Liberty Global Underperforms

Yesterday, after market close, Liberty Global Inc. (NasdaqGS:LBTYA - News) declared financial results for the fourth quarter of 2011, which failed to meet our expectations. Despite this, in the previous quarter, the company added a net 380,000 revenue generating units (:RGU), up 20% year over year. This is the highest quarterly net RGU addition since 2006.

Quarterly GAAP net loss from continuing operation was $438.2 million or a loss of $1.61 per share compared with a net income of $52.6 million or 5 cents per share in the prior-year quarter. However, fourth-quarter 2011 adjusted (excluding special items) EPS of 10 cents was significantly below the Zacks Consensus Estimate of 21 cents.

Quarterly total revenue of $2,404.5 million was an improvement of 6.9% year over year, which is well below the Zacks Consensus Estimate of $2,615 million. Year-over-year growth of the top line was primarily attributable to the consolidation of German operations.

Quarterly cost of operation was $868.4 million, up 5.1% year over year. Selling, General and Administrative expenses were $462.3 million, up 4.5% year over year. In the fourth quarter of 2011, operating income was $408.2 million, up 5.5% year over year.

During 2011, Liberty Global generated $2,736.6 million of cash from operations compared with $2,329.2 million in 2010. Free cash flow (cash flow from operations less capital expenditures) in 2011 was $809.3 million compared with $638.7 million in 2010.

At the end of 2011, Liberty Global had $2,626.4 million of cash & marketable securities and $24,757.9 million of outstanding debt on its balance sheet compared with $4,921.1 million of cash & marketable securities and $22,462.6 million of outstanding debt on its balance sheet at the end of 2010. At the end of 2011, debt-to-capitalization ratio was 0.87 compared with 0.86 at the end of fiscal 2010.

Subscriber Statistics

At the end of 2011, Liberty Global had 19.5382 million customers in 14 countries. UPC Broadband customer was 16.1163 million. Telnet customer was 2.1985 million. VTR customer was 1.1018 million. Puerto Rico customer was 121,600. Total Single-Play customer was 11.4558 million, up 9.2% year over year. Total Double-Play customer was 2.9131 million, up 10.3% year over year. Total Triple-Play customer was 5.1693 million, up 38.1% year over year.

During the reported quarter, Liberty Global added 380,000 net RGUs including net gains of 229,000 and 230,000 subscribers, respectively, for broadband Internet and telephony services and a net loss of 79,000 subscribers for video services. In the fourth quarter, the company added 282,000 digital video subscribers.

At the end of 2011, Liberty Global had 8.2 million digital cable subscribers with a penetration rate of 46%. Importantly, 50% of total digital cable subscribers are now using HD/DVR services.

Segment wise Results

Revenue from total UPC Broadband division was $1,558.3 million, up 8.9% year over year. Within this segment, revenue from Western Europe was $1,243.3 million, up 8.9% year over year. Revenue from Central and Eastern Europe was $285.3 million, up 9.7% year over year. Revenue from Central and other operation was $29.7 million, up 3.5% year over year.

Telenet revenue was $487.6 million, up 7.8% year over year. VTR revenue was $214.6 million, down 2.1% year over year. Corporate and other revenue was $164.1 million, down 1% year over year.

Businesses Restructuring Update

On July 11, 2011, Liberty Global decided to divest its operations in Australia. Liberty Global holds 54% stake of Austar United Communications Ltd., a leading pay-TV service provider in Australia. Austar announced that Liberty Global and Foxtel, the largest pay-TV operator in Australia, have entered into a definitive agreement, whereby Foxtel will acquire 100% stake of Austar for approximately $2.1 billion. Liberty Global will get around $1.08 billion through this divestiture.

Foxtel is jointly held by Australian telecom giant Telstra, News Ltd., a division of News Corp. (NasdaqGS:NWSA - News), and Consolidated Media Holdings. All these three shareholders agreed upon the deal. However, the proposed acquisition still needs to clear the Australian regulatory hurdles. However, Liberty Global is confident that this deal will be completed in 2012.

Recommendation

We maintain our long-term Neutral recommendation on Liberty Global. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.

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Liberty Global Underperforms