Liberty Global plc — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in U.S. dollars unless stated otherwise. Liberty Global provides video, broadband, fixed-line and mobile services in Europe. Results reflect continuing operations unless noted; Austria was sold in July 2018, while the proposed sale of Germany, Romania, Hungary and the Czech Republic was reported as discontinued operations.
Key financial results
- Revenue: Q3 continuing-operations revenue was $2.96 billion, up 1.3% reported and 1.6% organically year over year. Nine-month revenue was $9.10 billion, up 8.9% reported and 2.4% organically. Currency translation, acquisitions and business disposals affect reported comparisons.
- Operating performance: Q3 operating income was $208.6 million, versus $221.6 million a year earlier. Adjusted OIBDA, a company-defined measure, was $1.29 billion, up 4.3% reported and 4.8% organically; nine-month Adjusted OIBDA was $3.88 billion, up 9.8% reported and 3.3% organically. Q3 segment trends were mixed: U.K./Ireland and Belgium improved organically, while Switzerland declined.
- Profit and taxes: Loss from continuing operations was $396.7 million in Q3 and $1.09 billion for nine months. Liberty Global shareholders reported total net earnings of $974.1 million for Q3 and $700.2 million for nine months, substantially reflecting the $1.10 billion after-tax gain on the UPC Austria disposal. Income tax expense was $281.3 million for Q3 and $898.5 million for nine months, including effects of the U.S. Mandatory Repatriation Tax and other tax items. Continuing-operations loss per share was $0.56 in Q3, compared with $0.70 in Q3 2017.
- Cash flow and investment: Nine-month operating cash flow from continuing operations was $2.73 billion, compared with $2.46 billion in 2017. Continuing-operations investing cash flow was $790.8 million, including $2.06 billion of net proceeds from the Austria sale; financing cash outflow was $5.43 billion. Capital expenditures, net, were $1.14 billion. Adjusted free cash flow, a non-GAAP measure, was negative $962.6 million, versus positive $166.5 million, largely reflecting higher repayments of vendor- and intermediary-financed amounts.
- Debt and liquidity: Total debt and capital lease obligations were $29.73 billion at quarter-end, down from $32.70 billion at December 31, 2017; the carrying amount of debt was $29.07 billion. The weighted average stated borrowing rate was 4.57% (4.30% including specified derivative and other effects). Management reported leverage of 5.1x debt and 4.9x net debt to annualized Q3 Adjusted OIBDA under its stated calculation. Cash and cash equivalents were $949.2 million. Current liabilities exceeded current assets; management nevertheless said it expected adequate resources to meet foreseeable requirements over the next 12 months. Subsidiary facilities had $2.55 billion of unused capacity, subject to terms and conditions.
- Margins and costs: Adjusted OIBDA margins in Q3 were 44.5% in U.K./Ireland, 51.3% in Belgium, 59.1% in Switzerland and 46.8% in Central and Eastern Europe. Nine-month programming and copyright costs were $1.29 billion, up from $1.11 billion.
Material changes and notable items
- Austria was sold on July 31 for $2.06 billion in net cash proceeds. A portion repaid approximately $1.5 billion of debt; the filing also describes proceeds being made available for corporate purposes, including share repurchases.
- The pending Vodafone transaction covers Germany, Romania, Hungary and the Czech Republic. Based on year-end 2017 net debt and working capital, estimated cash proceeds were approximately €10.6 billion ($12.3 billion). Regulatory approval was expected no earlier than mid-2019; closing was not assured. If the agreement terminates because antitrust approval is not obtained, Vodafone agreed to pay €250 million.
- Liberty Global repurchased $1.68 billion of its shares during the first nine months. At September 30, $891 million remained authorized under repurchase programs. A further $500 million authorization was approved in July.
- The company reported an $83.1 million provision and $4.4 million related interest expense after a U.K. court ruled against its appeal concerning VAT treatment of prompt-payment discounts. Liberty Global intended to appeal.
- Nine-month results include substantial, volatile derivative and currency gains: net derivative gains were $529.7 million, compared with losses of $783.5 million in 2017. These fair-value and currency movements are not a reliable recurring earnings source.
Outlook, commentary and risks
- The filing provides no specific company-wide revenue, earnings or cash-flow guidance. Management says competition and macroeconomic and regulatory factors are pressuring revenue, subscribers and average revenue per user, notably in Switzerland and Belgium. Broadband growth and B2B revenue were relative strengths; handset sales lifted mobile non-subscription revenue but typically carry low margins.
- Management seeks subsidiary debt levels generally equivalent to four to five times Adjusted OIBDA. It expects to refinance or extend maturities as needed, but gives no assurance refinancing will be available on favorable terms. Approximately $22.2 billion of debt was not due until 2024 or later; $3.5 billion was classified as current.
- Belgian regulators required Telenet to provide third-party access to its digital television platform and broadband network, with interim wholesale resale prices reduced 17% from August 1, 2018. Telenet challenged the decision; the timing and outcome were uncertain.
- Other risks include intense competition, rising programming costs, foreign-exchange and interest-rate exposure, Brexit uncertainty, tax examinations, regulatory changes and potential impairment of goodwill or the VodafoneZiggo investment. The VodafoneZiggo JV reported a nine-month net loss of $283.1 million; the filing warns that any related impairment could be significant.
- The company estimated a $297.3 million liability for the U.S. Mandatory Repatriation Tax, subject to finalization, and disclosed $788.6 million in unrecognized tax benefits. It also disclosed significant contractual commitments, including $2.06 billion for programming and $2.07 billion for network and connectivity.
Important facts for investors to verify
- Progress, regulatory approvals, final consideration and debt-reduction plans for the proposed Vodafone sale.
- Whether organic revenue and Adjusted OIBDA trends persist, particularly in Switzerland and Belgium, and the impact of Belgian wholesale-access requirements.
- The composition and sustainability of cash generation, including vendor-financing repayments, capital spending and negative adjusted free cash flow.
- Debt maturities, refinancing access, subsidiary restrictions on cash transfers and the basis for the reported leverage ratios.
- Final tax estimates and outcomes of the U.K. VAT appeal, U.S. tax examinations and other disclosed contingencies.