What to Make of Liberty Media's Mixed Results
The narrow-moat firm's faster broadband speeds will enable it to continue to grow its customer base.
Liberty Global (LBTYA) reported good fourth-quarter revenue and EBITDA margins, but weak free cash flow. We are maintaining our fair value estimate at $38 per share and our narrow moat rating, and believe the shares are slightly undervalued. The firm reported revenue growth of 2.9% year over year on an organic basis, which limited full-year revenue decline to 12.9% versus our projection of 13.9%. The decline is due to the deconsolidation of its Dutch operations after merging with Vodafone’s assets in the Netherlands. Liberty’s U.K. operations had one of their best quarters ever with revenue growth of 4.4% as it benefited from fewer promotions and a price increase. However, this was partially offset by slower growth in Germany of only 2.5% and revenue growth of less than 1% in Belgium, Switzerland, and Austria. We note the firm’s Central European operations also saw solid revenue growth of 4.6%, but their margins were squeezed. The Swiss businesses’ operating cash flow fell 8% as it increased spending on sports content.
The main revenue driver continues to be subscriber growth with Liberty adding 149,300 revenue generating units in the quarter, however, this was only about half the number added in the year-ago period. That said, we believe the firm’s faster broadband speeds will enable it to continue to grow its customer base as will the build out of Project Lightning that is taking its network into new neighbourhoods. We are also pleased Liberty was able to raise prices in the U.K. and expect additional price increases to help. The firm continues to work on controlling costs, which enabled its EBITDA margin to reach 45.9%, as we compute it, versus our projection of 45.7%. However, Liberty’s free cash flow fell 16.4% in the quarter to $844 million and dropped 21.6% for the year to $1,551 million. Some of this is due to the increased spending on sports rights in Switzerland. While we believe the firm can improve its free cash flow going forward, this remains a concern.
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Allan C. Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.