One of the critical numbers to watch when Level 3 reports earnings in two weeks is their Communications SG&A expense. However, it is rather difficult to figure out what it ought to be due to the noise from one time events and integration expenses. Therefore, I put together a table to help me figure out what the real trend is. On the left we start with the reported SG&A number, then we work toward the far right column 'Total Base SG&A'. This represents what SG&A would have been a) pro forma all M&A, b) less stock compensation, and c) not including integration and other one time events. The point is to derive an SG&A that is comparable across many quarters and represents the current state of operations independent of one time events.
|Total SG&A||Acq||Pro Forma total SG&A||Stock comp||Acq Stock Comp||Cash SG&A||Integr||Bonus accrual reversal||Total Base SG&A|
- Acquired refers to the SG&A of Broadwing, Servecast, and Savvis CDN prior to consolidation with Level 3. For Servecast and Savvis CDN there is guesswork involved, but the numbers are small.
- The Bonus accrual reversals in Q3 and Q4 represent one time benefits to SG&A due to poor performance last year - less cash bonuses than expected.
- Level 3 did not report integration expenses separately in Q1, my $10M is an educated guess.
- All of the Q2/08 numbers of course represent my own guess: this is the number I think they ought to hit.
As you can see, Level 3 did pretty well in the first half of 2007, realizing substantial savings - but then they backslid when all the troubles started. If they are truly progressing on the integration and with the Unity systems, then this number needs to return to the 370s and keep dropping.
But wait, what about growth? Shouldn't SG&A go up since revenue has? Well, total revenue hasn't, but yes we should keep it in mind. Therefore here is my derived Total Base SG&A as a percentage of revenue.
|Total Base SG&A||Revenue (no SBC bonuses)||Base SGA as % of Rev|
This table shows essentially the same trend. As a percentage of revenue, savings from integrating the acquired companies stalled in Q2/07 at 36.2%. To prove they have really gotten past the hump, they need to restart that trend so that SG&A drops below 35% of revenue where Level 3 has said they want to be.
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