Liberty Global plc — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited results are reported under U.S. GAAP. Liberty Global provides video, broadband, fixed-line and mobile services across 14 countries. Its Liberty Global and LiLAC shares are tracking shares, not interests in separate legal entities.
Financial performance and liquidity
- Revenue: $4.588 billion, up 1.6% reported and 3.0% organically from $4.517 billion. Organic broadband subscription growth was partly offset by lower video and fixed-line telephony revenue.
- Profitability: Operating income was $586.6 million, versus $557.5 million. Net loss was $372.7 million, compared with $521.7 million; loss attributable to Liberty Global shareholders was $369.1 million versus $537.5 million. Q1 2016 loss per share was $0.39 for Liberty Global Shares and $0.88 for LiLAC Shares; Q1 2015 Old Liberty Global Shares loss per share was $0.61. These share classes are not directly comparable.
- Margins: Adjusted OIBDA, a non-GAAP measure, was $2.116 billion, up 0.9% reported and 3.5% organically. Its implied consolidated margin was about 46.1%, versus 46.4% a year earlier. Operating margin was about 12.8%, versus 12.3%.
- Cash flow: Operating cash flow was $1.089 billion, down from $1.374 billion. Investing cash outflow was $1.928 billion, including $1.341 billion for acquisitions; capital expenditures were $637.1 million. Financing provided $782.8 million. Company-defined free cash flow was negative $85.0 million, versus positive $330.0 million.
- Debt and liquidity: Debt and capital lease obligations totaled $49.072 billion, including $3.240 billion current; cash was $980.5 million. Current assets of $3.569 billion were well below current liabilities of $10.169 billion. Management reported leverage of 5.4x gross and 5.3x net debt to annualized Adjusted OIBDA under its stated calculation. Much of the cash was held in subsidiary borrowing groups and may not be freely accessible to the parent.
- Other balance-sheet items: Total assets were $69.852 billion and total equity was $9.578 billion at quarter-end. The company repurchased 7.64 million Class C shares for $286.4 million during the quarter.
Material changes versus Q1 2015
- Reported revenue rose $71.1 million; acquisitions contributed to growth, while foreign currency translation reduced reported revenue. Organic revenue increased 3.0%.
- Net loss narrowed by $149.0 million. Operating income improved, while non-operating results remained highly volatile: derivative instruments produced a $508.7 million loss versus a $618.5 million gain; foreign-currency transaction results were a $339.0 million gain versus a $1.036 billion loss; and investment fair-value changes were a $268.2 million loss versus a $151.4 million gain.
- Operating cash flow declined $285.0 million, and free cash flow swung from positive $330.0 million to negative $85.0 million. The filing cites lower cash generation and working-capital effects, as well as higher cash interest payments.
- Debt and capital leases increased from $46.749 billion at year-end 2015 to $49.072 billion. The BASE acquisition added Belgian revenue from February 12 and was funded partly with new debt.
Outlook, transactions, risks and unusual items
- Management outlook: The company expects significant restructuring charges during the remainder of 2016 as it optimizes its operating model and integrates acquisitions. No quantified full-year revenue or earnings guidance is provided in the supplied filing text.
- Transactions: Telenet acquired Belgian mobile operator BASE for approximately $1.498 billion in February. Liberty Global expected to complete its CWC acquisition in May 2016, subject to court sanction. The proposed 50:50 Dutch joint venture with Vodafone was expected to close around year-end 2016, subject to regulatory approval; Vodafone was to make an approximately €1.0 billion equalization payment, subject to adjustments.
- Operating and market risks: Management cited strong competition, market maturity, subscriber and ARPU pressure, rising programming costs, foreign-exchange and interest-rate exposure, and the risk that costs cannot be passed through to customers. Regulatory network-access obligations in Belgium could strengthen competitors and pressure Telenet revenue and cash flow.
- Debt and liquidity risks: Management said all borrowing groups were covenant-compliant and believed resources were sufficient for the next 12 months, despite negative working capital. It expects to refinance or extend later maturities and cautioned that financing may not be available on favorable terms. The company’s stated target leverage range is generally four to five times Adjusted OIBDA, compared with reported leverage of 5.4x.
- Contingencies: Proximus sought €1.4 billion in damages related to Telenet’s Interkabel acquisition; no amount was accrued because loss was not considered probable. Other disclosed matters include U.K. VAT disputes, a Hungarian VAT assessment of $19.6 million before interest and penalties, Puerto Rico litigation, and regulatory proceedings. The filing states outcomes and potential losses may be uncertain.
- Puerto Rico: The filing highlighted government fiscal stress and the possibility of debt restructuring, which could weaken customer demand and payment capacity. It reported that the government failed to pay $367.0 million of $422.8 million due on May 1, 2016, and noted further obligations due July 1.
- Unusual items: Q1 2016 other income included a $69.8 million cash settlement related to Vivendi litigation. Q1 2015 included $274.5 million of debt modification and extinguishment losses, compared with $4.3 million in Q1 2016. These items and noncash fair-value movements affect period comparisons.
Important facts for investors to verify
- Whether organic revenue and Adjusted OIBDA growth continue, and whether subscriber, ARPU and margin trends improve in pressured markets.
- How much cash is accessible at the parent level, upcoming refinancing needs, and progress toward reducing leverage.
- Whether negative free cash flow persists after acquisition spending and vendor-financing repayments.
- Completion and integration of CWC, the Dutch joint venture’s regulatory approval and terms, and expected benefits and funding needs.
- Developments in the Proximus, VAT, Puerto Rico and other legal or regulatory matters, including any resulting cash payments or operating restrictions.
- Actual restructuring charges, programming-cost trends, and the effects of foreign exchange and derivative fair-value volatility on reported results.