Liberty Global plc — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited consolidated results; amounts below are U.S. dollars unless stated otherwise. Liberty Global provides video, broadband, fixed-line telephony and mobile services across 14 countries. Comparisons are significantly affected by the June 2013 Virgin Media acquisition.
Financial and operating performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $4.602bn | $3.058bn | $9.136bn | $5.730bn |
| Operating income | $669.5m | $445.1m | $1.251bn | $973.3m |
| Loss from continuing operations | $234.0m | Earnings $12.9m | $654.0m | Earnings $33.0m |
| Net loss attributable to Liberty Global shareholders | $249.9m | $11.6m | $328.7m | $12.6m |
| Segment operating cash flow | $2.145bn | $1.440bn | $4.272bn | $2.700bn |
| Net cash provided by operating activities, continuing operations | Not stated separately | Not stated separately | $2.917bn | $1.349bn |
| Free cash flow, company-defined | Not stated | Not stated | $1.040bn | $224.9m |
Q2 revenue rose 50.5% reported, but estimated acquisition- and currency-adjusted growth was 4.3%; excluding Virgin Media’s organic growth, it was 3.2%. Six-month reported revenue increased 59.4%, while acquisition- and currency-adjusted growth was 4.4% (3.2% excluding Virgin Media’s organic growth). Q2 segment operating cash flow increased 48.9% reported and 8.1% organically; excluding Virgin Media, organic growth was 4.4%. Segment operating cash flow is a non-GAAP measure.
Q2 segment operating cash flow margin was approximately 46.6%, versus 47.1% a year earlier, calculated from reported segment operating cash flow and revenue. Broadband subscription revenue was a growth driver; fixed-line telephony subscription revenue and other revenue declined organically. The company reported 48.9m revenue-generating units and 4.3m mobile subscribers at June 30, and added 238,800 RGU organically in Q2.
At June 30, cash was $1.110bn, down from $2.702bn at year-end. Total assets were $65.529bn and total liabilities $54.742bn. Debt and capital lease obligations totaled $42.560bn, including $40.739bn of debt; the weighted average stated debt rate was 5.59%, and management reported an effective rate of 6.6% after specified adjustments. Debt to annualized Q2 operating cash flow was 4.9x and net debt to that measure was 4.8x. Current liabilities of $9.260bn exceeded current assets of $3.957bn. Management cited adequate resources for the next 12 months, while noting negative working capital and the need to refinance or extend maturities in later years.
Six-month capital expenditures were $1.402bn, versus $987.0m; company-defined free cash flow rose to $1.040bn from $224.9m. Financing activities used $4.061bn, and cash fell by $1.592bn overall. The filing reports $3.595bn of unused borrowing capacity across facilities, subject to covenant, subsidiary distribution and other restrictions. Only $577.2m of cash was held by Liberty Global and unrestricted subsidiaries; $533.0m was held within borrowing groups.
Material changes and unusual items
- Virgin Media contributed substantially to year-over-year reported growth; it was included only from June 7 in the 2013 reported comparison. Organic comparisons and pro forma measures therefore matter.
- The January 2014 Chellomedia sale generated $985.2m net cash proceeds and a $332.7m after-tax disposal gain in the first half. The gain supported reported net results, although the company still recorded a six-month net loss.
- Derivative losses were $328.6m in Q2 and $705.2m in the first half, compared with near-zero Q2 losses and first-half gains of $192.1m in 2013. Interest expense was $641.8m in Q2 and $1.295bn in the first half. These items, alongside debt extinguishment losses, contributed to continuing-operation losses despite higher operating income.
- Debt refinancing activity included new Virgin Media notes and facilities, Telenet refinancing, and repayment of certain UPC borrowings. Six-month debt modification and extinguishment losses were $73.9m. Consolidated debt and lease obligations declined to $42.560bn from $44.704bn at year-end.
- Telenet discontinued its digital terrestrial television service and recorded an $86.1m restructuring charge for remaining capacity-contract payments. Total first-half restructuring charges were $123.7m.
- The company repurchased shares for $885.5m in the first half; $2.641bn remained authorized. It also issued Class C shares in acquiring the remaining 20% noncontrolling interests in VTR GlobalCom and VTR Wireless.
Outlook, commentary and risks
The filing provides no quantified consolidated revenue or earnings guidance. Management described continued competition and market maturation, with pressure on subscriber counts and average revenue per user in certain markets. It highlighted organic revenue declines in the Netherlands and warned that its operating cash flow margin there could be difficult to maintain. Virgin Media expected a U.K. VAT legislative change to reduce revenue and operating income by approximately £28m–£30m from May 1 through year-end 2014.
The Ziggo offer, launched July 2, remained subject to tender, competition clearance and other closing conditions; the European Commission had opened an in-depth review expected to conclude in the second half of 2014. On July 17, Liberty Global acquired a 6.4% ITV stake for £480.7m ($822.1m), mostly financed through a share-secured loan and hedging arrangement.
Key risks include high leverage, refinancing and interest-rate exposure, foreign-exchange and derivative volatility, restricted access to subsidiary cash, competitive and regulatory pressures, programming costs, and acquisition execution. Notable contingencies include Belgian proceedings concerning Telenet’s Interkabel acquisition; German challenges to the Unitymedia KabelBW acquisition approval; the U.K. Virgin Media VAT dispute, with estimated maximum exposure of £38.3m and no accrual because loss was not considered probable; and other litigation and regulatory matters. The filing states that the amount or outcome of certain contingencies cannot be reasonably estimated. Management said disclosure controls were effective and reported no material change in internal controls during the quarter.
Important facts for investors to verify
- Separate organic growth from acquisition and foreign-exchange effects, particularly the Virgin Media contribution.
- Assess recurring operating performance apart from derivative fair-value movements, debt refinancing charges and the Chellomedia disposal gain.
- Review cash availability at the parent level, borrowing-group restrictions, near-term maturities and the company-defined free cash flow calculation.
- Track Ziggo offer approvals and financing needs, as well as the subsequent ITV investment and related secured borrowing.
- Monitor competition, regulatory decisions and litigation outcomes, including Telenet access obligations, German acquisition proceedings and the Virgin Media VAT case.