Level 3 common went up 20% prior to earnings, and is giving about half of that back today. Traders will be traders, big deal.
The important thing for Level 3 is that they finally got past a major hurdle. They got operations under control, not in words but in action. Unity may not be finished, but they proved that they now understand and control their current processes and their associated costs. Cutting capex by recycling equipment from the M&A’s demonstrated that they now know have control over their inventory – they know where their stuff is finally, and can leverage it. Of course, it was quite disturbing that they didn’t have this knowledge in the first place which is why they were punished by the market.
And of course a huge result of this newfound operational discipline is that Level 3 has sustainably reached positive free cashflow, something their greater scale (post M&A) should have produced late last year and which now in fact does. This will enable them to refinance their debt much more easily. Positive free cash flow has been a very long, difficult, and frustrating milestone for Level 3 to reach, so they had better not screw it up this time.
So now the next step is to restore real revenue growth. Having operations under control means a great deal when one is trying to restore one’s reputation with customers, and that is the remaining challenge Level 3 faces. I have always felt that expecting real revenue growth was not reasonable until operational discipline was demonstrated. In order to execute on revenue growth, you have to know what you sell, where you sell it, and who you sell it to – and they didn’t for a while there.
So now they switch focus to real revenue growth, and we should expect and demand real progress in the second half of the year. Work on further operational discipline will of course continue with the Unity rollout and also route decommissioning, but the focus can now be on growth again. Twelve months were lost, but time does soldier on.
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