Liberty Global plc — Q2 2019 Form 10-Q
Business context and reporting period. The unaudited quarter and six-month period ended June 30, 2019. Continuing operations provided broadband, video, fixed-line and mobile services in the U.K., Ireland, Belgium, Switzerland, Poland and Slovakia; Liberty Global also held a 50% interest in the VodafoneZiggo joint venture. Germany, Romania, Hungary, the Czech Republic, Austria and UPC DTH were presented as discontinued operations for applicable periods.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 |
|---|---|---|
| Revenue, continuing operations | $2.850 billion, down 5.5% reported and 1.3% organic year over year | $5.718 billion, down 5.9% reported and 0.9% organic |
| Adjusted OIBDA, continuing operations | $1.191 billion, down 8.7% reported and 4.0% organic | $2.374 billion, down 7.5% reported and 2.1% organic |
| Operating income | $148.7 million, versus $264.1 million | $254.2 million, versus $381.7 million |
| Continuing-operations earnings attributable to Liberty Global shareholders | Loss of $369.1 million; diluted continuing-operations EPS was $(0.50) | Loss of $684.7 million |
| Net earnings attributable to Liberty Global shareholders, including discontinued operations | $53.0 million, versus $912.6 million | $60.0 million, versus a loss of $273.9 million |
| Operating cash flow, continuing operations | Quarterly amount not provided in the presented cash-flow statement | $1.629 billion, versus $2.128 billion |
| Capital expenditures, net | Quarterly amount not provided in the presented cash-flow statement | $632.9 million, versus $794.8 million |
| Adjusted free cash flow, continuing operations | Quarterly amount not provided | Negative $72.5 million, versus negative $1.132 billion |
Q2 consolidated Adjusted OIBDA margin was approximately 41.8%, compared with 43.2% a year earlier; this is calculated from reported Adjusted OIBDA and revenue. Segment margins also fell year over year: U.K./Ireland 42.8% versus 44.0%, Belgium 49.0% versus 50.9%, and Switzerland 53.9% versus 56.9%.
At June 30, cash and cash equivalents were $1.269 billion, versus $1.481 billion at year-end 2018. Total assets were $53.987 billion and total liabilities $50.316 billion. Continuing-operations debt and finance lease obligations were $29.916 billion, including $3.681 billion current; the filing separately reports substantial debt within discontinued operations. Management’s leverage ratios, which include continuing and discontinued operations under its stated calculation, were 5.4x gross debt and 5.2x net debt to annualized Q2 Adjusted OIBDA. Borrowing groups were covenant-compliant. Management acknowledged negative working capital but said it expected sufficient resources to meet foreseeable needs over the next 12 months.
Material changes and drivers
- Reported revenue declines were substantially affected by foreign exchange; organic revenue also declined. Residential cable weakness, especially fixed-line telephony and non-subscription revenue, and lower B2B non-subscription revenue were partly offset by broadband growth and higher B2B subscription revenue.
- Organic Adjusted OIBDA fell 4.0% in Q2. Management cited revenue pressure, higher programming costs and U.K. network infrastructure charges, partly offset by lower customer-service and other costs.
- Reported earnings were volatile because of non-operating fair-value and currency movements. Q2 2018 included $675.5 million of derivative gains, compared with $152.9 million in Q2 2019; Q2 2019 also included $138.7 million of losses on investment and debt fair values and $48.3 million of debt-modification and extinguishment losses.
- Six-month continuing operating cash flow decreased by $499.6 million year over year, which management attributed mainly to lower affiliate dividends and derivative receipts, higher tax and interest payments, and foreign-exchange effects. Lower capex and debt repayments helped reduce cash outflows.
Outlook, transactions and risks
- No specific consolidated revenue, earnings or cash-flow guidance is provided in the filing. Management said programming and copyright costs were expected to rise, and it generally targeted subsidiary debt of four to five times consolidated Adjusted OIBDA. It cautioned that competition, regulation, foreign exchange and financing conditions could affect results and liquidity.
- On July 31, 2019, after quarter-end, Liberty Global completed the sale of its Germany, Romania, Hungary and Czech Republic operations, receiving net cash proceeds of approximately $11.3 billion. In August, it used part of the proceeds to repay $1.645 billion of UPC Holding term-loan principal. UPC DTH was sold in May for net proceeds of $145.8 million; the company recognized a $106.6 million after-tax disposal gain.
- The proposed sale of UPC Switzerland to Sunrise had an announced enterprise value of $6.3 billion and expected net cash proceeds of $2.6 billion, subject to approvals and adjustments. The filing expected regulatory approval before year-end 2019; completion was not assured.
- On August 7, the company announced its intention to launch modified Dutch auction tender offers of up to $2.5 billion in aggregate, funded from existing cash. The company cautioned that it might not complete the offers.
- Belgian regulators proposed wholesale access tariffs estimated to be 25% below interim prices, with a final decision anticipated in Q4 2019 and implementation in early 2020. Telenet opposed the proposal and challenged the regulatory decision; lower access prices could intensify competition and pressure revenue and cash flow.
- Other material risks include competitive pressure across markets, Brexit uncertainty, potential impairment of goodwill or the VodafoneZiggo investment, and legal and tax contingencies. The filing identifies a potential maximum £60 million exposure in a Virgin Media VAT matter for which no amount was accrued because loss was not considered probable. A Belgian competitor’s appeal seeks to revive a claim for €1.4 billion in damages; the company reported no accrual and said it did not expect a material impact.
Important facts for investors to verify
- Whether continuing-operations organic revenue and Adjusted OIBDA trends improve, particularly in Belgium and Switzerland, and how reported results are affected by currency movements.
- Completion, final proceeds and use of proceeds from the UPC Switzerland sale, and the effects of the completed Vodafone Disposal Group sale on debt, leverage and ongoing service obligations.
- Liquidity after debt repayments and any tender offers, including the timing and availability of cash held outside borrowing groups and subsidiary restrictions.
- The final Belgian wholesale access tariffs, the status and potential outcomes of significant litigation and tax matters, and any resulting charges or cash payments.
- Debt maturities, refinancing access, interest-rate exposure and the distinction between cash-flow measures and Adjusted OIBDA, a non-GAAP performance measure.