Liberty Global plc — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited interim results. Liberty Global provides video, broadband, fixed-line, mobile and business communications services across more than 30 countries. Comparability is affected by the December 2016 VodafoneZiggo joint venture transaction, the 2016 CWC acquisition and the 2016 BASE acquisition.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change / note |
|---|---|---|---|
| Revenue | $4,429.9 million | $4,588.0 million | Down 3.4% reported; up 2.1% organically |
| Adjusted OIBDA, consolidated reportable segments | $1,958.6 million | $2,115.5 million | Down 7.4% reported; up 3.5% organically |
| Operating income | $569.2 million | $586.6 million | Down 3.0% |
| Net loss attributable to Liberty Global shareholders | $(320.2) million | $(369.1) million | Loss narrowed; basic loss per Liberty Global share was $0.33, versus $0.39 |
| Operating cash flow | $978.7 million | $1,090.7 million | Down $112.0 million |
| Capital expenditures | $624.8 million | $637.1 million | Cash-flow basis; excludes vendor- and lease-financed additions |
| Adjusted free cash flow | $(390.6) million | $(85.0) million | Worsened, largely reflecting higher vendor/intermediary principal payments |
| Cash and cash equivalents | $2,636.7 million | $1,629.2 million at Dec. 31, 2016 | Increase largely related to VodafoneZiggo transaction proceeds |
| Debt and capital lease obligations | $44,367.5 million | $43,558.7 million at Dec. 31, 2016 | $2,967.5 million current; $41,400.0 million long-term |
Management reported leverage of 5.1x consolidated debt and 4.8x net debt to annualized quarterly Adjusted OIBDA, using its stated covenant-style debt measure. Adjusted OIBDA is a non-GAAP segment performance measure, not operating income. Current assets of $5,741.6 million were below current liabilities of $9,178.3 million. Management nevertheless stated it expected sufficient resources to meet foreseeable liquidity needs over the next 12 months.
Material changes and drivers
- Reported revenue declined despite 2.1% organic growth, reflecting the removal of Netherlands operations from consolidation after Liberty Global contributed Ziggo Group Holding to the 50%-owned VodafoneZiggo JV, as well as foreign exchange effects. Broadband revenue grew organically 8.7%; video revenue declined organically 1.3%, and mobile subscription revenue declined organically 2.9%.
- Segment Adjusted OIBDA was down year over year as reported, but increased 3.5% organically. The Netherlands joint venture generated Q1 revenue of $1,083.8 million and Adjusted OIBDA of $459.5 million; Liberty Global accounts for its share as an equity-method investment rather than consolidating its results.
- Net loss improved, but remained affected by volatile non-operating items: derivative losses were $269.1 million versus $508.7 million; foreign currency transaction gains were $78.9 million versus $339.0 million; and fair-value gains on certain investments and debt were $94.4 million versus losses of $268.2 million. Interest expense fell to $547.5 million from $619.3 million. Income tax was an expense of $146.8 million despite a pre-tax loss.
- Investing cash flow was $1,760.9 million, compared with cash use of $1,927.5 million in Q1 2016. Q1 2017 included $1,569.4 million of affiliate distributions and an $840.8 million VodafoneZiggo equalization payment subject to post-closing adjustments. Financing cash outflow was $1,754.2 million; Liberty Global repurchased approximately $1,001.2 million of its shares and LiLAC repurchased $18.9 million.
- Q1 debt refinancing included new Virgin Media and UPC facilities/notes, extending maturities; debt modification and extinguishment losses totaled $45.3 million. All borrowing groups were reported in covenant compliance at quarter end.
Outlook, risks and unusual items
- The filing provides no formal consolidated revenue or earnings guidance. Management expects significant interest expense to continue and anticipates refinancing or extending debt maturities as debt comes due in later years.
- Management expects programming and copyright costs to rise with content, sports-rights and subscriber-related costs. UK and Ireland network infrastructure charge increases were estimated at approximately £30 million in 2017, potentially rising to as much as £100 million annually by 2021; Germany’s planned June 2017 discontinuation of analog video was expected to reduce annual channel-carriage revenue and operating income by about €30 million.
- Risks include intense competition, foreign-exchange and interest-rate movements, regulation and acquisition integration. Management flagged possible CWC goodwill impairment if reporting-unit fair values decline materially; future impairment charges, if required, could be significant. The VodafoneZiggo JV also faced significant competition, particularly in mobile.
- Contingencies include Proximus’ Belgian claim seeking €1.4 billion in damages relating to Telenet’s 2008 municipal cable agreement; no amount was accrued because loss was not considered probable. Other disclosed matters include UK VAT disputes, a Hungarian VAT assessment on appeal, tax audits and regulatory proceedings. Outcomes and potential cash impacts may be uncertain.
- Pending acquisitions included SFR BeLux, expected in the second half of 2017 subject to conditions, and Multimedia Polska, expected in late 2017 or early 2018 subject to regulatory approval. After quarter end, Telenet refinanced debt with new facilities totaling €1.33 billion and $1.8 billion.
Important facts for investors to verify
- Reconcile reported versus organic growth and assess the full effect of VodafoneZiggo deconsolidation, CWC and BASE on comparisons.
- Review the definition and cash-flow reconciliation of Adjusted OIBDA and adjusted free cash flow, particularly vendor financing and principal repayments.
- Examine debt maturities, refinancing terms, leverage calculations and the availability of subsidiary cash, which may be restricted or difficult to upstream.
- Track CWC goodwill impairment indicators, competitive trends and regulatory developments, including Belgian network-access rules and UK infrastructure charges.
- Monitor the resolution of material tax and legal contingencies, VodafoneZiggo equalization adjustments, and the status and financing of pending acquisitions.