Earnings Preview: Level 3’s Integration Kicks Into High Gear

On Wednesday morning, Level 3 will report its first quarter earnings.  Hence, as has been our custom on this site, here is a quick preview of what to expect.  This will be Level 3’s first full quarter with the tw telecom business added in, and I expect to see significant integration expenses in advance of cost savings that will necessarily follow a bit later.  Also of note, my admittedly limited reading of the currency markets suggests the storms will be fierce on that front in both Europe and South America, so bring a raincoat.  Here is a table with my own guesses alongside the past 4 quarters in context.

$ in millions	Q1/14	Q2/14	Q3/14	Q4/14 pro forma	Q1/15 (my guess)	Comments
– North America – Wholesale	368	367	368	443	442	Key here for Level 3 is continuing the growth trend in North American Enterprise revs or at least holding mostly steady in what is traditionally Level 3’s weakest growth quarter.  Wholesale will do well to tread water, as usual.
– North America – Enterprise	675	684	695	1063	1072
– EMEA – Wholesale	87	86	80	75	71	While they are promising better things to come after a few rough years, currency fluctuations will probably mask any early progress here.
– EMEA – Enterprise	138	143	139	143	144
– Latin America – Wholesale	40	42	42	41	40	Gains offset by currency fluctuations, but nothing new in the underlying market trends.
– Latin America – Enterprise	149	157	158	150	152
Total Core Network Services	1,457	1,479	1,482	1,915	1,921	Up sequentially but barely, yet it will look better in constant currency terms.
– Wholesale Voice & Other	152	146	147	137	132	Trending downward as usual.
Total Revenue	1,609	1,625	1,629	2,052	2,053	Flat sequentially, and a bit less than projections
Comm. Adjusted EBITDA	458	459	471	625	625	I expect integration expenses will largely offset synergies realized in this quarter’s EBITDA
Adjusted earnings per share	0.47	0.21	0.35	0.35	0.30	This number is still rather hard to get a handle on.
Adj. Gross margin %	61.8%	62.3%	62.7%		63%
Adj. EBITDA margin %	28.5%	28.2%	28.9%	30.5%	30.5%	Deceptively flat given all the moving parts.
Capital Expenditures	163	241	204	346	350	Including integration expenses.
Free Cash Flow	(22)	62	117		(100-0)	As always, Q1 is the season of cash burn for Level 3, especially when integrating.

Investors will be watching the enterprise number carefully for signs that the combined company is hitting snags and losing momentum.  Currency effects will mean we hear lots of usage of the phrase ‘on a constant currency basis’.

It will be interesting to see how much detail the company gives on the progress of the integration.  No matter how easy they try to make it sound, this one will take a lot of elbow grease underneath to get right.  But they know that, which is why we aren’t hearing about headcount reductions and such.

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