Liberty Global

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Liberty Global provides a range of broadband internet, video, fixed-line telephony, and mobile communication services across Europe.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Liberty Global operates in an industry that has seen substantial consolidation over the past few years. This has created larger players with more economies of scale.

Business Overview

Liberty Global is a major international telecommunications company that provides broadband internet, video, fixed-line telephony, and mobile communications to residential and business customers primarily in Europe. They operate under various brand names across seven countries: Switzerland (Sunrise), Belgium (Telenet), Ireland (Virgin Media), Slovakia (UPC Slovakia), the UK (Virgin Media O2), and the Netherlands (VodafoneZiggo). This global footprint, particularly within Europe, positions Liberty Global in a competitive, yet evolving market landscape.

The company’s revenue is diverse, spanning various service offerings within each country. A breakdown of their revenues across the various reportable segments is provided below.

Residential Services: Revenue from fixed-line broadband, video, and voice services, as well as mobile services for residential consumers.

B2B Services: Revenue from business-oriented fixed and mobile services.
Infrastructure and Other: Revenue from the group level in areas where Liberty Global has its operational control or the other.

The telecommunications industry is characterized by rapid technological changes and intense competition. Here are some of the key trends at play:

The industry is seeing a strong trend of combining fixed and mobile services into “converged” offerings, creating new opportunities and bundled offerings to consumers. This helps to increase customer retention and offer a single billing solution.

Fiber optics rollouts: Fiber networks offer higher speeds and lower costs and this is the main battleground of communications as it is vital for companies to be able to keep up with customer demands.
5G mobile technology: The rollout of 5G mobile networks will enable much faster mobile speeds and increased usage of mobile data, creating new possibilities for the future.
Growth in online content: Streaming media has increased in importance and become a vital part of most people’s consumption patterns.
Consolidation in the telecom sector: The telecom sector has experienced significant M&A activity over the past decade as larger players combine to leverage operational efficiency and scale.
Focus on customer experience: With the rise of OTT players, there is a greater emphasis on providing good customer service as it is also a way to distinguish between competitors.
Regulation: The telecom industry is heavily regulated, and governments frequently intervene to ensure that the market remains competitive. This is an important factor that companies should consider.

It’s worth noting that Liberty Global has divested and also acquired various business lines in different geographical areas, which has led to its focus on its operations in Europe. They exited several regions to maintain the financial solvency of the business.

The competitive landscape varies from country to country, each market being influenced by the players in the region, regulatory conditions, and customer demands. Liberty Global is constantly competing with local players, but also has increased its focus on long-term and reliable earnings.

Financial Analysis

Let’s analyze some financial details of Liberty Global. The company’s core revenue is generated through subscription-based services. Its revenue segments include: Residential, B2B, and a segment called Other, which are mostly from the company’s various non-core business segments.

Operating performance is reflected by the various metrics. For example, Adjusted EBITDA and adjusted EBITDA margin, which are used by management to understand the company’s operational profitability.

Adjusted EBITDA as a % of total revenue.

2022: 38%

2021: 38.9%

2020: 39.6%

Adjusted EBITDA from Continuing Operations is an important financial figure to analyze as it represents the amount of operating income that will be available for debt servicing and dividends.

2022: $7,042.0 million 2021: $7,454.5 million 2020: $7,313.5 million From these financial values, it’s visible that while their overall revenues have been quite strong, it has been decreasing YOY. Let’s analyze the cash flow. Net cash provided by operating activities:

2022: $1,202.9 million 2021: $1,393.8 million 2020: $2,435.7 million There is a substantial decrease in net operating cash flow year over year. In terms of profitability, Liberty Global hasn’t been profitable for the last few years.

Net loss attributable to Liberty Global shareholders

2022: -$1,405.2 million 2021: -$1,416.8 million 2020: -$1,772.9 million

There is also a very interesting note about their balance sheets, because they are using derivatives to hedge certain of their currency risks. Here is some details about that: “We are exposed to foreign currency exchange risk related to our non-U.S. denominated operations and some of our debt obligations, including our senior notes and hybrid notes. We use derivatives to manage the risk that changes in foreign currency exchange rates will materially affect our financial results. In addition, a portion of our revenue is recognized in currencies other than the currency that is utilized in each operating segment. (This is most notably seen in the Swiss franc and GBP segments). This exchange rate risk can often be hedged using various derivative instruments, such as foreign currency forward and swap contracts. However, we do not apply hedge accounting to such instruments.”

The company is utilizing derivatives as a risk management method and also to improve its future stability as per its risk appetite.

Moat Assessment

Liberty Global has some sources of competitive advantages (or moats), but their strength and durability are variable.

Network Effects: The company operates in fixed line, mobile and video services and these segments have some elements of scale. There is some advantage in having more users which lead to higher customer adoption, although that network effect is limited by the availability of local operators.

Switching Costs: Switching costs are relevant since customers need to change their equipment and also have a bit of friction if they want to change their contracts. This makes it more likely that they will renew their contracts with their current suppliers. However, it is not a very high switching cost and customers can jump between competitors fairly readily.
Local Infrastructure: It is difficult for new entrants to enter an industry that requires substantial capex investment. Companies that already have a large infrastructure are at a major advantage over new entrants. Liberty Global is very strong in this category, especially compared to new entrants, but might not be as strong when competing with other incumbent players.

Based on these considerations, Liberty Global has only a narrow moat (2 / 5), given its sources of competitive advantage, as they are not as strong as other companies with a wider moat. They are likely to erode as newer and more competitive technologies arrive on the marketplace.

Risks to the Moat and Business Resilience

Technological Change: The telecom industry is very prone to technological changes. This can be a potential source of loss of profits if a competitor brings a better product. This affects all players in the industry, including Liberty Global. They have shown they have an intent on keeping up with the latest technologies.
Increased Competition: In some regions, Liberty Global faces a lot of competition from other players in the industry. This leads to companies losing pricing power. Although Liberty Global has made acquisitions to counter this effect, they still have a high potential of losing out to more focused players.
Economic Downturn: During times of economic distress, customers may shift their purchasing decisions to cut costs. This would decrease the earnings and reduce the value of these companies. This makes their revenues susceptible to economic uncertainty.
Regulatory and Political Risk: As telecommunications companies are very highly regulated, they are always vulnerable to any type of political or regulatory decisions made in the countries they operate in. These can drastically change the profits that they earn.

Based on these risks, Liberty Global seems to be at a medium-to-low risk level. Although there are risks that can affect its profitability, it is also unlikely to become a penny stock given the nature of the business. Overall, it has a medium level of business resilience.

Understandability

Liberty Global operates in a complex industry, with different types of offerings which vary from geography to geography. Therefore it needs some research to understand the nuances of the company and what drives its revenues and profits. Thus this is a business that is at a medium level (3 / 5) of understandability.

Balance Sheet Health

Liberty Global’s balance sheet suggests they are not in the most sound financial position. The debt load seems quite high.

High Debt: The company has a high level of debt in its capital structure, which makes it less safe during economic downturns. This could limit the future prospects for growth.
Low Cash: In the face of the high debt that the company has, they have a fairly low amount of cash. Their cash position is barely enough to cover their short-term obligations.
Negative Equity: The company has a negative equity. Although this is not uncommon for telecom companies that make a lot of investments, it still shows the need to keep a close watch on the financial health of the business.

Based on this, the balance sheet of Liberty Global has a lower-than-average score (3 / 5).

Recent News

The recent earnings calls and press releases talk about the strategic decisions undertaken by the company. Management’s focus is on improving profitability, reducing costs, expanding into new growth avenues (fiber and 5G), and focusing their energy to develop better customer experience. They also discuss the steps that are being taken to integrate the acquired assets seamlessly into their ongoing operations. They are aiming to become a lean, effective operator. Overall, their focus is on deleveraging the company as well as finding new ways to drive growth and create long-term value for the shareholders. They have also highlighted their intent on focusing on the fiber to the home rollouts.

The company has been in the news regarding a potential sale of its operations. If that happens, it might further reduce their debt and improve their business’ future outlook. This is to be closely monitored.