Liberty Global plc — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited U.S. GAAP results. Continuing operations primarily cover the U.K. and Ireland, Belgium, Switzerland, Poland and Slovakia; Liberty Global also holds a 50% noncontrolling interest in the VodafoneZiggo joint venture in the Netherlands. Businesses sold in 2019 are reported as discontinued operations in the prior-year comparison.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $2,875.8 million | $2,868.0 million |
| Adjusted OIBDA from continuing operations | $1,150.3 million | $1,183.3 million |
| Operating income | $280.6 million | $105.5 million |
| Earnings (loss) from continuing operations | $1,017.7 million | $(306.9) million |
| Net earnings attributable to Liberty Global shareholders | $949.8 million | $7.0 million |
| Cash provided by continuing operating activities | $449.8 million | $306.3 million |
| Adjusted free cash flow | $(317.0) million | $(624.5) million |
| Capital expenditures, net | $347.8 million | $331.3 million |
| Cash and cash equivalents at period end | $5,440.5 million | $8,142.4 million at December 31, 2019 |
| Debt and finance lease obligations | $27,398.5 million | $28,182.5 million at December 31, 2019 |
Revenue was nearly flat year over year; on an organic basis, excluding foreign-exchange effects and acquisitions, it declined 0.4%. Adjusted OIBDA fell 2.8% reported and 4.0% organically. The implied consolidated Adjusted OIBDA margin was about 40.0%, versus 41.3% in the comparable quarter. Operating income was about 9.8% of revenue.
Q1 2020 earnings include substantial non-cash and market-sensitive items: $1,237.3 million of derivative gains and $391.7 million of foreign-currency transaction gains, partly offset by $529.8 million of fair-value losses on investments and debt. These items drove much of the swing in reported earnings and are not presented by management as a dependable source of recurring income. The Q1 2019 comparison also included $322.6 million of earnings from discontinued operations; reported net earnings therefore are not directly comparable.
Liquidity, debt and cash flow
- At March 31, 2020, cash was $5.44 billion and short-term investments were $1.64 billion. The company reported $1.974 billion of investments held in separately managed accounts; access to subsidiary cash may be subject to tax, legal and financing restrictions.
- Total debt before financing costs and discounts was $26.89 billion; debt and finance leases together were $27.40 billion. The company reported $3.94 billion as current and $23.46 billion as long-term on the balance sheet.
- Management reported LTM consolidated debt to Adjusted OIBDA of 5.2x and net debt to Adjusted OIBDA of 3.7x. All borrowing groups were in compliance with debt covenants at quarter-end, and management said it expected sufficient resources to meet foreseeable requirements over the next 12 months.
- About $19.3 billion of consolidated debt was not due until 2026 or later. Debt maturities include $3.61 billion of vendor financing, a significant portion of which is classified as current.
- Operating cash flow increased to $449.8 million, but adjusted free cash flow remained negative at $317.0 million. Cash used in investing activities was $2.35 billion, largely reflecting purchases and sales of investments; cash used in financing activities was $783.2 million.
- Cash and cash equivalents declined by $2.70 billion during the quarter. The company also repurchased $224.4 million of its shares; $842.7 million remained authorized under the program at March 31.
Material changes and operating performance
- Revenue growth in Belgium and higher revenue in Central and Corporate were offset by weakness in U.K./Ireland and lower organic revenue in Switzerland. Reported revenue benefited from a $29.1 million acquisition impact and was reduced by foreign exchange.
- Residential cable subscription revenue declined organically 0.9%, including lower fixed-line telephony revenue. Residential mobile subscription revenue increased 5.6% organically; B2B subscription revenue rose 12.4%, while B2B non-subscription revenue declined 4.0%.
- Adjusted OIBDA declined in U.K./Ireland and Switzerland; Belgium and Central and Eastern Europe were comparatively resilient. Segment margins fell in U.K./Ireland, Belgium and particularly Switzerland.
- Programming and other direct costs rose 6.8% reported (5.9% organically), partly because $14.9 million of sports-rights costs were accelerated into Q1 after sports cancellations related to COVID-19. SG&A declined 5.0%, and depreciation and amortization fell to $783.5 million from $939.6 million.
- Operating cash flow improved year over year, with management citing lower tax and interest payments, partly offset by lower cash generation from Adjusted OIBDA and working capital and higher derivative-related cash payments.
Outlook, risks and unusual items
- COVID-19: Management said the company had not experienced an overall material adverse impact through Q1 and residential net customer losses were generally in line with expectations. Demand and network traffic increased as customers worked and stayed at home. However, prolonged economic disruption could impair collections, subscriber trends, supply chains, investment plans, liquidity and results. Retail closures, customer relief measures and the pausing of some sports charges were among the company’s responses. No quantified earnings guidance was provided.
- Capital and refinancing: Management cited available cash, investments and undrawn revolving facilities, with no maintenance-based leverage covenants generally applicable to its credit facilities. It cautioned that future refinancing access and terms are uncertain, particularly under adverse market conditions.
- Regulation and litigation: Belgian regulators’ wholesale-access rules and prospective tariffs could pressure Telenet’s revenue and cash flows. In April 2020, a U.K. tribunal ruled against Virgin Media in a VAT prompt-payment-discount dispute; Virgin Media was seeking further appeal. A separate payment-handling VAT dispute also remained under appeal. Other disclosed matters include Proximus litigation in Belgium and asserted claims related to the sale of UPC Austria; no loss was accrued for these matters where management did not consider loss probable.
- Other exposures: The filing identifies potential goodwill or affiliate-investment impairment, competitive pressures, foreign-exchange and interest-rate volatility, programming costs, and significant contractual commitments. A database with information on approximately 900,000 individuals was accessed without permission; the company said it contained no passwords or financial details and did not expect a material financial impact.
- Subsequent financing actions: After quarter-end, Telenet and UPC Holding replaced certain facilities with revolving facilities maturing in 2026. These actions occurred after March 31 and are not reflected in quarter-end balances.
Important facts for investors to verify
- How much of Q1 earnings and equity value changes reflect non-cash derivative, currency and investment revaluations rather than recurring operations.
- Whether negative adjusted free cash flow, vendor-financing repayments and the near-term debt maturity schedule remain manageable alongside planned capital investment and share repurchases.
- How COVID-19 affects customer collections, churn, B2B demand, equipment availability, sports-related revenues and costs, and network-extension timing in subsequent quarters.
- The final impact of Belgian wholesale-access tariffs, U.K. VAT litigation and other contingent tax, regulatory and sale-indemnity exposures.
- Whether the company’s leverage, covenant headroom and access to cash held outside the borrowing groups remain consistent with management’s liquidity assessment.