Liberty Global plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The company provides video, broadband, fixed-line and mobile services in Europe. Continuing operations included the U.K. and Ireland, Belgium, Switzerland, Poland and Slovakia, plus a 50% interest in the VodafoneZiggo joint venture. Several businesses are presented as discontinued operations; results below are identified accordingly.
Key financial results
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue, continuing operations | $2,868.0 million | $3,063.5 million; down 6.4% reported and 0.6% organically |
| Adjusted OIBDA, continuing operations | $1,183.3 million | $1,261.7 million; down 6.2% reported and 0.2% organically |
| Operating income | $105.5 million | $117.6 million |
| Loss from continuing operations | $306.9 million | $1,367.2 million loss |
| Net earnings (loss) | $15.7 million | $1,178.6 million loss |
| Continuing-operations operating cash flow | $306.3 million | $670.3 million |
| Capital expenditures, net | $331.3 million | $484.2 million |
| Adjusted free cash flow | $(624.5) million | $(998.9) million |
Discontinued operations contributed $322.6 million of net earnings, compared with $188.6 million in Q1 2018; this contribution more than offset the continuing-operations loss and produced positive consolidated net earnings. Adjusted OIBDA is a company-defined non-GAAP measure.
Revenue declines reflected foreign exchange as well as operating pressure. Organic revenue decreased in the U.K./Ireland, Belgium and Switzerland; Central and Eastern Europe grew. Broadband subscription revenue increased organically by 2.3%, while fixed-line telephony subscription revenue declined 6.4%. B2B revenue increased 2.9% organically.
Balance sheet, debt and liquidity
- At March 31, 2019, cash and cash equivalents were $939.4 million; total assets were $53.4 billion and total equity was $3.85 billion.
- Debt and finance lease obligations had a carrying amount of $30.04 billion, including $3.68 billion classified as current. The weighted-average stated debt interest rate was 4.58%; including specified derivative and other effects, the company reported a 4.33% weighted-average rate.
- Management reported leverage of 5.4x debt and 5.3x net debt to annualized quarterly Adjusted OIBDA, calculated under its stated methodology and including continuing and discontinued operations. All borrowing groups were covenant-compliant at quarter-end.
- Cash held by Liberty Global and unrestricted subsidiaries was $824.5 million; borrowing groups held $114.9 million. Access to subsidiary cash may be limited by debt terms, tax and legal considerations, and other factors.
- Management acknowledged negative working capital but said it believed resources were sufficient to repay or refinance current obligations and fund foreseeable requirements over the next 12 months. It expects to refinance or extend maturities as debt comes due in later years.
Material changes and business developments
- Reported revenue fell $195.5 million year over year, while the organic decline was $17.5 million; foreign exchange was a major contributor to the reported decrease. Adjusted OIBDA declined $78.4 million reported, but only $2.5 million organically.
- Operating cash flow from continuing operations fell $364.0 million. Management cited higher derivative, tax and interest payments, partly offset by higher cash provided by Adjusted OIBDA and related working-capital items.
- Net capital expenditures decreased to $331.3 million from $484.2 million. Total property and equipment additions, including vendor- and lease-financed assets, were $698.6 million, down from $983.6 million.
- Financing cash outflow from continuing operations was $737.5 million, including $1,395.1 million of debt and finance lease repayments/repurchases, $926.6 million of borrowings and $207.2 million of Liberty Global share repurchases.
- Share repurchases totaled $214.1 million for 9.05 million Class C shares; $353.2 million remained authorized at quarter-end.
- On February 27, 2019, Liberty Global agreed to sell UPC Switzerland to Sunrise for a stated enterprise value of $6.3 billion. Expected net cash proceeds were approximately $2.6 billion, subject to adjustments; closing required regulatory and shareholder approvals and was expected before year-end 2019. Certain UPC Holding debt is included in the transaction, and a facility balance of $1.645 billion was expected to be repaid at or before closing.
- The proposed sale of Germany, Romania, Hungary and the Czech Republic to Vodafone remained pending, with closing expected in summer 2019 subject to conditions and regulatory approval. The company estimated proceeds of approximately €10.6 billion ($11.9 billion) using specified December 2017 net-debt and working-capital assumptions; proceeds would be adjusted at closing.
- The sale of UPC DTH closed on May 2, 2019, after quarter-end, for net cash proceeds of €134.2 million ($149.9 million at the transaction date). The sale of UPC Austria had closed in July 2018.
Outlook, risks and unusual items
- No consolidated numerical earnings or revenue guidance is provided in the supplied filing text. Management expects programming and copyright costs to rise in future periods due to content expansion, rate increases and enhanced-video subscriber growth. The company also cited expected U.K. network infrastructure charge increases of £28 million ($36 million) in 2019 versus 2018.
- Competition was affecting revenue, subscriber units and/or ARPU across markets, particularly Switzerland and Belgium. The VodafoneZiggo JV reported revenue of $1,093.9 million and a net loss of $150.3 million, versus $1,196.6 million revenue and a $76.2 million net loss in Q1 2018; Liberty Global warned that an impairment of its investment or JV assets could be significant.
- Belgian regulators imposed wholesale network-access obligations on Telenet, including an interim 17% reduction in monthly wholesale cable resale access prices from August 2018. Telenet challenged the decision; final tariffs were expected by the end of 2019.
- Brexit uncertainty, foreign-exchange and interest-rate movements, regulation, programming costs, refinancing access and competition could adversely affect results, cash flow and liquidity. The company reported $11.9 billion of variable-rate debt; a hypothetical 50-basis-point rate increase would add $59.5 million to annual interest expense and cash outflows before derivative effects.
- Q1 continuing-operations results included $70.9 million of impairment, restructuring and other operating charges, including $37.5 million of restructuring charges and $22.6 million of U.K./Ireland network-asset impairment. Share-based compensation rose to $67.3 million from $42.7 million, principally reflecting higher performance-based awards.
- Contingencies include regulatory, tax and legal matters. Notable items include a disputed U.K. VAT exposure and a Belgian litigation claim of €1.4 billion ($1.6 billion) against Telenet; the filing said no loss was considered probable for the latter and no amount was accrued. The company stated that potential losses for some contingencies cannot be meaningfully estimated.
- The company adopted lease accounting guidance on January 1, 2019, recognizing operating-lease right-of-use assets of $545.1 million and lease liabilities of $558.1 million at adoption; management said the adoption did not significantly affect Q1 operations or cash flows.
Important facts for investors to verify
- Whether the Vodafone and Sunrise transactions receive required approvals, close on anticipated timelines, and deliver expected net proceeds and debt reduction.
- Underlying subscriber, ARPU and organic revenue trends by market, particularly in Belgium and Switzerland, and the effects of wholesale-access regulation and competition.
- Cash generation after vendor/intermediary financing repayments, capital investment and interest; Q1 adjusted free cash flow was negative despite lower capital expenditures.
- Debt maturities, refinancing availability and leverage, including the distinction between subsidiary borrowing-group liquidity and cash available at the corporate level.
- Potential effects of tax, VAT and litigation matters, as well as possible impairment at the VodafoneZiggo JV or of Liberty Global’s investment.