Liberty Global (LBTYK) reported a sloppy set of 1Q15 results mostly explained by difficult comparison based on one-time items.  Management reiterated all of its 2015 guidance for revenue, operating cash flow (OCF), free cash flow (FCF), and subscriber growth.  Nevertheless, these results clipped the stock by 3% and it seems likely that the shares will take a breather until a better quarter is reported that reinforces investor confident about the near-term and long-term outlook.  Northlake’s confidence is not shaken.  We intend to hold LBTYK shares, looking ahead to better news in the second quarter and our long-term FCF based target in the mid $60s.

LBTYK reported adjusted revenue and OCF of 3% and 1%, respectively.  Revenues about matched expectations but OCF fell short. Compounding the miss on financial metrics, subscriber growth came in significantly below expectations as the company added just 68,000 revenue generating units against street estimates for around 300,000.  Tough comparisons against one-time items in the year ago quarter and a difficult in the Netherlands following the closing of the acquisition of Ziggo made the numbers look worse than the reality.  We expect a quick bounce back and management noted that April was a strong month for growth.

After several years of M&A activity including major purchase in the UK, Netherlands, and Germany, LBTYK is transitioning to a period where operations lead growth.  Price increases taken in Germany and rebranding in Netherlands contributed to the weaker results this quarter but should give way to a quick improvement without the distraction of M&A.  Growth in the UK financial metrics was very strong as the company is realizing full synergies from the Virgin Media acquisition.  This provides a taste of what is to come in Netherlands and Germany.  Management also noted early progress on the potentially very high return on building out new homes in the UK.  Similar opportunities may exist in Germany, Switzerland, and other countries.

The shift to stressing operations and the build out in the UK set up LBTYK for accelerating growth in revenue, OCF, and FCF, particularly looking ahead to 2017 and beyond.  In the meantime, a return to mid-single growth in revenue and OCF as soon as the second quarter should allow the stock to move back toward the low $50s.

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.