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Why Is Liberty Global (LBTYA) Down 5.5% Since Last Earnings Report?

Zacks Equity Research
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A month has gone by since the last earnings report for Liberty Global (LBTYA). Shares have lost about 5.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Liberty Global due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers. <p style="text-align: justify;"><strong>Liberty Q2 Revenues Up On Strong U.K./Ireland RGU additions</strong></p><p style="text-align: justify;">Liberty Global reported second-quarter 2018 earnings of 80 cents per share against the year-ago quarter’s loss of 90 cents.<br /><br />The Zacks Consensus Estimate for earnings was pegged at 12 cents per share.<br /><br />Revenues on a reported basis rose 9.9% year over year to $3.05 billion, which lagged the Zacks Consensus Estimate of $4.06 billion. On a rebased basis, revenues increased 2.7% from the year-ago quarter.<br /><br />Notably, in May 2018, Liberty entered into an agreement with Vodafone to sell operations in Germany, Romania, Hungary and the Czech Republic. The transaction is expected to close not before mid-2019.<br /><br />Moreover, on Jul 31, 2018, Liberty completed the sale of its Austrian operations for net cash proceeds of €1.8 billion ($2.1 billion at the transaction date).<br /><br /><strong>Top-Line Details</strong><br /><br />Residential cable revenues decreased 1.8% year over year. Residential mobile revenues (including interconnect and handset sales) were up 7.1%. Moreover, B2B revenues (including SOHO and non-subscription revenues) increased 8% from the year-ago quarter.<br /><br />Liberty added 42,900 subscribers (revenue generating units or RGUs) during the quarter, up 14.4% from the year-ago quarter due to improved volumes in all regions except for Switzerland. Average revenue per unit (ARPU) per cable customer relationships increased 7.6% to $58.73. On a rebased basis, growth was 1%.<br /><br />U.K./Ireland RGU additions were 112,200, up from 78,100 in the year-ago quarter. Revenues on a reported basis increased 10.9% year over year to $1.73 billion.<br /><br />On a rebased basis, U.K./Ireland revenues climbed 4.1%, driven by 2.5% growth in residential cable business supported by subscriber growth and accelerating cable ARPU, 16.1% rebased growth in residential mobile revenues and 2.7% rebased revenue growth in the company’s B2B business.<br /><br />RGU attrition in Belgium was 8,000 reflecting negative impacts of stiff competition. However, the company’s converged quad-play package additions continued to grow. Liberty gained 18,000 new "WIGO" subscribers during the reported quarter.<br /><br />Belgium revenues on a reported basis increased 10.1% year over year to $753.9 million. On a rebased basis, revenues decreased 1% due to lower residential cable revenues and mobile revenues.<br /><br />Switzerland RGU attrition was 53,800 compared with a gain of 6,000 in the year-ago quarter, primarily hurt by intensifying competition. Revenues on a reported basis decreased 1.9% year over year to $332.2 million. On a rebased basis, revenues decreased 1.9%, primarily due to lower residential cable revenues.<br /><br />Continuing CEE (Poland, Slovakia and DTH) RGU attrition was 7,100, narrower than a loss 31,000 in the year-ago quarter. Revenues on a reported basis increased 7.8% year over year to $152.9 million. On a rebased basis, revenues increased 0.3% due to lower residential cable revenues.<br /><br />Liberty added 158,000 subscribers to its next-generation video platforms (including Horizon TV, Horizon-Lite, TiVo, Virgin TV V6 and Yelo TV) and reached 6.7 million or 77% of the company’s total cable video base (excluding DTH) by the end of the reported quarter.<br /><br />Liberty also deployed 360,000 latest WiFi connect box. Its installed base reached almost 5.1 million or 55% of broadband subscribers across the company’s continuing operations.<br /><br />In mobile, the company added 54,000 subscribers. Mobile ARPU (including interconnect revenues) on a reported basis decreased 1.4% to $18.88. On a rebased basis, the figure declined 3.5%.<br /><br />Further, mobile ARPU (excluding interconnect revenues) on a reported basis decreased 1.8% to $15.08. On a rebased basis, the figure declined 4.5%.<br /><br /><strong>Operating Details</strong><br /><br />In the second quarter, programming and other direct costs of services increased 16.1% from the year-ago quarter to $818 million.<br /><br />Depreciation & amortization (D&A) expenses increased 5.2% to $970.2 million. Selling, general & administrative (SG&A) expenses were $531.6 million, up 2.8% from the year-ago quarter.<br /><br />Operating income increased 4.7% from the year-ago quarter to $210.7 million. However, operating margin contracted 30 basis points (bps) to 6.9%.<br /><br />Segment operating cash flow (operating income after adjusted for non-cash items) increased 10.3% year over year to $1.31 billion.<br /><br />U.K./Ireland operating cash flow (OCF) on a reported basis increased 8.9% year over year to $763.6 million. On a rebased basis, OCF increased 2.4%, driven by increased revenues and lower marketing costs.<br /><br />Belgium OCF on a reported basis surged 21.2% year over year to $383.7 million. On a rebased basis, OCF increased 9% due to lower direct costs as a result of the migration of subscribers to its own mobile network.<br /><br />Switzerland OCF on a reported basis declined 11% year over year to $189 million. On a rebased basis, OCF decreased 11% due to decline in revenues as well as increase in interconnect costs and higher expenses associated with the MySports Platform.<br /><br />Finally, Continuing CEE OCF on a reported basis increased 4.8% year over year to $67.9 million. On a rebased basis, OCF decreased 2.5%.<br /><br /><strong>Balance Sheet & Cash Flow</strong><br /><br />As of Jun 30, 2018, Liberty had $862.4 million cash and cash equivalents compared with $554.9 million as of Mar 31, 2017.<br /><br />Cash provided by operating activities were $1.46 billion, while free cash outflow was $131.1 million.<br /><br />Liberty bought nearly $800 million of stock in the reported quarter.<br /><br /><strong>2018 Guidance</strong><br /><br />Liberty Global expects to deliver approximately 5% rebased OCF growth from continuing operations.<br /><br />Adjusted free cash flow is estimated to be around $1.6 billion. Property and equipment additions are projected to be $5.1 billion for the full year.</p>

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.

VGM Scores

At this time, Liberty Global has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Liberty Global has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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