Liberty Global to Underperform - Analyst Blog

We downgrade our recommendation for Liberty Global Inc. (LBTYA) to Underperform following its second quarter 2010 financial results, well below the Zacks Consensus Estimate. We do not find any immediate growth catalyst for Liberty Global. According to our assessment, the company will remain loss making throughout fiscal 2010.
 
Liberty Global is suffering from severe foreign exchange rate fluctuations. The company operates in 14 countries all outside of the U.S. Continuing foreign currency rate volatility may further diminish the company’s earnings in future reporting quarters. In the second quarter 2010, Liberty Global incurred a whopping $758.3 million of foreign currency transaction losses. In addition, in the same quarter, interest expense increased a massive 65% year over year. Liberty Global’s highly leveraged balance sheet may further increase interest charges going forward.
 
Liberty Global continues to lose customers for its basic video offerings. In the second quarter 2010, it lost 108,000 video customers, up 8% year over year. This was mainly due to a loss of 41,000 video subscribers in the Romanian operations. Several European broadband service providers are gradually deploying high-speed DSL and Fiber-to-the-Home networks, making the industry extremely competitive. In addition, we expect more cash-squeezed consumers to downsizing existing services, and churn off the subscriber base.
 
Although recently acquired Unitymedia helped Liberty Global to grow its top line, overall ARPU decreased considerably. Unitymedia generated significantly lower ARPU compared with the rest of the Liberty Global Group.