Liberty Global plc — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Liberty Global provides video, broadband, fixed-line, mobile and business communications services in more than 30 countries. Results are not directly comparable with 2016 because of the December 2016 VodafoneZiggo joint venture (JV) transaction, the 2016 CWC and BASE acquisitions, and foreign-exchange movements.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $4.585bn | $5.074bn | $9.015bn | $9.662bn |
| Operating income | $641.9m | $487.8m | $1.211bn | $1.074bn |
| Net earnings (loss) attributable to Liberty Global shareholders | $(674.3)m | $101.4m | $(994.5)m | $(267.7)m |
| Basic and diluted EPS, Liberty Global shares | $(0.75) | $0.23 | $(1.07) | $(0.15) |
| Adjusted OIBDA, consolidated reportable segments | $2.101bn | $2.306bn | $4.060bn | $4.421bn |
Despite lower reported revenue and Adjusted OIBDA, organic revenue grew 1.8% in Q2 and 1.9% in the first half; organic Adjusted OIBDA grew 5.8% and 4.7%, respectively. The filing attributes much of the reported decline to the VodafoneZiggo transaction and currency translation, partly offset by acquisitions. Q2 operating income improved, but net results swung to losses, driven in part by a $514.5m derivative loss, $89.6m of debt modification and extinguishment losses, and $129.7m income tax expense. Derivative and currency marks are volatile and may be non-cash.
Organic growth was supported by broadband and B2B services; residential mobile revenue declined organically. European Division Adjusted OIBDA margin was 48.6% in Q2, versus 47.8% a year earlier; LiLAC Division margin was 40.1%, versus 38.6%. Margins reflect transaction and acquisition mix as well as organic performance.
Cash flow, debt and liquidity
- First-half operating cash flow was $2.711bn, compared with $2.670bn. Cash capital expenditures were $1.193bn, versus $1.276bn; total property and equipment additions, including vendor and lease financing, were $2.398bn.
- Adjusted free cash flow, a non-GAAP measure defined by the company, was $48.5m, down from $396.1m. The measure deducts substantial vendor/intermediary financing and lease principal payments and is not cash available for discretionary uses.
- Investing cash flow was positive $711.8m, including $1.569bn of distributions from affiliates and an $845.3m VodafoneZiggo-related equalization payment. Financing cash outflow was $3.442bn, including $2.150bn spent repurchasing Liberty Global shares and $41.1m repurchasing LiLAC shares.
- At June 30, cash and cash equivalents were $1.690bn; restricted cash was $728.6m. Total debt and capital lease obligations were $46.695bn, including $3.751bn current and $42.945bn long-term on the balance sheet. The company reported leverage of 5.1x debt and 4.9x net debt to annualized quarterly Adjusted OIBDA.
- Management reported all borrowing groups in covenant compliance and said it believed resources were sufficient to repay or refinance current maturities and fund foreseeable needs over the next 12 months. It also disclosed negative working capital and noted that subsidiary cash can be restricted or difficult to upstream. Corporate-level available liquidity was described as $1.050bn, subject to tax and legal considerations.
- Management’s 2017 property and equipment additions expectations were 29%–31% of revenue for the Liberty Global Group and 19%–21% for LiLAC, the latter reduced from its prior 21%–23% expectation. These are estimates, not earnings guidance.
Material developments, outlook and risks
- Liberty Global owned a 50% noncontrolling interest in VodafoneZiggo after deconsolidating the Netherlands business. The JV reported first-half revenue of $2.180bn and net loss of $48.7m; Liberty Global recognized its share through affiliate results. The filing flags intense competition, particularly in the JV’s mobile business, and potential impairment risk.
- Telenet acquired SFR BeLux for $453.2m in June. The planned Multimedia Polska acquisition, with stated enterprise value of $809.6m, remained subject to regulatory approval and was expected to close in late 2017 or early 2018.
- Debt refinancing transactions extended maturities and reduced certain borrowing rates, but generated $134.9m of first-half debt modification and extinguishment losses. Management generally targets debt of four to five times consolidated Adjusted OIBDA; actual leverage was above that range at 5.1x.
- Risks include intense competition, foreign-exchange and interest-rate volatility, Brexit-related uncertainty, regulatory access requirements in Belgium, and economic and political weakness in certain markets, including Puerto Rico. UK and Irish network infrastructure charge increases were estimated at about $39m in 2017, potentially rising to as much as $130m annually by 2021.
- Contingencies include a Proximus claim against Telenet seeking €1.4bn in damages, which Liberty Global said it would defend and for which it recorded no accrual because loss was not considered probable. Other tax and VAT disputes remain unresolved. The filing also reports a £100m CWSF pension-fund drawdown contributed after quarter-end; based on a July 2017 valuation, management expected no material CWSF funding contributions through April 2019.
- The company planned to adopt the new revenue recognition standard in 2018 and expected a relatively minor timing effect on revenue, but initially expected significant deferral of certain contract acquisition and fulfillment costs. No consolidated revenue or earnings guidance is provided in the supplied filing text.
Investor verification priorities
- Reconcile reported trends with organic growth and the effects of the VodafoneZiggo transaction, acquisitions and currency changes.
- Review debt maturities, refinancing terms, covenant headroom, accessible subsidiary liquidity and the 4.9x net leverage measure.
- Assess the sustainability of cash generation and capital needs, including the gap between property additions and cash capital expenditures and the low first-half adjusted free cash flow.
- Monitor competitive and regulatory developments in the Netherlands, Belgium, the UK and LiLAC markets, plus the status of the Multimedia acquisition and potential impairments.
- Track the Proximus litigation, tax/VAT matters, CWSF funding position and management’s assumptions behind capex and liquidity expectations.