Liberty Global PLC (NASDAQ: LBTYK) continues to offset the decline of cable TV with growth in broadband and mobile services across its markets. That helped drive growth in sales and cash flow in the first quarter of 2018, which was reported this week.
Management is also shuffling its strategy once again, selling assets in Europe to focus on a few mature, core markets. Here are the details of operations and the sale that investors should know.
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Liberty Global PLC: The raw numbers
|Metric||Q1 2018||Q1 2017||Year-Over-Year Change|
|Sales||$4.16 billion||$3.51 billion||18.4%|
|Operating cash flow||$1.90 billion||$1.59 billion||19.2%|
|Adjusted free cash flow||($625.1 million)||($331.0 million)||n/a|
Data Source: Liberty Global PLC Q1 2018 earnings release.
What Happened With Liberty Global PLC This Quarter?
The headline numbers looked extremely strong but they may overstate the current state of Liberty Global's business. Here are some operating metrics to keep in mind.
- Revenue and earnings were heavily impacted by currency translation, so the rebased numbers into constant -urrency terms are notable for investors. Revenue was up 4.2% on a rebased basis while operating cash flow increased 4.7%.
- Organic revenue generating units (RGUs) increased by 66,100 with a gain of 78,300 data RGUs and 71,800 voice RGUs. Video continues to struggle, losing 84,000 RGUs in the quarter.
- Geographically, there were 44,900 RGUs added in the U.K. and Ireland, 28,700 added in Germany, and 48,700 in central and eastern Europe. Belgium and Switzerland/Austria lost 21,500 and 34,700 RGUs, respectively.
- Next-generation TV services added 201,000 subscribers and reached 7.9 million homes or 45% of Liberty Global's cable video base at the end of the quarter.
Operating metrics are improving broadly, but in the future, Liberty Global will be drawing from a smaller base of countries. Along with earnings, the company announced the sale of operations in Germany, Hungary, Romania, and the Czech Republic to Vodafone. Here are a few details of the deal.
- Vodafone will pay $22.7 billion for the assets in Germany, Hungary, Romania, and the Czech Republic and net cash proceeds after debt will be $12.7 billion to Liberty Global, plus any cash generated by the businesses between now and closing, which is expected in mid-2019.
- The total enterprise value to operating cash flow multiple for the deal is 11.5.
- The assets being sold generated about 28% of Liberty Global's 2017 operating cash flow.
- Management did not announce how it would use the cash from the sale.
What management had to say
The sale of European assets is the most notable change for Liberty Global long-term and management spent a lot of time justifying the move. CEO Mike Fries said:
We have a rich history at Liberty Global of successfully developing and reshaping our business to drive innovation, advance customer services and create significant value for shareholders. This is one of those moments. The transaction appropriately values our core cable operations at a double digit OCF [operating cash flow] multiple and will deliver 10.6 billion euros ($12.7 billion) of estimated cash proceeds to Liberty Global.
Liberty Global was in a tough position in some of these countries with a small market share and very little pricing power or ability to invest in building out a better network. The sale will give Vodafone a better position in the market and Liberty Global clearly thinks it's getting a great price. That's why the deal made sense to both sides.
After shedding assets, Liberty Global's results will be dominated by the U.K. and Ireland, which will account for over half of the company's revenue. The product offerings in these two countries are improving rapidly and with next-generation TV service being expanded and strong broadband and voice products, these are markets in which Liberty Global can effectively compete.
Investors will want to watch what management does with cash from the asset sale. Liberty Global could go on a buying spree or execute a large buyback of shares, both of which could help shares long term.
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