Alright, here's the updated model with actual results versus my expectations. It was an interesting quarter and a good one at that - all things considered.
Revenues: Adjusted CNS grew app. 2% Q108-Q208 after being essentially flat from Q407 - Q108. Furthermore, this amount is pretty typical for this time of the year due to the seasonality of the business. I was happy to see some growth here. We need to increase the growth rate of CNS course, and I hope for around 3% and 4% in Q308 and Q408 respectively. I wonder how long SBC will last, and like that our market-share in WVS has grown from around 150m per q to 175m. I guess I would also point out that revenues were actually 17M higher than what I thought they would be so the benefit of 12M wasn't needed to meet my expectation, it was all gravy.
Gross Margin: We could spend a lot of time on this line item. It was a bit higher than I expected but some of that is driven by the one-time gains I didn't anticipate at the revenue line. However, the real item of discussion here is when will we see meaningful increases in this number based on the expectations associated with the acquisitions? We are seeing small incremental improvements as they improve network optimization etc. but until they shut down Broadwing (which requires higher capex spending) we won't see a nice step up. Further, my understanding is that they cannot shut-down some of the legacy networks until they complete the implementation of specific functionality in Unity. So I'm not expecting a big move here until next year. That's disappointing, but the reality is, Unity is such a strategic asset, at this point it's OK with me that they take the time necessary to get this right. Once Unity is done I expect domestic LVLT to look a hell of a lot more like European LVLT.
SG&A: The market is not valuing Sunit correctly in terms of his ability to control this line item. We clearly made this the critical focus over the last few quarters in an effort to create FCF so that we can refinance our debt. The company has done a *great job* on bringing cost control to the business. I guess you could say they cut too deep in Enterprise sales but in aggregate, even if that is true, I think it was worth it. The street got this part of the story *completely* wrong IMHO.
CF Operations: Ok, now we get to the good stuff…no, the GREAT stuff. Again, the way we have improved working capital over the last year has been *exceptional*. Keep in mind that over the next few quarters this area will become a source of cash, perhaps to the tune of 100M. When you go to bed at night say a small prayer of thanks to the folks in the AP/AR dept. at LVLT as they are doing a fine job. Collect at 30 days and pay in 60!
CF Investing: The_Highwayman was all over this issue before the market in terms of completing network inventory and using it to lower our capex number. I'm hopeful that we are not spending at the expense of investing in new sales. Keep in mind that to get to 11% for the year we need to spend on average around 125M in Q3/4 so I'm hopeful that money is being earmarked for either new growth or to support efforts to decommission redundant routes.
FCF: I have waited YEARS for this data-point! We needed to get here so that we can enter into conversations regarding debt refinance. The thing I am most happy about is that BK conversation is no longer relevant as it's all about valuation. I would add that I think there is a very good possibility that we are going to be FCFP for not only 09, but also for 08! More on that later….
I will post my thoughts for Q3 once I have a chance to read the call notes, 10q and talk to all my friends that follow the company. In summary, regardless of what Wall Street thinks, I think this was a solid step in the right direction, will allow us to get reception from the debt market and quiet the talk of raising equity-negative capital. We need to increase the growth rate on CNS but I think people are discounting the seasonality of our revenue streams, the fact that we were so focused on cost containment, and our product set. Our valuation is based on a big 'g' so we need to prove that number.
Finally, I thank Rob for allowing a forum to post this note and spreadsheet and as I explained in my original post, I don't get a thing for this. But I do request that if you're reading this and you participate in other forums that are relevant, please spread links to the articles on this blog that you like, or just digg it or save it as a del.icio.us boorkmark or whatever - it helps build traffic and overall internet reputation for this forum. Thanks for reading and leave a comment or send me a note if you find an error our have an insight that will help the collective cause.
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