Liberty Global plc: Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless stated otherwise, amounts are U.S. dollars. Liberty Global provides broadband, video, fixed-line and mobile services in Europe. Its consolidated operations include Switzerland, Belgium and Ireland; it also owns 50% interests in the U.K. VMO2 and Dutch VodafoneZiggo joint ventures, accounted for using the equity method.
Business context and comparability
Results are affected by major portfolio changes: the U.K. operations were contributed to VMO2 in June 2021, Poland was sold on April 1, 2022, and Telenet sold its tower assets on June 1, 2022. Poland is presented as discontinued operations. The U.K. transaction makes year-to-date comparisons particularly difficult; reported results also reflect substantial foreign-exchange movements.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,746.3 million | $1,901.4 million | $5,353.8 million | $8,390.5 million |
| Operating income | $108.9 million | $101.0 million | $192.2 million | $1,239.4 million |
| Adjusted EBITDA | $664.0 million | $758.5 million | $1,998.1 million | $3,273.2 million |
| Net earnings attributable to Liberty Global shareholders | $2,348.0 million | $277.1 million | $6,172.9 million | $12,790.7 million |
| Diluted EPS, continuing operations | $4.87 | $0.48 | $10.41 | $22.19 |
| Cash from continuing operating activities | Not stated for quarter | Not stated for quarter | $1,903.5 million | $2,414.0 million |
- Q3 revenue fell 8.2% as reported, but increased 4.1% organically; Q3 Adjusted EBITDA declined 12.5% as reported but rose 2.1% organically. Consolidated Q3 Adjusted EBITDA margin was approximately 38.0%, versus 39.9% a year earlier.
- For the nine months, reported revenue declined 36.2%, including a $2,736.4 million reduction from the U.K. transaction. Organic revenue increased 2.0%; organic Adjusted EBITDA decreased 1.1%.
- Q3 net earnings included large non-operating gains: $1,462.7 million in foreign-currency transaction gains, $546.9 million in derivative gains, and $501.0 million in affiliate results. These items are volatile and are not a dependable measure of recurring operating performance.
- Nine-month net earnings also included the $848.9 million after-tax gain on the Poland sale and the $700.4 million pre-tax gain on Telenet’s tower sale. The prior-year comparison included the $10,790.7 million pre-tax U.K. JV transaction gain.
- Nine-month adjusted free cash flow, a company-defined non-GAAP measure, was $678.9 million, down from $877.6 million. Net cash capital expenditures were $929.3 million. The filing notes that adjusted free cash flow does not deduct all mandatory or contractual obligations.
- At September 30, cash and cash equivalents were $1,594.1 million; short-term investments were $2,149.0 million. The company also reported $2,374.8 million of investments under separately managed accounts, of which $2,149.0 million was classified as short-term. Not all subsidiary cash is freely accessible to the parent.
- Total debt and finance lease obligations were $13,219.9 million, including $716.7 million current and $12,503.2 million long-term. Debt before finance leases and related adjustments was $12,857.8 million; weighted-average stated borrowing rate was 4.84%, while the reported rate including specified derivative effects was 3.17%. The company reported covenant compliance for all borrowing groups.
Material changes and management commentary
- Consolidated Q3 revenue was pressured by currency translation and declines in reported fixed-line and mobile revenue; organic increases in B2B, mobile subscription and other revenue partly offset this. Management cited competition in all markets.
- Management said inflation, particularly in labor, programming and energy, is increasing costs and may outpace the company’s ability to raise prices. It characterized the Q3 COVID-19 impact as relatively minimal, while noting that future economic effects remain uncertain.
- Operating cash flow for the first nine months declined $510.5 million year over year. Investing cash flow turned positive, primarily reflecting proceeds from the Poland sale, tower sale and investment transactions. Financing cash use increased, including $1,573.8 million of share repurchases and higher net debt repayments.
- Liberty Global repurchased shares for an aggregate $1,587.3 million during the first nine months. An additional $400 million authorization was approved in July; $114.6 million remained at quarter-end.
- The company expects to refinance or extend debt maturities as they approach and says it believes resources are sufficient for the next 12 months. It cautioned that future refinancing availability and terms are uncertain. Its stated general leverage objective is debt of four to five times consolidated Adjusted EBITDA.
Outlook, risks and contingencies
- No specific revenue, earnings or cash-flow guidance is provided in the filing. The pending Telenet-Fluvius NetCo transaction was expected to close in early 2023, subject to regulatory and shareholder conditions.
- Risks highlighted include inflation and consumer spending, competitive and regulatory pressure, foreign-exchange and interest-rate volatility, programming and energy costs, refinancing and counterparty risks, and potential impairment of goodwill or the VMO2 investment. Telenet’s Belgian wholesale-access regulation may strengthen competitors and affect revenue or cash flows.
- On October 7, 2022, the U.S. Department of Justice sued Liberty Global’s U.S. subsidiary for approximately $284 million in federal taxes and penalties relating to 2018. The company said no amount was accrued, intends to defend the claim, and is pursuing a related tax refund claim of approximately $110 million.
- Other matters include the Proximus challenge to Telenet’s Interkabel acquisition, tax indemnities related to disposed operations, and ordinary-course legal, tax and regulatory contingencies. The filing says outcomes are uncertain; certain potential losses cannot be meaningfully estimated.
Important facts for investors to verify
- Separate underlying operating performance from reported earnings driven by currency, derivatives, affiliate accounting and disposition gains; review segment and organic trends.
- Confirm the sustainability of organic revenue and EBITDA growth, particularly amid competition, inflation and weaker fixed-line trends.
- Assess cash available at the parent level versus cash held within borrowing groups, and the impact of vendor financing, capital commitments and share repurchases on cash generation.
- Review debt maturities, covenant headroom, interest-rate hedges and the company’s ability to refinance on acceptable terms.
- Track the U.S. tax litigation, Belgian regulatory and Interkabel proceedings, and the conditions and timing of the proposed NetCo transaction.