Business context and reporting period
Liberty Global plc filed this unaudited Form 10-Q for the three months ended March 31, 2015. It provides video, broadband, fixed-line and mobile services across 14 countries, principally in Europe, as well as in Chile and Puerto Rico. Results include Ziggo, acquired in November 2014; reported year-over-year comparisons are also affected by foreign exchange movements and other acquisitions and disposals.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $4,516.9 million | $4,533.7 million |
| Operating income | $557.5 million | $581.7 million |
| Loss from continuing operations | $521.7 million | $420.0 million |
| Net loss attributable to Liberty Global shareholders | $537.5 million; $0.61 loss per share | $78.8 million; $0.10 loss per share |
| Operating cash flow, company-defined | $2,097.3 million | $2,127.5 million |
| Cash from operating activities | $1,373.9 million | $1,320.4 million |
| Capital expenditures | $661.2 million | $735.0 million |
| Free cash flow, company-defined | $330.0 million | $336.3 million |
- Reported revenue decreased 0.4%; excluding acquisitions, the U.K. non-cable disposal and currency effects, revenue increased 3.0% organically. Organic subscription revenue rose 3.6%, led by broadband internet (+10.1%); fixed-line telephony subscription revenue declined 1.2% organically.
- Reported operating cash flow decreased 1.4%, while organic operating cash flow increased 1.0%. Operating cash flow divided by revenue was approximately 46.4%, versus 47.0% in Q1 2014.
- Interest expense was $615.9 million, down from $653.5 million as reported, but up 7.6% excluding currency effects. Depreciation and amortization was $1,451.4 million, up $74.3 million.
- Non-operating results included a $1,035.6 million foreign-currency transaction loss, a $274.5 million loss on debt modifications and extinguishments, and a $618.5 million derivative gain. These volatile items contributed to the larger continuing-operations loss.
- Cash and cash equivalents were $630.4 million at March 31, 2015, down from $1,158.5 million at year-end. Total debt and capital lease obligations were $44.1 billion; long-term debt and lease obligations were $42.8 billion. The weighted average stated debt interest rate was 4.94%; including specified derivative and other effects, the company reported 5.4%.
- Debt-to-annualized quarterly operating cash flow was 4.9x; net debt to that measure was 4.8x. The company reported negative working capital, but said it expected to meet or refinance current maturities and fund foreseeable needs over the next 12 months. All borrowing groups were in covenant compliance.
- Operating cash flow and free cash flow are company-defined non-GAAP measures; free cash flow was nearly flat year over year. Q1 cash flows included $486.5 million of net cash paid on derivatives and $425.9 million of share repurchases.
Material changes versus the prior comparable period
- Reported revenue was nearly unchanged, but currency translation materially obscured organic growth. The Netherlands’ reported revenue more than doubled because Q1 2014 did not include Ziggo; on a pro forma basis, Netherlands revenue declined organically 1.9%.
- Reported net loss attributable to shareholders widened substantially. Q1 2014 included a $339.9 million after-tax gain on the Chellomedia disposal; Q1 2015 had no discontinued-operation earnings or disposal gain. Q1 2015 also had larger currency transaction losses and debt-refinancing charges.
- Cash from operating activities increased, while company-defined free cash flow declined modestly. Capital expenditures fell, but principal payments on vendor- and intermediary-financed amounts increased to $381.7 million from $220.8 million.
- Goodwill fell to $26.9 billion from $29.0 billion, largely reflecting $2.2 billion of foreign-currency translation reductions. Total assets declined to $67.7 billion from $72.8 billion; shareholders’ equity declined to $12.4 billion from $14.1 billion.
- Organic RGU additions were 68,400, compared with 345,100 a year earlier. The company reported 170,100 fewer basic video RGUs, partly offset by broadband additions of 153,900 and fixed-line telephony additions of 83,200.
Outlook, management commentary, risks and unusual items
- No quantified company-wide revenue, profit or cash-flow guidance is provided in the supplied filing text. Management said it expected additional restructuring charges during 2015 related to integrating Ziggo with UPC Nederland and the broader European operations.
- Management targets subsidiary debt generally at four to five times consolidated operating cash flow and reported leverage of 4.9x at quarter-end. It expects to refinance or extend maturities as debt comes due in later years; access to funding and covenant capacity remain important risks.
- Management cited intense competition, market maturity, organic declines in some markets and pressure on ARPU. Broadband growth was a strength, while basic video losses and Netherlands competition weighed on subscriber trends and margins. Programming and copyright costs rose 11.3% organically in the European Operations Division; management expects these costs to remain significant and face upward pressure.
- Foreign-exchange movements were material to reported results, including the large transaction loss and translation reductions in goodwill and equity. The company uses derivatives to manage currency and interest-rate exposures; derivative fair values and gains or losses may be volatile. It reported that 98% of debt was effectively fixed-rate after considering derivatives and specified caps and collars.
- Debt refinancing in Q1 generated $274.5 million of reported extinguishment and modification losses, primarily from redemption premiums and write-offs of financing costs. Refinancings included new Virgin Media and Unitymedia notes and repayment or redemption of higher-coupon debt.
- Subsequent events: Telenet agreed to acquire BASE for €1.324 billion, expected to close by March 2016 subject to approvals; a €100 million termination fee may apply if competition authorities do not approve. Liberty Puerto Rico’s Choice acquisition, valued at approximately $272.5 million, was expected to close in Q2 2015 subject to approvals. Additional Virgin Media and UPC refinancing transactions also occurred after quarter-end.
- Material contingencies include Belgian network-access regulation and litigation, U.K. VAT disputes, tax audits, and other legal, tax and regulatory matters. Potential U.K. VAT exposures of up to £42.2 million and approximately £65 million were not accrued because loss was not considered probable. Certain outcomes and potential losses cannot be reasonably estimated from the filing.
- Contractual commitments totaled $51.3 billion, including debt and capital leases; projected interest payments were $18.0 billion. The company cautioned that programming commitments shown exclude future inflation and other variable increases and may understate expected payments.
Important facts for investors to verify
- How much of reported operating and free cash flow reflects sustainable organic performance, considering acquisition effects, currency movements, vendor financing and the company’s non-GAAP definitions?
- Whether operating performance and liquidity can support approximately 4.9x leverage, current maturities, refinancing needs and substantial committed interest and programming payments.
- Whether competitive, regulatory and subscriber trends—especially basic video losses, Netherlands performance, Belgian access obligations and German carriage agreements—affect future revenue, ARPU and margins.
- The timing, financing, approval conditions and integration risks for the BASE and Choice acquisitions, and the effect of subsequent refinancings on debt costs and maturities.
- Potential cash and earnings effects of foreign-exchange volatility, derivative settlements, tax audits, VAT disputes and other legal or regulatory contingencies.