Liberty Global plc — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in U.S. dollars unless noted. Liberty Global provides video, broadband, fixed-line and mobile communications services in Europe. Continuing operations include the U.K. and Ireland, Belgium, Switzerland, Poland and Slovakia; the Netherlands business is a 50%-owned joint venture.
Financial results and liquidity
- Revenue: Q3 continuing-operations revenue was $2.84 billion, down 3.0% reported and 0.3% organically year over year. Nine-month revenue was $8.56 billion, down 5.0% reported and 0.6% organically.
- Operating performance: Q3 operating income was $208.8 million, versus $205.2 million a year earlier. Adjusted OIBDA, a non-GAAP measure, was $1.21 billion, down 5.7% reported and 3.5% organically; its margin was approximately 42.7%, versus 43.9%. Nine-month Adjusted OIBDA was $3.59 billion, down 6.9% reported and 2.6% organically.
- Profit: Q3 continuing-operations earnings were $587.2 million, or $0.77 per share attributable to Liberty Global shareholders. Nine-month continuing operations recorded a $59.3 million loss. Reported net earnings were $12.89 billion for Q3 and $12.98 billion for nine months, largely reflecting the disposal gain described below.
- Cash flow: Nine-month cash from continuing operating activities was $2.22 billion, down from $2.71 billion. Net continuing-operations investing cash inflow was $9.81 billion, including sale proceeds; continuing financing cash outflow was $6.43 billion. Adjusted free cash flow, a non-GAAP measure, was negative $143.4 million versus negative $970.2 million.
- Debt and liquidity: At September 30, cash and cash equivalents were $7.38 billion; debt and finance lease obligations totaled $27.48 billion, including $3.38 billion current. Management reported leverage of 5.1x gross and 3.6x net debt to annualized Q3 Adjusted OIBDA, and stated that borrowing groups were covenant-compliant. It said resources were sufficient for foreseeable needs over the next 12 months, while noting future refinancing needs.
Material changes versus comparable periods
- On July 31, 2019, Liberty Global sold its Germany, Romania, Hungary and Czech Republic operations to Vodafone for net cash proceeds of approximately $11.1 billion and recorded a $12.2 billion gain. These businesses are presented as discontinued operations. The gain, rather than recurring operating performance, is the principal reason reported net earnings surged.
- Liberty Global also sold UPC DTH in May 2019, receiving approximately $145.8 million net proceeds and recording a $106.6 million gain. UPC Austria had been sold in 2018.
- Continuing revenue weakness was concentrated in fixed-line telephony, video and residential non-subscription revenue. Broadband subscription revenue and B2B subscription revenue grew organically, but did not fully offset declines elsewhere. Management cited competition and pressure on subscribers and average revenue per user.
- Q3 continuing-operations results included $582.1 million of derivative gains; nine-month derivative gains were $652.2 million. These volatile, largely non-cash fair-value movements materially affect reported earnings.
- Cash rose substantially following the Vodafone sale, while debt declined from year-end. Liberty Global repurchased $3.2 billion of its shares during the first nine months, including $2.7 billion through Q3 tender offers.
Outlook, risks and unusual items
- The filing provides no specific consolidated revenue or earnings guidance. Management said network extension programs may be continued, modified or cancelled depending on results, and expects to refinance or extend debt maturities as they approach.
- The proposed sale of UPC Switzerland to Sunrise remained subject to shareholder approval and other conditions; the agreement was amended after quarter-end and includes termination rights and a potential CHF 50.0 million termination fee under specified circumstances.
- Belgian regulators’ 2018 decision requiring Telenet to provide wholesale network access remained in force after a September 2019 court ruling. Proposed “reasonable access” tariffs could represent an additional 25% reduction from interim wholesale prices; Telenet opposed the proposal.
- Other disclosed risks include intense competition, Brexit-related uncertainty, foreign-exchange and interest-rate exposure, rising programming costs, and possible impairment of goodwill or the VodafoneZiggo investment. The joint venture reported a nine-month net loss of $322.3 million, and Liberty Global warned its share of any future impairment could be significant.
- Contingencies include ongoing tax matters and litigation. Virgin Media estimated maximum exposure of £47 million in one VAT dispute, with no provision recorded because loss was not considered probable. The filing states outcomes of legal and regulatory proceedings cannot be assured.
- Unusual non-operating and accounting items include the Vodafone disposal gain, derivative and currency gains, debt-extinguishment losses of $97.3 million for nine months, and a $132.0 million tax benefit from a valuation-allowance decrease related to restructuring activities.
Key facts investors should verify
- Separate the $12.2 billion Vodafone disposal gain and other discontinued-operations results from recurring continuing-operations performance.
- Track organic revenue, Adjusted OIBDA and margins by market, particularly in Belgium and Switzerland, and distinguish reported changes from currency effects.
- Review debt maturities, leverage definitions, borrowing-group restrictions and the sustainability of liquidity after the $3.2 billion share repurchase program.
- Assess cash conversion alongside vendor financing: nine-month property and equipment additions were $2.04 billion, while reported net capital expenditures were $900.1 million.
- Monitor the Sunrise transaction, Belgian wholesale-access tariffs, tax and legal contingencies, and any impairment indicators for the VodafoneZiggo investment.