TheJuice Comments on Level 3’s Q2 Earnings

July 30th, 2009 by · 1 Comment

[TheJuice blogs about his financial models and projections for telecom companies, most frequently about Level 3 Communications.  If you have something to share on Telecom Ramblings, contact the webmaster]

Here is the current state of my LVLT model following today's earnings report:

Well, let's start out with the good since we can dispense with it quickly.

  1. SGA moving down.  This is a double edge sword, as it helps the company but kills moral with the constant RIFS. I also wonder, "how sustainable are these reductions?"  In my line of work we spend a lot of time working with co's asking/answering that question.  Is this just a case where we are trading in full timers for lower priced Indian contractors as some suggest?
  2. Interest, net was a bit lower than expected.  Trying to get your hands around our balance sheet is crazy.
  3. Working Capital was better than expected. Sunit is running a very focused ship.
  4. We were able to lower our network costs at the same rate as our loss of revs. The is something I follow, which is to say that for every dollar of existing CNS, I track how much gross margin we get.  It's not exact but has some trend value. Suffice to say we only dropped .01% even though we had a large drop in revs. Although from an absolute perspective, being down, this is bad, considering the drop in revs I would say we are managing the network inventory/costs quite well.

As to the bad........I'm not even sure where to start.

  1. We have a top line problem and we need to fix it.  All that talk about addressable markets and the like goes in one ear and out the other for me now.
  2. Enterprise is a dog that is decidedly not hunting.
  3. Wholesale has become a bit dysfunctional with carriers trading products based on which ones have the highest rate of price decline.
  4. AND, for whatever reason, which I have never understood, we are not a net taker in Wholesale Voice market share.

We need to grow into our balance sheet and it's not happening.  Furthermore, the "forward looking guidance" is not really forward looking now is it?  It's a whole lot of, "we don't have a clue and we're not going to tell you as we don't want to get sued anymore."  I wonder how that lawsuit is going anyway.  After today, I own one share. I'll buy more around $1.  We have a pretty difficult environment and these guys are working hard but without top line growth this baby isn't going anywhere.

I wonder two things:

  1. Why do we trade at a premium to our peers?
  2. Why do I put so much time into this company?
Categories: Financials · Guest Posts · Internet Backbones

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  • ES says:

    1.) Because it is an underutilized asset. This mgmt has gotten the EBITDA wrong, meaning the market recognizes that this asset should be able to generate more ebitda than this mgmt has been able to deliver. Yes, they did a good job avoiding bankruptcy but they have neglected their mkt opportunity as a result of the debt hangover. In a market with so much uncertainty, investors like asynchronous risk, execution risk, in this case with a strong mkt backdrop.
    2.) That’s for you to answer.

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