents our estimate of the difference between the operating results of the periods under comparison that is attributable to the timing of an acquisition. In general, we base our estimate of the acquisition impact on an acquired entity’s operating results during the first three months following the acquisition date such that changes from those operating results in subsequent periods are considered to be organic changes.
Changes in foreign currency exchange rates have a significant impact on our operating results as all of our operating segments, except for Puerto Rico, have functional currencies other than the U.S. dollar. Our primary exposure to foreign currency risk from a translation perspective is currently to the euro and the Japanese yen. In this regard, 38.0% and 27.0% of our U.S. dollar revenue during 2008 was derived from subsidiaries whose functional currencies are the euro and the Japanese yen, respectively. In addition, our operating results are impacted by changes in the exchange rates for the Swiss franc, the Chilean peso, the Hungarian forint, the Australian dollar and other local currencies in Europe. The portions of the changes in the various components of our results of operations that are attributable to changes in foreign currency exchange rates from a translation perspective are highlighted under Discussion and Analysis of our Reportable Segments and Discussion and Analysis of our Consolidated Operating Results below. For additional information concerning our foreign currency risks and the applicable foreign currency exchange rates in effect for the periods covered by this Annual Report, see Quantitative and Qualitative Disclosures about Market Risk — Foreign Currency Risk below.
The amounts presented and discussed below represent 100% of each business’s revenue and operating cash flow. As we have the ability to control Telenet, J:COM, VTR and Austar, GAAP requires that we consolidate 100% of the revenue and expenses of these entities in our consolidated statements of operations despite the fact that third parties own significant interests in these entities. The third-party owners’ interests in the operating results of Telenet, J:COM, VTR, Austar and other less significant majority owned subsidiaries are reflected in minority interests in earnings of subsidiaries, net, in our consolidated statements of operations. Our ability to consolidate J:COM is dependent on our ability to continue to control Super Media, which will be dissolved in February 2010 unless we and Sumitomo mutually agree to extend the term. If Super Media is dissolved and we do not otherwise control J:COM at the time of any such dissolution, we will no longer be in a position to consolidate J:COM. When reviewing and analyzing our operating results, it is important to note that other third-parties own significant interests in Telenet, J:COM, VTR and Austar and that Sumitomo effectively has the ability to prevent our company from consolidating J:COM after February 2010.
Discussion and Analysis of our Reportable Segments
All of the reportable segments set forth below derive their revenue primarily from broadband communications services, including video, voice and broadband internet services. Certain segments also provide CLEC and other B2B services and J:COM provides certain programming services. At December 31, 2008, our operating segments in the UPC Broadband Division provided services in 10 European countries. Our Other Central and Eastern Europe segment includes our operating segments in the Czech Republic, Poland, Romania, Slovakia and Slovenia. Telenet, J:COM and VTR provide broadband communications services in Belgium, Japan and Chile, respectively. Our corporate and other category includes (i) Austar, (ii) other less significant operating segments that provide broadband communications services in Puerto Rico and video programming and other services in Europe and Argentina and (iii) our corporate category. Intersegment eliminations primarily represent the elimination of intercompany transactions between our broadband communications and programming operations, primarily in Europe.
For additional information concerning our reportable segments, including a discussion of our performance measures and a reconciliation of total segment operating cash flow to our consolidated earnings (loss) before income taxes, minority interests and discontinued operations, see note 21 to our consolidated financial statements.
The tables presented below in this section provide a separate analysis of each of the line items that comprise operating cash flow (revenue, operating expenses and SG&A expenses, excluding allocable stock-based compensation expense in accordance with our definition of operating cash flow) as well as an analysis of operating cash flow by reportable segment for (i) 2008 as compared to 2007 and (ii) 2007 as compared to 2006. In each case, the tables present (i) the amounts reported by each of our reportable segments for the comparative periods, (ii) the U.S. dollar change and percentage change from period to period and (iii) the percentage change from period to period, after removing foreign currency translation effects (FX). The comparisons that exclude FX assume that exchange rates remained constant during the periods that are included in each table. As discussed under Quantitative and Qualitative Disclosures about Market Risk below, we have significant exposure to movements in foreign currency exchange rates. We also provide a table showing the operating cash flow margins of our reportable segments for 2008, 2007 and 2006 at the end of this section.
Substantially all of the significant increases during 2007, as compared to 2006, in the revenue, operating expenses and SG&A expenses of our Telenet (Belgium) segment are attributable to the effects of our January 1, 2007 consolidation of Telenet, and accordingly, we do not separately discuss these increases below.
The revenue of our reportable segments includes amounts received from subscribers for ongoing services, installation fees, advertising revenue, mobile telephony revenue, channel carriage fees, telephony interconnect fees, late fees, programming revenue and amounts received for CLEC and other B2B services. In the following discussion, we use the term “subscription revenue” to refer to amounts received from subscribers for ongoing services, excluding installation fees, late fees and mobile telephony revenue.
The rates charged for certain video services offered by our broadband communications operations in Europe and Chile are subject to rate regulation. Additionally, in Europe, our ability to bundle or discount our services may be constrained if we are held to be dominant with respect to any product we offer. The amounts we charge and incur
with respect to telephony interconnection fees are also subject to regulatory oversight in many of our markets. Adverse outcomes from rate regulation or other regulatory initiatives could have a significant negative impact on our ability to maintain or increase our revenue. For information concerning adverse regulatory developments in the Netherlands, see note 20 to our consolidated financial statements.
The Netherlands. The Netherlands’ revenue increased $120.5 million or 11.4% during 2008, as compared to 2007. Excluding the effects of foreign currency exchange rate fluctuations, the Netherlands’ revenue increased $41.4 million or 3.9%. This increase is attributable to an increase in subscription revenue that was partially offset by a decrease in non-subscription revenue. The increase in subscription revenue is due to (i) higher ARPU and (ii) a higher number of average RGUs during 2008, as compared to 2007. ARPU was higher during 2008, as the positive impacts of (i) an improvement in the Netherlands’ RGU mix, attributable to a higher proportion of telephony, digital cable and broadband internet RGUs, (ii) January 2008 price increases for certain video, broadband internet and telephony services and (iii) growth in the Netherlands’ digital cable services, including increased revenue from premium digital services and products, were only partially offset by the negative impacts of (a) increased competition, (b) changes in telephony subscriber calling patterns and an increase in the proportion of telephony subscribers selecting fixed-rate calling plans and (c) customers selecting lower-priced tiers of broadband internet services. The increase in average RGUs is attributable to an increase in average telephony, digital cable and broadband internet RGUs that was only partially offset by a decline in average analog cable RGUs. The decline in the Netherlands’ average analog cable RGUs is primarily attributable to (i) the migration of certain analog cable customers to digital cable services and (ii) the effects of significant competition from the incumbent telecommunications operator in the Netherlands. We expect that we will continue to face significant competition from the incumbent telecommunications operator in future periods. The increase in subscription revenue during 2008 also includes a $6.8 million increase that is primarily related to favorable analog cable rate settlements with certain municipalities, with $4.5 million of the increase occurring during the fourth quarter of 2008. The decrease in the
Netherlands’ non-subscription revenue is primarily attributable to (i) a decrease in revenue from B2B services, as increased competition has led to the loss of certain B2B contracts, and (ii) lower revenue from installation fees as a result of higher discounting and lower subscriber additions.
Switzerland. Switzerland’s revenue increased $143.1 million or 16.4% during 2008, as compared to 2007. Excluding the effects of foreign currency exchange rate fluctuations, Switzerland’s revenue increased $42.7 million or 4.9%. This increase is attributable to an increase in subscription revenue, due to (i) a higher number of average RGUs and (ii) higher ARPU during 2008. The increase in average RGUs is attributable to increases in average digital cable, broadband internet and telephony RGUs that were only partially offset by a decline in average analog cable RGUs. ARPU was higher during 2008, as the positive impacts of (i) an improvement in Switzerland’s RGU mix, attributable to a higher proportion of digital cable, telephony and broadband internet RGUs, (ii) a January 2008 price increase for analog and digital cable services and (iii) Switzerland’s digital migration efforts were only partially offset by the negative impacts of (a) increased competition, (b) lower telephony call volumes, (c) customers selecting lower-priced tiers of broadband internet services and (d) a lower-priced tier of digital cable services and a decrease in the rental price charged for digital cable set-top boxes that Switzerland began offering in April 2007 to comply with the regulatory framework established by the Swiss Price Regulator in November 2006. Switzerland’s non-subscription revenue remained relatively constant during 2008, as a decrease in interconnect revenue was offset by individually insignificant net increases in other components of non-subscription revenue. The decrease in interconnect revenue primarily is attributable to reductions in interconnect tariffs that were imposed by a regulatory authority during the fourth quarter of 2008. These tariff reductions, which were retroactive to January 1, 2007, resulted in decreases in interconnect revenue of $2.2 million for the year ended December 31, 2008 and $4.4 million for the fourth quarter of 2008, each as compared to the corresponding prior year period.
Austria. Austria’s revenue increased $34.9 million or 6.9% during 2008, as compared to 2007. This increase includes $22.0 million attributable to the impacts of the October 2007 Tirol acquisition and another less significant acquisition. Excluding the effects of these acquisitions and foreign currency exchange rate fluctuations, Austria’s revenue decreased $23.9 million or 4.8%. Most of this decrease is attributable to a decrease in subscription revenue, as the negative impact of lower ARPU was only partially offset by the positive impact of a higher number of average RGUs. The decline in subscription revenue, which, as discussed under Overview above, is largely related to the significant competition we are experiencing in Austria, includes declines in revenue from broadband internet and telephony services that were only partially offset by an increase in revenue from video services. ARPU decreased during 2008, as compared to 2007, as the positive impacts of (i) an improvement in Austria’s RGU mix, primarily attributable to a higher proportion of digital cable RGUs, and (ii) a January 2008 rate increase for analog cable services were more than offset by the negative impacts of (a) increased competition, (b) a higher proportion of customers selecting lower-priced tiers of broadband internet and digital cable services, (c) lower telephony call volumes and (d) an increase in the proportion of subscribers selecting VoIP telephony service, which generally is priced lower than Austria’s circuit-switched telephony service. The increase in average RGUs is attributable to increases in average digital cable and telephony RGUs that were only partially offset by decreases in average analog cable and, to a lesser extent, broadband internet RGUs. Non-subscription revenue in Austria decreased slightly during 2008, as compared to 2007, as a decrease in installation revenue was only partially offset by individually insignificant net increases in other components of non-subscription revenue. In light of current competitive and economic conditions, we expect that Austria will continue to be challenged to maintain or increase the amount of its local currency revenue during 2009.
Ireland. Ireland’s revenue increased $48.6 million or 15.8% during 2008, as compared to 2007. Excluding the effects of foreign currency exchange rate fluctuations, Ireland’s revenue increased $24.4 million or 7.9%. Most of this increase is attributable to an increase in subscription revenue as a result of (i) higher ARPU and (ii) a slightly higher number of average RGUs during 2008, as compared to 2007. ARPU increased during 2008, as the positive impacts of (i) an improvement in Ireland’s RGU mix, primarily attributable to a higher proportion of digital cable RGUs, (ii) a January 2008 price increase for certain analog cable, digital cable and MMDS video services, (iii) an increase in the proportion of broadband internet customers selecting higher-priced tiers of service and (iv) a July 2008 price increase for certain broadband internet services were only partially offset by the negative impact of increased competition. The increase in average RGUs is attributable to increases in the average number of broadband internet, telephony and digital cable RGUs that were largely offset by declines in average analog cable and MMDS video RGUs.
Hungary. Hungary’s revenue increased $28.8 million or 7.6% during 2008, as compared to 2007. Excluding the effects of foreign currency exchange rate fluctuations, Hungary’s revenue increased $0.6 million or 0.2%, as a decline in subscription revenue was more than offset by an increase in non-subscription revenue. Subscription revenue declined during 2008, as the negative impact of lower ARPU was only partially offset by the positive impact of a higher number of average RGUs. The decline in subscription revenue, which, as discussed under Overview above, is largely related to the significant competition we are experiencing in Hungary, includes a decline in revenue from video services that was only partially offset by increases in revenue from broadband internet and telephony services. ARPU declined during 2008, as compared to 2007, as the positive impacts of (i) improvements in Hungary’s RGU mix, primarily attributable to a higher proportion of broadband internet and digital cable RGUs and (ii) a January 2008 rate increase for analog cable services were more than offset by the negative impacts of (a) increased competition, (b) a higher proportion of customers selecting lower-priced tiers of broadband internet and video services and (c) changes in telephony subscriber calling patterns and an increase in the proportion of telephony subscribers selecting fixed-rate calling plans. The increase in average RGUs is attributable to increases in average broadband internet, telephony, digital cable and, to a lesser extent, DTH RGUs that were only partially offset by a decline in average analog cable RGUs. The decline in average analog cable RGUs is primarily due to (i) the migration of analog cable subscribers to digital cable following the second quarter 2008 launch of digital cable services and (ii) the effects of competition. The increase in non-subscription revenue during 2008 is primarily attributable to an increase in B2B revenue.
Other Central and Eastern Europe. Other Central and Eastern Europe’s revenue increased $143.8 million or 17.8% during 2008, as compared to 2007. This increase includes $13.2 million attributable to the impact of acquisitions. Excluding the effects of acquisitions and foreign currency exchange rate fluctuations, Other Central and Eastern Europe’s revenue increased $34.7 million or 4.3%. Most of this increase is attributable to an increase in subscription revenue as a result of the positive impact of higher average RGUs during 2008 that was only partially offset by the negative impact of lower ARPU. The increase in average RGUs is attributable to increases in average broadband internet RGUs (mostly in Poland, Romania and the Czech Republic) and telephony RGUs (mostly related to the expansion of VoIP telephony services in the Czech Republic, Poland and Romania), that were only partially offset by a decline in average video RGUs. The decline in average video RGUs is attributable to decreases in Romania and, to a lesser extent, the Czech Republic and Slovakia that were only partially offset by small increases in Poland and Slovenia. ARPU declined in our Other Central and Eastern Europe segment during 2008, as compared to 2007, as the positive impacts of (i) an improvement in RGU mix, primarily attributable to a higher proportion of digital cable (due in part to the second quarter 2008 launch of digital cable services in Poland and Slovakia) and broadband internet RGUs and (ii) rate increases for video services in certain countries were more than offset by the negative impacts of (a) increased competition, (b) a higher proportion of broadband internet and video subscribers selecting lower-priced tiers and (c) changes in subscriber calling patterns and an increase in the proportion of telephony subscribers selecting fixed-rate calling plans.
Although competition is a factor throughout our Other Central and Eastern Europe markets, we are experiencing particularly intense competition in Romania and the Czech Republic. In Romania, competition has contributed to (i) an organic decline in total RGUs during the three months ended December 31, 2008 and (ii) declines in ARPU, video revenue and overall revenue during 2008, as compared to 2007. In response to the elevated level of competition in Romania, we have implemented aggressive pricing and marketing strategies. These strategies, which contributed to the organic decline in Romania’s revenue, were implemented with the objective of maintaining our market share in Romania and enhancing our prospects for continued revenue growth in future periods. In the case of the Czech Republic, competition has contributed to declines during 2008, as compared to 2007, in (i) ARPU from all product categories and (ii) revenue from video services. We expect that we will continue to experience significant competition in future periods in Romania, the Czech Republic and other markets within our Other Central and Eastern Europe segment.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
The following discussion and analysis, which should be read in conjunction with the discussion and analysis included in our 2008 Annual Report on Form 10-K, is intended to assist in providing an understanding of our financial condition, changes in financial condition and results of operations and is organized as follows:
•
Forward-Looking Statements. This section provides a description of certain of the factors that could cause actual results or events to differ materially from anticipated results or events.
•
Overview. This section provides a general description of our business and recent events.
•
Material Changes in Results of Operations. This section provides an analysis of our results of operations for the three and nine months ended September 30, 2009 and 2008.
•
Material Changes in Financial Condition. This section provides an analysis of our corporate and subsidiary liquidity, condensed consolidated cash flow statements and our off balance sheet arrangements.
•
Quantitative and Qualitative Disclosures about Market Risk. This section provides discussion and analysis of the foreign currency, interest rate and other market risk that our company faces.
The capitalized terms used below have been defined in the notes to our condensed consolidated financial statements. In the following text, the terms, “we,” “our,” “our company” and “us” may refer, as the context requires, to LGI or collectively to LGI and its subsidiaries.
Unless otherwise indicated, convenience translations into U.S. dollars are calculated as of September 30, 2009.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent that statements in this Quarterly Report are not recitations of historical fact, such statements constitute forward-looking statements, which, by definition, involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In particular, statements under Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk contain forward-looking statements, including statements regarding business, product and finance strategies, our capital expenditure priorities, subscriber growth and retention rates, competitive and economic factors, the maturity of our markets, anticipated cost increases, liquidity, credit risks, foreign currency risks and target leverage levels. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. In addition to the risk factors described in our 2008 Annual Report on Form 10-K, the following are some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events:
Overview
We are an international provider of video, voice and broadband internet services with consolidated broadband communications and/or DTH satellite operations at September 30, 2009 in 14 countries, primarily in Europe, Japan and Chile. Through our indirect wholly-owned subsidiary UPC Holding, we provide video, voice and broadband internet services in nine European countries and in Chile. The European broadband communications operations of UPC Broadband Holding, a subsidiary of UPC Holding, are collectively referred to as the UPC Broadband Division. UPC Broadband Holding’s broadband communications operations in Chile are provided through VTR. Through our indirect majority ownership interest in Telenet (50.3% at September 30, 2009), we provide broadband communications services in Belgium. Through our indirect controlling ownership interest in J:COM (37.8% at September 30, 2009), we provide broadband communications services in Japan. Through our indirect majority ownership interest in Austar (55.0% at September 30, 2009), we provide DTH satellite services in Australia. We also have (i) consolidated broadband communications operations in Puerto Rico and (ii) consolidated interests in certain programming businesses in Europe, Japan (through J:COM) and Argentina. Our consolidated programming interests in Europe are primarily held through Chellomedia, which also owns or manages investments in various businesses, primarily in Europe. Certain of Chellomedia’s subsidiaries and affiliates provide programming services to certain of our broadband communications operations, primarily in Europe.
We completed acquisitions of Mediatti, Interkabel and Spektrum, and certain other less significant acquisitions in Europe and Japan since the beginning of 2008. These acquisitions impact the comparability of our 2009 and 2008 results. For additional information, see note 3 to our condensed consolidated financial statements.
As further discussed in note 3 to our condensed consolidated financial statements, our condensed consolidated financial statements have been reclassified to present UPC Slovenia as a discontinued operation. Accordingly, in the following discussion and analysis, the operating statistics, results of operations and cash flows that we present and discuss are those of our continuing operations unless otherwise indicated.
We focus on achieving organic revenue and customer growth in our broadband communications operations by developing and marketing bundled entertainment and information and communications services, and extending and upgrading the quality of our networks where appropriate. As we use the term, organic growth excludes foreign currency translation effects (FX) and the estimated impact of acquisitions. While we seek to obtain new customers, we also seek to maximize the average revenue we receive from each household by increasing the penetration of our digital cable, broadband internet and telephony services with existing customers through product bundling and upselling, or by migrating analog cable customers to digital cable services that include various incremental service offerings, such as video-on-demand, digital video recorders and high definition programming. We plan to continue to employ this strategy to achieve organic revenue and customer growth.
Through our subsidiaries and affiliates, we are the largest international broadband communications operator in terms of subscribers. At September 30, 2009, we owned and operated networks that passed 34,653,000 homes and served 26,826,700 revenue generating units (RGUs), consisting of 15,221,100 video subscribers, 6,543,400 broadband internet subscribers and 5,062,200 telephony subscribers.
Including the effects of acquisitions, our continuing operations added a total of 200,700 and 619,300 RGUs during the three and nine months ended September 30, 2009, respectively. Excluding the effects of acquisitions (RGUs added on the acquisition date), but including post-acquisition RGU additions, our continuing operations added 199,100 and 609,300 RGUs during the three and nine months ended September 30, 2009, respectively, as compared to 213,600 and 761,200 RGUs that were added by our continuing operations on an organic basis during the respective 2008 periods. The organic RGU growth during the 2009 periods is attributable to the growth of our (i) digital cable services, which added 326,900 and 1,191,800 RGUs, respectively, (ii) telephony services, which added 123,700 and 441,700 RGUs, respectively, (iii) broadband internet services, which added 129,900 and 397,400 RGUs, respectively and (iv) DTH video services, which added 13,600 and 13,400 RGUs, respectively. The growth of our digital cable, telephony, broadband internet and DTH video services was partially offset by (i) declines in our analog cable RGUs of 391,300 and 1,423,400, respectively, and (ii) less significant declines in our multi-channel multi-point (microwave) distribution system (MMDS) RGUs.
We are facing difficult economic environments in most of the countries in which we operate. These economic environments have made it (i) more difficult to attract new subscribers, (ii) more likely that certain of our subscribers will downgrade or disconnect their services and (iii) more difficult to maintain ARPUs at existing levels. Accordingly, our ability to increase, or in certain cases maintain, the revenue, RGUs, operating cash flow and liquidity of our operating subsidiaries could be adversely affected to the extent that relevant economic environments remain weak or decline further. We are unable to predict the extent of any of these potential adverse effects.
The video, broadband internet and telephony businesses in which we operate are capital intensive. Significant capital expenditures are required to add customers to our networks, including expenditures for equipment and labor costs. Significant competition, the introduction of new technologies or adverse regulatory initiatives could cause us to decide to undertake previously unplanned upgrades of our broadband communications networks in the impacted markets. In addition, no assurance can be given that any future upgrades will generate a positive return or that we will have adequate capital available to finance such future upgrades. If we are unable to, or elect not to, pay for costs associated with adding new customers, expanding or upgrading our networks or making our other planned or unplanned capital expenditures, our growth could be limited and our competitive position could be harmed.
Our analog video service offerings include basic programming and, in some markets, expanded basic programming. We tailor both our basic channel line-up and our additional channel offerings to each system according to culture, demographics, programming preferences and local regulation. Our digital video service
offerings include basic and premium programming and incremental product and service offerings such as enhanced pay-per-view programming (including video-on-demand and near video-on-demand), digital video recorders and high definition television services.
We offer voice-over-internet-proto col, or “VoIP” telephony services in all of our broadband communications markets. In Austria, Belgium, Chile, Hungary, Japan and the Netherlands, we also provide circuit-switched telephony services. In select markets, including Australia, we also offer mobile telephony services using third-party networks.
Material Changes in Results of Operations
Changes in foreign currency exchange rates have a significant impact on our reported operating results as all of our operating segments, except for Puerto Rico, have functional currencies other than the U.S. dollar. Our primary exposure to foreign currency risk from a translation perspective is currently to the euro and the Japanese yen. In this regard, 34.6% and 32.3% of our U.S. dollar revenue during the nine months ended September 30, 2009 was derived from subsidiaries whose functional currency is the euro and the Japanese yen, respectively. In addition, our reported operating results are impacted by changes in the exchange rates for the Swiss franc, the Chilean peso, the Hungarian forint, the Australian dollar and other local currencies in Europe. The portions of the changes in the various components of our results of operations that are attributable to changes in foreign currency exchange rates from a translation perspective are highlighted under Discussion and Analysis of our Reportable Segments and Discussion and Analysis of our Consolidated Operating Results below. For information concerning our foreign currency risks and the applicable foreign currency exchange rates in effect for the periods covered by this Quarterly Report, see Quantitative and Qualitative Disclosures about Market Risk — Foreign Currency Risk below.
The amounts presented and discussed below represent 100% of each operating segment’s revenue and operating cash flow. As we have the ability to control Telenet, J:COM, VTR and Austar, GAAP requires that we consolidate 100% of the revenue and expenses of these entities in our condensed consolidated statements of operations despite the fact that third parties own significant interests in these entities. The noncontrolling owners’ interests in the operating results of Telenet, J:COM, VTR, Austar and other less significant majority-owned subsidiaries are reflected in net earnings attributable to noncontrolling interests in our condensed consolidated statements of operations. Our ability to consolidate J:COM is dependent on our ability to continue to control Super Media, which will be dissolved in February 2010 unless we and Sumitomo mutually agree to extend the term. If Super Media is dissolved and we do not otherwise control J:COM at the time of any such dissolution, we will no longer be in a position to consolidate J:COM. When reviewing and analyzing our operating results, it is important to note that other third parties own significant interests in Telenet, J:COM, VTR and Austar and that Sumitomo effectively has the ability to prevent our company from consolidating J:COM after February 2010.
Discussion and Analysis of our Reportable Segments
All of the reportable segments set forth below derive their revenue primarily from broadband communications services, including video, voice and broadband internet services. Certain segments also provide CLEC and other B2B services and J:COM provides certain programming distribution services. At September 30, 2009, our operating segments in the UPC Broadband Division provided services in nine European countries. Our Other Central and Eastern Europe segment includes our operating segments in the Czech Republic, Poland, Romania and Slovakia. Telenet, J:COM and VTR provide broadband communications services in Belgium, Japan and Chile, respectively. Our corporate and other category includes (i) Austar, (ii) other less significant operating segments that provide broadband communications services in Puerto Rico and video programming and other services in Europe and Argentina and (iii) our corporate category. Intersegment eliminations primarily represent the elimination of intercompany transactions between our broadband communications and programming operations, primarily in Europe.
For additional information concerning our reportable segments, including a discussion of our performance measures and a reconciliation of total segment operating cash flow to our earnings (loss) from continuing operations before income taxes, see note 14 to our condensed consolidated financial statements.
The tables presented below in this section provide a separate analysis of each of the line items that comprise operating cash flow (revenue, operating expenses and SG&A expenses, excluding allocable stock-based compensation expense in accordance with our definition of operating cash flow) as well as an analysis of operating cash flow by reportable segment for the three and nine months ended September 30, 2009, as compared to the corresponding prior year periods. These tables present (i) the amounts reported by each of our reportable segments for the comparative periods, (ii) the U.S. dollar change and percentage change from period to period and (iii) the percentage change from period to period, after removing FX. The comparisons that exclude FX assume that exchange rates remained constant during the periods that are included in each table. We also provide a table showing the operating cash flow margins of our reportable segments for the three and nine months ended September 30, 2009 and 2008 at the end of this section.
The revenue of our reportable segments includes amounts received from subscribers for ongoing services, installation fees, advertising revenue, mobile telephony revenue, channel carriage fees, telephony interconnect fees, late fees, programming distribution revenue and amounts received for CLEC and other B2B services. Consistent with the presentation of our revenue categories in note 14 to our condensed consolidated financial statements, we use the term “subscription revenue” in the following discussion to refer to amounts received from subscribers for ongoing services, excluding installation fees, late fees and mobile telephony revenue.
The rates charged for certain video services offered by our broadband communications operations in Europe and Chile are subject to rate regulation. Additionally, in Europe, our ability to bundle or discount our services may be constrained if we are held to be dominant with respect to any product we offer. The amounts we charge and incur with respect to telephony interconnection fees are also subject to regulatory oversight in many of our markets. Adverse outcomes from rate regulation or other regulatory initiatives could have a significant negative impact on our ability to maintain or increase our revenue. For information concerning adverse regulatory developments in the Netherlands, see note 13 to our condensed consolidated financial statements.
CONF CALL
Mike Fries
Thank you. And welcome everybody. As usual, we have a number of folks on the call from our side, from all over the place. And those you may hear from are Bernie Dvorak, Co-CFO; Rick Westerman, Investor Relations; and free folks from our operations; Gene Musselman from Europe; Ram Halus [ph], Japan; and Mauricio Ramos, Chile. I think before I get started, the operator has one more note to read there. Operator?
Operator
Certainly. Page two of the slide details the company's Safe Harbor statement regarding forward-looking statements. Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including with respect to Liberty Global's outlook and future growth prospects, its expectations regarding competitive and economic conditions and liquidity, and other 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 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. So, as the operator mentioned, we are going to be speaking from slides today. And the agenda will be pretty much as we’ve normally done and I’ll hit some highlights, Bernie will talk about financial results, and we’ll get to your questions. I’m on slide four here entitled 2008 highlights.
I’d like to begin maybe with a broad generalization, which I think would be helpful at times like this. We believe our business is in pretty good shape. We continue to deliver stable growth. Our balance sheet is solid. And our core strategic initiatives are intact. So let me start with organic growth figures, which is still in my opinion are the strongest part of our story.
First of all, we added over 1 million RGUs during 2008, excluding acquisitions, and we ended the year with 26.5 million video, voice and data subscriptions. And those RGUs additions together with our continued focus on task discipline and scale efficiencies helped to deliver operating cash flow growth of 14% for the year. Our OCF margins improved 300 basis points to 43%. And we grew our free cash flow, which is an increasingly important metric for us and, I believe, you, about over 80%. I think these results speak for themselves.
On the M&A front, we’ve often said that while doing deals as in our “D&A” will always remain smart and disciplined. And I think while this was an unusual year with the credit markets largely shut down, we still completed some very attractive and highly strategic transactions. In total, we added 1.4 million RGUs, completed over 20 deals; some big, but most of them pretty small. On the larger side, J:COM, for example, acquired over 540,000 RGUs in Japan, increasing our market share and footprint there in core cities. And Telenet acquired over 730,000 subs in Belgium, which expanded our reach to 100% of Flanders.
We also completed or in the process to completing some tactical disposals. These are generally assets that are non-core and can generate tax efficient cash to the parent company. Perhaps the best example would be the sale of Mediatti to J:COM, which closed in December, and generated over $120 million to us, but also enhanced J:COM’s strategic and financial position in the Tokyo region.
In terms of our M&A pipeline, I think it’s fair to say we continue to work on the number of new opportunities, both big and small. But the message I’d like to leave you with is that we are going to continue to be clever and patient in this area. There is also considerable focus these days on balance sheets and liquidity, and that makes sense to us. But I have to tell you from our perspective, it’s almost as if we have been anticipating just this sort of environment, proactively pushing out maturities and actively hedging currencies and floating rate exposure for some time now.
We’ll get into more detail later, but we feel very good about our debt and liquidity position. We believe our current leverage is appropriate given our cash flow profile. As I just said, our debt is generally hedged in long-term.
Liquidity front, we sit today with over $2 billion of cash and debt availability. And remember, we are generating free cash flow at all our major credit pools and on a consolidated basis. The last major component of our strategy is well known by all of you. And I’m referring, of course, to our buyback initiative, which today (inaudible) repurchased 6 billion of our equity, including 2.2 billion just last year, representing a total of over 40% of the company since we started. I simply say that we remain committed to this approach, and as you will see, we think we are capitalized to continue down that path.
So with that as an intro, let me jump into our operating results, beginning with subscriber growth on slide five. I think the main takeaway from these charts should be that our growth in RGUs throughout the year has been steady. If you look at total RGU net add in the top left of the slide, you will see that we averaged approximately 260 net adds per quarter and delivered 284,000 in the fourth quarter, bringing full-year net adds to over 1 million. And again, that excludes acquisitions.
Our results continued to be impacted by video subscriber losses, as you can see in the top right. But importantly, we did not see an acceleration of video losses in the fourth quarter. In fact, the number of 54,000 was essentially flat to our quarterly average. The bottom half of the page shows a picture of voice and data net adds, and it’s a pretty good picture. Both of these products rebounded in the fourth quarter compared to the prior two quarters and exceeded our quarterly average. Voice adds for the year were 655,000, including 170,000 in the fourth quarter.
And telephony, in our opinion, continued to be a growth business, especially in places like Central and Eastern Europe who were only 11% penetrated. We also continued to capture meaningful market share from telco line losses. In fact, we estimate that the incumbents in our 11 European markets lost around 1.4 million lines on our footprint over the last two years. In that same period, we added over 800,000.
Turning to broadband, total net adds were approximately 630,000 for the year and 168,000 in the quarter. And we think we’ve got good runway for growth here too, especially with 3.0, which Gene is going to give you a little bit more color on. But perhaps the brightest spot in our performance continues to be digital TV, which we have isolated on slide six.
We’ve talked for some time about the importance of this product, growing ARPUs and reducing video churn, and its working on both fronts. The chart on the right shows the development of our digital cable business over the last three years. And you can see we’ve taken our digital sub base from 1.3 million to 5.1 million in that period, with growth actually accelerating in the last four quarters, particularly in the fourth quarter where we added nearly 470,000 new digital subs, by far our best quarter ever.
Penetration today is at 36% and we are seeing great tick-up of DVRs and HD, which are available pretty much in every market now. In fact, we estimate over 50% of our digital base taking DVR, HD or dual box from us today. Digital is clearly having a positive impact on video churn, and perhaps the best example is Central and Eastern Europe where video losses declined 50% in the fourth quarter compared to our quarterly average through September.
And ARPU uplift, which typically ranges from 25% to 100% depending on the market, is helping to drive our revenue build and drop into the OCF line. So the punch line is that we are seeing continued, and in the case of digital TV, accelerated growth in our advanced services. And the next slide, number seven, illustrates that pretty clearly.
You can see that in the first three quarters of this year, we averaged around 650,000 advanced service adds per quarter. Now again, that includes digital video plus voice plus data. And in the fourth quarter, that number was around – was up 30% to 839,000, a record quarter for us and actually a record quarter for a number of our divisions. And remember, given our relatively low analog TV rates around the world, these are the products that drive higher ARPUs, deliver solid margins, and form the basis of our bundles.
At year-end, nearly 40% of our 16.9 million customers took a bundle from us. And triple play customers were up 27% year-over-year. So all of our bundling metrics, we think, are looking good and improving. And we are just really – I think we are half way through the game on this. Of course, bundling reduces churn and drives customer ARPUs, and customer ARPUs were up 15% year-over-year to over $45. And while there are some effects in that number, even in local currencies, ARPU per customer was up 7% to 9% year-over-year in operations like UPC, Telenet and VTR. And that’s really the main goal for us; drive the volume of advanced services and continue to increase the ARPU that we are generating out of each home.
So before I conclude with some outlook remarks, let me turn over to Gene. He is going to address some four key areas of focus for us in Europe and then I’ll get back up. Gene?
Gene Musselman
Yes. Thank you, Mike. And good morning, everyone. I apologize upfront, I may sound a bit teeny [ph], but I’m on a telephone that I can’t change out in the – I hope you can – it's audible for everyone. I’d like to take just a few minutes to acquaint you with the current economic climate, what we are doing with our products, and update regarding the recent EU decision in NL, and provide some insight into a few of our key markets.
Looking at the economic situation, so far we have seen limited impact to date across all of our markets. Gross sales were down modestly in the fourth quarter compared to last year, although net churn remained at similar levels compared to the same period a year ago. In addition, ARPU for – RGU for UPC remained stable in Q4 ’08 compared to Q4 ’07. That was primarily driven by strong growth in Western Europe.
I should mention that we remained diligent, however, and continued to monitor our markets, including Central and Eastern Europe where currencies have been volatile and consumer spending is expected to come under pressure. Having said that, it’s worth pointing out that most forecasts continue to show that five out of our six markets in Central and Eastern Europe will show positive growth national product GDP for next year.
Shifting to products, I’m happy to say that our product roadmap is on track with ’08 turning out to be a banner year, especially for digital, surpassing 2 million subscribers in November and posting record digital adds in Q4. And this trend is expected to continue throughout ’09 with digital being our key growth driver. In fact, just a few minutes ago I got a memo from Poland. They just went over the 100,000 mark, and they are aiming to double that by year-end. So, things are looking pretty good, as Mike mentioned in the area of digital.
For the first time, we began the year with a digital platform in place across all of our markets and advanced services are widely available. Mike mentioned DVR for all practical purposes have been launched in all of our markets, high depth in 12 out of 15 of the markets with the number of channel is expanding rapidly. And VoD will be in side markets by the end of the year with four launches to take place starting with Austria, to be followed by Kabocan [ph], Hungary and Poland.
Moving on to the Internet, we see Euro DOCSIS as a real game changer. Euro DOCSIS 3.0 was launched regionally in the Netherlands during the fall of ’08 under the Fiber Power with speeds of 60 and 120 megabits, the highest in the Netherlands. As such, we have enjoyed very positive reaction following the launch with the press, with the local press calling DSL, the new digital dial-up.
By rolling out 3.0, it has allowed us to upgrade the speeds of our existing subscribers in the Netherlands to safeguard our current base and sustain our ARPU. And we will follow the similar approach in our other markets. Further Euro DOCSIS 3.0 is planned to be rolled out across eight markets in Europe, with Austria and Czech in the next few weeks actually. The Netherlands – and I should add that Netherlands will complete their Euro DOCSIS 3.0 rollout in June, at which time they will be passing approximately 2.2 million homes that are ready – Euro DOCSIS 3.0 ready for service.
Turning to regulatory in the Netherlands, many of you have likely seen the recent decision by the EU Commission where they especially granted – where they especially granted the Dutch regulator [ph] opt the right to open up access to our networks to third parties and require us to provide wholesale video services. In our minds, this was a strange and ultimately a politically motivated decision since the video market in Holland has never been more competitive than it is today. Although it’s worth noting here that the Commission was split on the matter with the Competition Commissioner expressing a deep concern. Regardless, though, the new rules are expected to become effective in mid-March. At this point, it is too early to comment on what the economic implications might be, but as a practical matter, we don’t see any significant impact this year. In the meantime, we will feel the decision into national level, and it’s important to say that we don’t see any further impact or any impact from this decision at this point on our other markets.
Lastly, I’d like to give you a quick update on a few of our key markets, staring with Netherlands and Switzerland, our two largest markets. Both enjoyed solid growth in ’08, delivering rebased OCF growth of 15% and 17% respectively. Also good news, we believe that Romania is poised for a significant turnaround in ’09. Video churn has been reduced by 35% from ’07 due to the loyalty programs that we launched last year, the database cleanup that we undertook, the deployment of Darby which enabled better handling of collections, and a myriad of other things.
Finally, a quick update on Hungary and Austria. Both of these markets I’d like to characterize as kind of a work in progress. Hungary delivered rebased OCF growth of 11% in Q4. That’s a positive sign. On the other hand, the Hungarian economy bears watching going forward. In Austria, we continued to see strong competition, although leveraging our Euro DOCSIS 2.0 infrastructure and the rollout of 3.0 were very encouraging. Q4 also marked Austria’s first growth quarter for Internet in the last five quarters. And this was largely due to the steps enjoyed by mobile data heretofore.
With this, I’d like to turn back to Mike. Mike?
Mike Fries
Okay, thank you. Nice job. And that’s a lot of information there, and I think most of it pretty darn good for us. Before I pass it over to Bernie to run through financials, I’m going to provide some quick color on 2009 operating outlook on slide nine here, let me start with the economy. I think Gene hit the high points in Europe pretty well, and it’s probably worth pointing out that we believe we benefit from geographic diversity on our operating platform at times like this.
So I’d just make one key additional point, and it probably bears repeating. If you have to go through cycles like this, we think it sure helps to be selling connectivity through three of the most important devices in people’s lives; their TV, their PC and their telephone. And when people stay home, they consume more of what we’ve got. And importantly, what we’ve got is getting better with 100 megabit broadband speed and kilowatts for digital and competitive bundles. And nobody is entirely immune to the macro environment. And we are watching things very closely, as Gene said, but we will continue to grow in 2009.
And we are providing guidance today of 5% to 7% operating cash flow growth for the year. That might sound conservative, but it’s still best-in-class and we believe achievable. We also expect continued margin expansion and free cash flow growth of at least 25%. So at current FX rates, that will be well over $900 million of free cash flow this year as CapEx continues to decline as a percentage of revenue.
And then finally, our capital allocation of over 2 billion of liquidity and significant cash at the parent company, we will continue to generate and utilize capital or buybacks and acquisitions if they arise. We are not being specific on quantum today for stock purchases, but our money is going a lot further at these prices than it had in the past, as you well know. And I think you can expect that we remain opportunistic on that front.
So let me turn it over to Bernie to run through financials and then we’ll get to your questions. Bernie?
Bernie Dvorak
Thanks, Mike. I’d just start on page 11 where you see the highlights for revenue and OCF growth over the last three years. Reported 2008 revenue reached $10.6 billion while reported OCF hit $4.5 billion, reflecting two-year CAGRs of 28% and 39% respectively. We’ve been successful at driving the OCF margin expansion through cost discipline, dropping over 60% of our reported incremental revenue to the OCF line in 2008. 2008 results were also benefited, as Mike had mentioned, from acquisitions in Japan and Belgium, as well as from favorable foreign exchange movements.
If you turn to page 12, it shows the full year revenue by segment. Consolidated revenue for the fourth quarter was $2.6 billion, reflecting reported growth of 4%. If you adjust that for FX, it results in 8% growth. Revenue for the year was $10.6 billion, reflecting reported growth of 17%. However, adjusting for FX, growth is 8% as well. So, as you can see, FX was a headwind for us on a reported basis in the fourth quarter, but was in our favor for the full year. So if you adjust for FX and acquisitions, our rebased growth was 6% for both the quarter and the full year.
At UPC, revenue reached $1 billion for the fourth quarter and $4.5 billion for the year, reflecting a 3% rebased growth rate for both periods. Telenet and J:COM each posted rebased revenue growth of 6% for the full year 2008, and VTR led our segments with 12% rebased growth on a full year basis. In addition to VTR, Poland and Australia were also double-digit rebased growth – revenue growers in 2008.
Turning – slide 13 shows segment breakout of OCF. We achieved OCF of $1.1 billion and $4.5 billion for the fourth quarter and full year, reflecting reported growth of 15% and 27%. Rebased OCF was 14% for both the quarter and the year, and in line with full year guidance.
On a rebased basis, VTR and UPC led with 18% and 16% growth in Q4 and 18% and 14% for the full year. Specifically, UPC generated nearly $490 million of OCF in the fourth quarter and $2.1 billion for 2008. For the fourth quarter, Western Europe delivered 17% rebased growth, and Central and Eastern Europe, which continues to be adversely affected by Romania, posted 6% growth. The Netherlands and Switzerland, as Gene mentioned, UPC’s two largest markets, had their best OCF growth quarters of the year in the fourth quarter.
Both Telenet and J:COM had very solid quarters with OCF of $175 million and $342 million for Q4, reflecting rebased growth of 12% and 10%. On a full year basis, these operations generated $727 million and $1.2 billion of OCF, each achieving rebased growth of 11%.
If you go to slide 14, that lays out rebased growth by country for all 15 of our markets. This chart shows a well-diversified mix of faster growth markets and a few that faced some challenges in 2008, as we have discussed. We believe diversification is the key differentiating factor our story compared to a single country MSO. Additionally, it’s apparent by the rebased growth rates each of our markets with the exception of Romania experienced OCF margin improvement in 2008 as compared to 2007 on a rebased basis. Romania, Hungary and Austria were our three weakest markets in 2008. Excluding those three markets, rebased growth was over 7% for revenue and over 16% for OCF.
If you turn to slide 15, this shows our margin for 2006 to 2008 on a consolidated basis as well as OCF margin improvement by segment. Over the last two years, we’ve increased consolidated OCF margins from 36% in 2006 to 42.9% in 2008, a 690 basis point improvement. In the fourth quarter of 2008, we realized OCF margins of 43.2% versus 39.2% in 2007, reflecting our strongest quarter of the year. Finally, we expect continued OCF margin expansion in 2009 albeit at a slower pace than in the last several quarters.
If you turn to page 16, it shows our 2008 capital spend in a little more detail. In 2008, our CapEx was $2.4 billion for the full year and $696 million for the fourth quarter. As a percentage of revenue, our full year CapEx was 22%, down slightly compared to 2007. In the fourth quarter, however, our CapEx as a percentage of revenue was 27% versus 24% in the year-ago quarter. This increase was due to a combination of factors, including bringing forward CapEx into 2008 that we would have otherwise incurred in 2009 as a result of negotiating favorable vendor discounts.
Additionally, we incurred incremental spend as compared to 2007 related to the expansion and success of digital cable, as well as our 3.0 rollouts. The chart on the left depicts the components of our CapEx. Over 55% is related to CPE and scalable infrastructure, which we would classify as success based as we grow our advanced service RGUs. Adding network spend to this would put the CapEx that is intended to drive revenue to over 80%.
In terms of our network, over 90% of our cable network is two-way at year-end, as we added over 1 million organic two-way homes in 2008. As Mike indicated earlier, we expect to drive down CapEx as a percentage of revenue in 2009 and expect UPC to be a major driver to this improvement.
Turning to page 17, we meaningfully increased both our free cash flow and free cash flow conversion ratio in 2008 as compared to 2007. Free cash flow for 2008 was $763 million versus $419 million in 2007, representing an 80% plus increase. Our 2008 free cash flow growth was derived from a 28% increase or approximately $685 million from cash flow from operations versus a 17% increase or approximately $340 million year-over-year increase in CapEx.
Another metric which we look at is free cash flow conversion, which is free cash flow as a function of operating cash flow or how much of our OCF drops to free cash flow. In 2008, this increased 500 basis points to 17% from 12% in the year-ago period. As we think about free cash flow growth in 2009, we would expect to continue to see meaningful growth out of our key credit group UPC as well as on a consolidated basis, as our guidance highlighted earlier.
Turning to slide 18, it shows total debt at Q4 increased approximately $1.2 billion from the third quarter of 2008 to $20.5 billion. The increase is primarily due to new borrowings at J:COM and UPC, as well as the FX translation impact of the yen strengthening to the dollar in the fourth quarter. Weighted average cost of debt remained low at year-end of approximately 4.6%. If you factor in the impact of our derivatives, our cost of debt was closer to the 5.5% to 6.0% range. And additionally, we have hedged over 90% of our floating rate debt.
At year-end our cash position was $1.4 billion. If you include restricted cash, it was $1.8 billion. At year-end 2008, our leverage was 4.6 times gross, 4.2 times net, which was similar to year-end 2007, but an increase compared to the third quarter of ’08. The increase in Q3 was largely due to three factors. The first being new borrowings, as discussed previously. The second was the impact of FX, as the variance of the spot rate at year-end, which translates the balance sheet, and the average rate used for OCF worked against us. And three, OCF from J:COM’s acquisition of Mediatti was not included in the quarter since it was consolidated right at year-end.
We are comfortable with our current leverage level. With the credit markets remain challenging, we expect our leverage levels may start to head towards four times or below. We are very aggressive in managing balance sheet risk, including repayment risk. In terms of amortizations of our debt, approximately 90% is due 2012 or after. In the next two years, through 2010, approximately 6% are due, however, most of that is related to J:COM. We’ve also hedged our currency mismatch with our debt, especially in the Central and Eastern Europe markets.
If you turn to slide 19, it shows an overview of our liquidity. At December 31, we had roughly $2 billion of liquidity consisting of $817 million of cash at the parent, $557 million of cash at our operating subsidiaries, and $871 million of undrawn borrowing capacity through our subs. We expect that we could borrow all of this capacity upon reporting our Q4 results.
The chart on the right depicts the impact of our buyback and our shares outstanding. Since year-end 2007, we have expended approximately $2.3 billion, and that’s a current number through February, or the middle of February, and reducing our shares outstanding by over 20%. As Mike said, we remain committed to our repurchase strategy, but we will be prudent in how we approach it. We think our equity is extremely attractive today and we will look forward to capitalize on it.
If you turn to slide 20, in conclusion, the global economic environment will certainly impact our business. However, we think we are well diversified, well positioned in our markets and believe that we will deliver growth in the face of difficult conditions. The story for us in 2009, as we talked about earlier, is advanced digital video services. And we are excited about our product offering and rollout schedule. In 2008, consumers were very accepting of our digital product, particularly DVR. HD and VoD, we expect, will pick up steam during the course of this year.
Also this year we expect to expand our reach of 3.0 in the Netherlands and we will launch it in many of our European markets during the year. We are excited about offering our customers next gen broadband products, which will be true differentiators in our markets. We feel confident about our balance sheet and access to liquidity. Our amortization schedule has been pushed out. And we will certainly look to any favorable market windows to be proactive and further churning out our maturities.
Our hedging of the balance sheet has worked and provided some comfort to us, as certain currencies in markets that we operate have weakened. We are matching our debt to OCF, and we look forward to continue to hedge our risk as these businesses grow. We expect strong free cash flow growth, as we’ve highlighted a few times as evidenced by our guidance, which combined with our cash position and borrowing capacity puts us in a position to not only weather the storm, but take advantage of it as well.
So with that, operator, I think we are ready for Q&A.
|
|
Fund Letters
