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Liberty Global (LBTYA) Posts Earnings in Q4, Sells Swiss Unit

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Two Zacks 1 Strong Buys With Revenue Growth.

Liberty Global LBTYA reported fourth-quarter 2018 net earnings of $25.1 million, against the year-ago quarter’s loss of $992 million.

Revenues on a reported basis declined 1.2% year over year to $2.95 billion. On a rebased basis, revenues increased 1.2% from the year-ago quarter.

Liberty Global lost 32,500 subscribers (revenue generating units or RGUs) during the quarter, against subscriber gain of 3,200 in the year-ago quarter. The decline reflects weakness in Belgium and Switzerland, partially offset by improved performance in CEE (Poland, Slovakia and DTH) operations and at Virgin Media.

Liberty Global also announced the divestiture of its Swiss operation, UPC Switzerland, to Sunrise Communications Group AG for a total enterprise value of CHF6.3 billion ($6.3 billion) on a U.S. GAAP basis. The enterprise value implicit in the sale price represents a multiple of 10x UPC Switzerland’s currently estimated 2019 adjusted segment operating cash flow (OCF).

Sunrise will also acquire UPC Holding borrowing group’s existing senior and senior secured notes and associated derivatives and certain other debt items worth roughly CHF3.7 billion ($3.7 billion) as of Dec 31, 2018. The net proceeds to Liberty Global are expected to be CHF2.6 billion ($2.6 billion), subject to customary other liabilities and working capital adjustments at completion.

As of Dec 31, 2018, UPC Switzerland’s network passed 2.3 million homes and served 1.1 million customers who subscribed to 1.1 million video, 700,000 broadband and 520,000 voice services.

Notably, in May 2018, Liberty Global entered into an agreement with Vodafone VOD to sell operations in Germany, Romania, Hungary and the Czech Republic. The transaction is expected to close not before mid-2019.

Top-Line Details

Residential cable revenues decreased 0.5% year over year to $1.9 billion. Residential mobile revenues declined 4% to $413 million. Moreover, B2B revenues increased 7.2% from the year-ago quarter to $501 million.

The company lost 74,900 video RGUs compared with loss of 31,600 RGUs in the year-ago quarter. Liberty Global added 24,800 data RGUs, significantly down from 42,700 RGUs added in the year-ago quarter. Voice RGUs addition was 17,600, against loss of 7,400 RGUs in the year-ago quarter.

Average revenue per unit (ARPU) per cable customer relationships decreased 1% to $60.18. On a rebased basis, growth was 2%.

U.K./Ireland RGU additions were 23,500, up from 7,700 in the year-ago quarter, driven by Project Lightning.

U.K./Ireland revenues on a reported basis decreased 0.9% year over year to $1.69 billion. On a rebased basis, U.K./Ireland revenues climbed 2.4%, driven by 3% growth in residential cable business supported by subscriber growth and accelerating cable ARPU, and 3.1% rebased revenue growth in the company’s B2B business.

RGU attrition in Belgium was 54,400 compared with 11,800 in the year-ago quarter, reflecting negative impacts of stiff competition.

Belgium revenues on a reported basis decreased 3.3% year over year to $733.3 million. On a rebased basis, revenues decreased 0.7% due to lower cable subscription revenues and mobile revenues.

Switzerland RGU attrition was 48,600 compared with subscriber loss of 22,500 in the year-ago quarter, primarily due to intensifying competition. Revenues on a reported basis decreased 5.8% year over year to $325.6 million. On a rebased basis, revenues decreased 5.1%, primarily due to lower residential cable subscription revenues.

Continuing CEE (Poland, Slovakia and DTH) gained 47,000 RGUs compared with 30,300 in the year-ago quarter. Growth was primarily driven by stronger video, broadband and voice additions in Poland.

Continuing CEE revenues on a reported basis decreased 5% year over year to $119.1 million. On a rebased basis, revenues decreased 0.5% due to lower residential cable revenues.

Liberty Global also built 194,000 new premises in the reported quarter. Moreover, Virgin Media delivered 144,000 new premises in the U.K. & Ireland.

Mobile Details

In mobile, Liberty Global added 28,000 subscribers.

Belgium added 2,000 mobile subscribers, while Switzerland added 8,500, driven by bundling success.

U.K./Ireland added 17,000 mobile subscribers as post-paid growth was partially offset by low-ARPU prepaid losses. The penetration of 4G at Virgin Media increased to 79% of the company’s post-paid subscriber base at the end of the fourth quarter.

Liberty Global stated that more than 56% of the company’s mobile base has now migrated to MVNO platform in the U.K., allowing the company to offer more converged bundles.

Mobile ARPU (including interconnect revenues) on a reported basis decreased 8.8% to $18.19. On a rebased basis, the figure declined 1.4%.

Further, mobile ARPU (excluding interconnect revenues) on a reported basis decreased 7.6% to $14.49. On a rebased basis, the figure declined 1.3%.

Operating Details

Operating income jumped 73.4% from the year-ago quarter to $252.4 million. Operating margin expanded 370 basis points (bps) to 8.6%.

Segment operating cash flow (operating income after adjusted for non-cash items) increased 2.9% year over year to $1.30 billion on a rebased basis.

U.K./Ireland operating cash flow (OCF) on a rebased basis increased 1.2%.

Belgium OCF on a rebased basis increased 12.1% due to lower direct costs as a result of the migration of subscribers to its own mobile network.

Switzerland OCF on a rebased basis decreased 8% due to decline in residential cable subscription revenues.

Finally, Continuing CEE OCF on a rebased basis increased 3.2% due to lower programming and labor costs.

Balance Sheet & Cash Flow

As of Dec 31, 2018, Liberty had $1.5 billion of cash and unused borrowing capacity of $2.5 billion under its credit facilities.

Total principal amount of debt and capital leases were $29.9 billion for continuing operations. Moreover, average debt tenor is almost seven years, with approximately 76% not due until 2024 or thereafter for continuing operations.

As of Dec 31, 2018, Liberty’s adjusted gross and net leverage ratios for the full company (including discontinued operations) were 5.0x and 4.8x, respectively.

Cash provided by operating activities was $1.28 billion, while free cash flow from continuing operations was $1.08 billion in the reported quarter.

Liberty Global bought stock worth $2 billion in 2018.

2019 Guidance

Liberty Global expects OCF growth from continuing operations to be flat or down due to inorganic headwinds in the U.K. and tough comparisons in Belgium.

Adjusted free cash flow is estimated between $550 million and $600 million. Property and equipment additions are projected to be $2.7 billion for the full year.

Liberty Global expects to repurchase shares worth $500 million through first half of 2019.

Zacks Rank & Stocks to Consider

Currently, Liberty Global carries a Zacks Rank #3 (Hold).

Charter Communications CHTR and NTN Buzztime NTN are stocks worth considering in the broader consumer discretionary sector. Both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rate for Charter and NTN are currently pegged at 38% and 20%, respectively.

 

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