Liberty Global (LBTYK) showed progress in 2Q17 after a disappointing 1Q that was accompanied by lowered 2017 guidance and a major reset and management change related to its UK buildout known as Project Lightning. 2Q17 was mixed for LBYTK with rebased revenues a bit below reduced expectations, new subscriber additions below expectations, and operating cash flows slightly ahead of estimates after adjusting for favorable one-time items. Rebased revenue growth of 1.6% and adjusted rebased OCF growth of about 4.5% are below full year guidance but are a step in the right direction after the weak 1Q17. Management affirmed all 2017 guidance for revenue, OCF, free cash flow, and subscriber additions and noted the big acceleration would come in 4Q17. Back end loaded guidance is always a risk but we believe street expectations are already assuming a slight miss in 2017. As noted in prior LBTYK updates, we have been too patient with this stock over the last few years as we are overly influenced by our long successful history with this management team and outsized potential upside of 50%+ if the story comes together. 2Q17 was far from perfect but there were enough positives – led by general stabilization in key performance metrics – that we going to remain patient.
Items we are monitoring include (1) UK growth still looks anemic even with the benefit of new homes coming online from Project Lightning, (2) Germany should have a big uptick in 2H17 as 2Q17 saw focus on the switch-off of analog signals at the expense of growth initiatives, (3) cost controls accelerated and provided a nice boost to OCF against weak revenue in 2Q and should leverage OCF growth if the top line improves as guided, and (4) capital allocation and M&A could emerge again as upside given what see at both LBTYK and Vodafone (VOD), the likeliest merger or asset sale/swap partner for LBTYK.
LBTYK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. LBTYK is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.