EUR 850.00 For Business Accounts Only

Morningstar | Liberty Global Reported 2Q Results That Were a Bit Weak, but Maintaining FVE; Shares Undervalued

Liberty Global reported slightly weak second-quarter results. We are maintaining our $38 fair value estimate, and our narrow moat remains intact. The firm reported revenue grew 9.9% year over year versus our full-year forecast of 9.3%. As in the first quarter, most of the revenue growth is from the U.S. dollar strengthening against the British pound and the euro. We anticipate this relationship to hold throughout the year. Excluding foreign exchange movements, Liberty Global reported revenue grew 3.1% or 2.7% from continuing operations, which excludes its operations in Germany, Hungary, Romania, and the Czech Republic that it has agreed to sell to Vodafone. The firm only provided some metrics for the full company beyond revenue, so our results don’t always compare as we continue to model the entire company as we believe there is less than a 50% chance of the deal being approved by European Union regulators.

We were pleased to see Liberty’s largest market, the U.K., increase its revenue 4.1% organically. If the Vodafone deal does go through, the U.K. will become even more important. The U.K. has slowly been increasing its growth rate as it benefits from “Project Lightning” where the firm has built its network past an additional 1.3 million premises over the past three years. This project should continue for at least two more years. In Germany, it continues to grow its broadband and telephone base by about 4.5%, while losing video subscribers. Germany and Liberty’s Central Eastern European operations have consistently been the fastest and most consistent generators of subscriber growth, so we are somewhat worried regarding future growth if the deal goes through.

Potentially more important than growth will be EBITDA margins if the deal goes through, as reported EBITDA margin from continuing operations was just 41.5% versus our entire company full-year estimate of 46.4%. However, quarterly results were particularly bad in Switzerland, which likely won’t continue.

In Switzerland revenue fell 1.9% as it lost 53,800 revenue generating units in the quarter as competition increased. Liberty has changed management in the country and is about to launch a new set top box with improved functionality that should help stem the tide. The additional costs of its launch last year of its MySports channels also increased its costs, which pushed its operating cash flow down 11%. However, in the third quarter the firm will have lapped the launch of MySports, which should help going forward. Additionally, management maintained its full-year guidance, which gives us some comfort that the year will end better than this quarter on an organic basis.