Liberty Global plc — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Liberty Global provides video, broadband internet, fixed-line telephony and mobile services across 14 countries. Comparisons with Q1 2013 are materially affected by the June 2013 Virgin Media acquisition; Q1 2013 reported results did not include Virgin Media.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior period |
|---|---|---|
| Revenue | $4.534 billion | $2.672 billion; reported increase 69.7%. Organic increase, excluding acquisitions and foreign exchange, was 4.4%. |
| Operating income | $581.7 million | $528.2 million |
| Operating cash flow (company-defined segment measure) | $2.128 billion; approximately 46.9% of revenue | $1.260 billion; approximately 47.1% of revenue. Organic growth was 11.1%. |
| Continuing-operations result | Loss of $420.0 million | Earnings of $20.1 million |
| Net result attributable to Liberty Global shareholders | Loss of $78.8 million, or $0.10 per share | Loss of $1.0 million |
| Operating cash flow from continuing operations | $1.320 billion | $551.7 million |
| Capital expenditures | $735.0 million | $499.4 million |
| Free cash flow (company-defined) | $329.4 million | $21.9 million |
| Cash and cash equivalents | $3.092 billion at March 31 | $2.702 billion at December 31, 2013 |
| Debt and capital lease obligations | $44.472 billion; $3.471 billion classified as current | $44.704 billion at December 31, 2013 |
Revenue growth included $1.588 billion attributed to acquisitions. Excluding acquisitions and foreign exchange, subscription revenue increased 5.3%; broadband internet subscription revenue increased 16.8%, while video and fixed-line telephony subscription revenue rose 0.2% and 0.7%, respectively. Operating cash flow is a non-GAAP measure and should not be treated as a substitute for operating income or cash flow from operations.
Interest expense rose to $653.5 million from $471.5 million, principally reflecting higher average debt following the Virgin Media acquisition. The company recorded a $376.6 million net derivative loss, compared with a $195.5 million gain in Q1 2013. Total current liabilities exceeded current assets by approximately $4.773 billion. Management cited sufficient resources to meet foreseeable liquidity needs over the next 12 months, while noting that subsidiary debt restrictions limit access to some cash.
Material changes and notable items
- Virgin Media acquisition: The principal reason reported revenue, operating expenses, depreciation and amortization, and interest expense increased year over year. Management reports consolidated organic revenue growth of 4.4%; excluding Virgin Media’s organic growth, it would have been 3.2%.
- Chellomedia sale: Substantially all assets were sold on January 31, 2014 for €750 million (approximately $1.033 billion) cash. The transaction produced a $339.9 million after-tax disposal gain, included in discontinued operations.
- Telenet DTT closure: Discontinuing digital terrestrial television services generated an $86.1 million restructuring charge for remaining capacity-contract payments. Total impairment, restructuring and other operating items were $113.6 million, versus $20.9 million.
- Debt and capital allocation: The company repurchased $390.4 million of its shares during the quarter. It also issued $1.4 billion of VTR Finance notes and completed other refinancing and repayment activity. Subsequent to quarter-end, Virgin Media refinanced and redeemed certain notes, and UPC Holding repaid $400 million of notes.
- Acquisition proposal: Liberty Global had agreed to offer cash and shares to acquire the Ziggo shares it did not already own. Completion remained subject to customary conditions, including competition clearances and a minimum tender condition.
Outlook, risks and contingencies
The filing provides no specific consolidated revenue or earnings guidance. Management described intense competition, market maturity and pressure on subscriber trends and average revenue per user in some markets, particularly the Netherlands; it expected the Netherlands to face challenges in maintaining its operating cash flow margin. Organic RGU additions were 345,100, compared with 372,800 in Q1 2013.
Key risks include high leverage and refinancing needs, interest-rate and foreign-exchange movements, restricted access to subsidiary cash, competitive and regulatory pressures, programming costs, and acquisition integration and approval. The company’s stated target debt range was four to five times consolidated operating cash flow; reported debt and net debt leverage were 5.1x and 4.8x, respectively, at March 31. All borrowing groups were reported in covenant compliance at quarter-end.
Material legal and regulatory matters include Belgian proceedings concerning Telenet’s municipal-network acquisition and regulated resale access, German proceedings concerning the Kabel BW acquisition and multiple-dwelling contracts, a UK VAT dispute with estimated maximum exposure of £37.2 million ($62.0 million) that was not accrued because loss was not considered probable, and a new Puerto Rico class action claim. The filing states that outcomes and potential losses in several matters cannot be reasonably estimated.
Important facts for investors to verify
- Assess underlying performance using acquisition- and currency-adjusted growth, and distinguish reported results from the Virgin Media pro forma comparison disclosed in the filing.
- Review debt maturities, refinancing completed after March 31, covenant headroom and restrictions on moving cash between subsidiary borrowing groups and the parent.
- Evaluate the sustainability of operating cash flow and free cash flow after capital spending, vendor-financing repayments, lease payments and interest.
- Track the Ziggo offer, its financing and regulatory conditions, as well as the post-quarter-end debt refinancing transactions.
- Monitor competitive and regulatory developments, particularly in the Netherlands, Belgium and Germany, and the outcome of the disclosed legal, tax and contingency matters.