TheJuice's Level 3 model – Q2 results

July 27th, 2008 by · 7 Comments

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 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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7 Comments So Far

  • lvltmatrices says:

    Thanks for all your work.

  • carlk says:

    After the Sun Rocket debacle with respect to neglected collections, yes, it’s a favorable sign that Sunit is on top of his A/R people at this snapshot in time. However, let’s not forget that that is their job for which he is ultimately responsible, and they are all getting paid well for. As shareholders, one shouldn’t have to pray for it, nor lose any sleep over it either!

    Just as one shouldn’t have to be praying for BMG sales right now, after all we’ve been told-years-and all we have been through! I’m glad Abdel will be pressured by that very serious Hobbs gentleman. I smell laser beam focus on his behalf, even though I must struggle through his accent. Maybe the best outcome will be, when Abdel becomes one of the churn members that they’re describing!

    I am very interested in the European story that is unfolding, inclusive of “constant currency” reporting vs. future converted dollars and melded growth rates including same.

    Any comments on that, Juice, or anyone else?

  • John from England says:

    I am intrigued at the staggering growth in LVLT in Europe . Could anybody explain why they seem to be on a large dose of steroids and what is happening there . Tx Big John

  • greyheadguy says:

    Yes, Europe has shown terrific growth. I believe the fact that they have been mostly unaffected there by the aquisitions, and the intergration/provisioning problems that developed from it, are part of the reason.

    Perhaps it’s a tell that these guys are really really good, and what the rest of the business will morf into? Sorry, that’s just way too positive a comment!

    Juice, great job, thanks.

  • carlk says:

    According to Jim Crowe, LVLT is the largest ALL IP provider in Europe. It’s good to be ON NET with the low cost proider!

    Additionally, he seemed to encourage the banking bean counters on the call, to go closer to their knitting by creating an “exchange,” for monitoring and determining aggregate annual bit demand growth rates for the internet universe, globally, where he says, LVLT, is a proxy for at least 20 percent of that traffic growing at least 60-80 percent per annum according to his belief system. CSCO’s work is limited to IP only traffic, as I understood him, not taking into account hybrid networks and systems where internet traffic is also loaded and unloaded.

    One other point of interest, was the fact that, Jim Crowe seemed to be rooting for last mile distributors of connections to be able to charge more for “content” in addition to traditional charges, i.e., Net Neutrality; over Crowe’s dead body.

    Maybe Jim Crowe is as tired as I am, as he watches his backbone transfer valuable content from place to place, without receiving fair compensation for such a large capital investment, i.e., 25 B in Gross PP&E.

  • carlk says:

    Regarding net neutrality, Jim Crowe said, we benefit by their actions, i.e., cables and rbocs moving to charge more to or from emerging content companies, etc.

    I’m wondering when all of these benefits will translate into his stock price so, he can finish rolling up internet companies and models still acting as cogs in the wheel, at the same time preventing the internet from reaching its ultimate promise.

  • skibare says:

    Juice…….nice summary and God hopes that the MERRILL LYNCH guys read this arena for actual PREDICTIONS that are damn close and to the point………..Nice Work to YOU and Toes!!!! Now, its time to FOCUS on WHY FaceBook, MySpace, YouTube, Google, and Yahoo along with Skype ALL USE Level3………I imagine Cuil is next to announce along with the MERRILL Upgrade today, Greener Pastures are in store for us holding LONG for 2018 along with Mason and company……….Rumor on street has WINS coming in Spades on Web2.0 Companies……..Thanks Again for a FINE JOB

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