Liberty Global plc — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Liberty Global provides video, broadband, fixed-line telephony and mobile services across 14 countries. The July 1, 2015 LiLAC transaction created Liberty Global and LiLAC tracking shares; these are shares of the same parent company, not interests in separate legal entities. Results include significant acquisition and foreign-exchange effects.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $4.597B | $4.497B | $13.681B | $13.633B |
| Adjusted OIBDA | $2.192B | $2.111B | $6.474B | $6.383B |
| Operating income | $546M | $704M | $1.728B | $1.955B |
| Income (loss) from continuing operations | $141M | $176M | $(791)M | $(478)M |
| Net income (loss) attributable to Liberty Global shareholders | $133M | $157M | $(869)M | $(172)M |
- Reported revenue rose 2.2% in Q3 and 0.3% for the nine months. Excluding acquisitions, dispositions and foreign exchange, management reported organic growth of 4.0% and 3.5%, respectively.
- Adjusted OIBDA, a company-defined non-GAAP measure, increased 3.9% in Q3 and 1.4% for the nine months. Total segment Adjusted OIBDA margins were approximately 47.7% in Q3 versus 46.9% and 47.3% for the nine months versus 46.8%.
- Broadband internet subscription revenue was a growth driver: organic growth was 9.8% in Q3 and 9.9% year to date. Video subscriber losses continued; organic RGU additions were 319,600 in Q3 versus 344,200 in the prior-year quarter.
- Operating income fell despite higher revenue, reflecting higher depreciation and amortization and Q3 impairment, restructuring and other operating items. Q3 share-based compensation was $125M, including $63.5M of incremental expense recognized following LiLAC-related award modifications.
- Non-operating results were volatile. Q3 included $742M of derivative gains, $216M of foreign-currency transaction losses and $276M of investment fair-value losses. For the nine months, foreign-currency transaction losses were $911M and debt modification and extinguishment losses were $383M.
- Nine-month operating cash flow was $4.159B versus $4.070B. Investing cash outflow was $2.863B, including $1.852B of cash capital expenditures; financing cash outflow was $1.351B. Company-defined free cash flow was $1.693B versus $1.363B.
- Property and equipment additions, including vendor-financed and leased assets, were $3.006B for the nine months. Cash capital expenditures alone therefore do not reflect total additions.
- At September 30, cash was $1.111B; total assets were $69.553B and total liabilities $57.912B. Current assets of $3.468B were below current liabilities of $8.292B.
- Third-party debt was $45.669B and capital lease obligations $1.387B, or approximately $47.1B combined. Management reported debt and net debt leverage of 5.0x and 4.9x annualized quarterly Adjusted OIBDA, respectively. The weighted-average interest rate on debt, including specified derivative effects, was 5.2%.
- Management identified $372M of cash at Liberty Global and unrestricted subsidiaries as corporate-level available liquidity, subject to tax and legal considerations; $739M was held in borrowing groups, where access may be restricted. Debt facilities showed $4.016B of unused capacity, subject to covenants and other limitations.
Material changes and notable transactions
- The November 2014 Ziggo acquisition materially affects year-over-year comparisons in the Netherlands. Q3 Netherlands revenue declined 3.0% organically on a pro forma basis; the reported increase reflects Ziggo’s inclusion in 2015 results.
- Choice Cable TV was acquired in Puerto Rico in June 2015; it contributed $30M of revenue in the nine-month period. Liberty Global owns 60% of the combined business with Searchlight.
- During the first nine months, Liberty Global repurchased shares for an aggregate $1.450B; $2.491B remained authorized at quarter end.
- Debt refinancing activity generated $383M of nine-month losses on debt modification and extinguishment, mainly from redemption premiums and write-offs of financing costs and discounts.
- Foreign currency translation and transaction movements were substantial. Nine-month foreign-currency translation adjustments reduced other comprehensive income by $277M.
Outlook, risks and contingencies
- No specific revenue or Adjusted OIBDA numerical guidance is provided. Management’s Liberty 3.0 program targets improved organic growth over several years through mobile, B2B, network expansion and cost efficiencies; results are uncertain and benefits are expected over time.
- Management expected 2015 consolidated property and equipment additions to equal 21%–23% of revenue. Virgin Media’s U.K. network extension could connect up to an estimated four million additional homes and businesses from 2015 through 2020; expansion in other markets could increase capital needs.
- Management cited strong competition, market maturity and pressure on subscriber and revenue trends, particularly in the Netherlands and Switzerland/Austria. Programming costs are rising; Virgin Media’s new programming contract carried meaningfully higher rates, with a September rate increase intended to offset a substantial portion.
- Liquidity depends on subsidiary cash generation and access to borrowing-group resources. Management said it expected to meet foreseeable needs over the next 12 months despite negative working capital, but future refinancing and access to credit are not assured. All borrowing groups were reported covenant-compliant at quarter end.
- Telenet’s proposed €1.324B BASE acquisition remained subject to regulatory approval, was expected to close by March 2016, and could trigger a €100M termination fee if competition authorities did not approve it.
- Material exposures include Belgian network-access regulation and litigation, U.K. VAT disputes (estimated maximum exposures of $66.9M and potentially up to $98M before penalties or interest), a Hungarian VAT assessment of $21M plus potentially significant interest and penalties, and Puerto Rico litigation. The filing states that these exposures were not accrued where loss was not considered probable, or that outcomes could not be reasonably estimated.
- Puerto Rico’s fiscal stress, including a reported missed $58M government bond payment, could affect customer demand and payment capacity. Other risks include currency and interest-rate volatility, counterparty credit risk, programming commitments, and possible goodwill or asset impairments.
Important facts for investors to verify
- Assess underlying performance using acquisition- and currency-adjusted results, especially the Netherlands comparison, and review subscriber trends alongside revenue growth.
- Confirm the location and practical availability of cash and facility capacity, subsidiary restrictions, debt maturities and refinancing needs.
- Review the assumptions behind the 21%–23% capital-additions outlook, vendor financing, and the investment required for U.K. and potential other-market network extensions.
- Track BASE approval, financing and termination-fee exposure, and integration progress for Ziggo and Choice.
- Monitor the listed regulatory, tax and litigation matters, programming-cost increases, and fair-value impacts from derivatives and investments.
- Consider the tracking-share structure: Liberty Global and LiLAC shares do not represent ownership of separate legal entities, and holders remain exposed to the parent’s liabilities and risks.