Level 3 Leans Into the Wind

October 23rd, 2008 by · 6 Comments

Level 3 Communications (LVLT) reported earnings this morning, with mixed results.  Communications EBITDA was $257M, above the expectations of many, a feat accomplished with continued impressive cost savings.  Good thing too, because revenue growth continued to lag a bit, with total revenues of $1.070B, and core revenues of $964M.  Free cash flow was $-4M, or basically neutral.  Comparing with my estimates in yesterday’s primer, I wasn’t too far off.

Looking forward, the company was forced to reduce guidance for revenue growth from its 8-13% range to 7.5%.  At this point everyone knew that 8% was the likely best result for this number, so the reduction isn’t all that large and not all that surprising all things considered.  But it was still a bit of a letdown, Level 3 will need to return to double digit revenue growth in 2009 if it wants to earn back the respect it once had as a growth engine.  EBITDA guidance was narrowed to between $980M and $1.0B, which implies that Q4 EBITDA will be $268M +/- $10M.

As for the effects of macroeconomic trends, the company reported some lengthening of sales cycles in its wholesale and business markets group, but nothing really material so far.  In the content business, they saw pullbacks in spending by some content owners that depend on financing, but increases from larger customers.  European revenues remained strong and have as yet shown no effects from the financial crisis.

The company did manage to buy back $39M of its 2009 debt and $32M of its 2010 debt at a discount in the third quarter.  Hopefully they have continued that trend in October at even lower rates.  As expected, the company will continue to work on refinancing the 2010 debt, but doesn’t need to make a move just yet.  All in all, a mixed report that certainly wouldn’t have satisfied anyone with the stock at $3.50, but at $1.25 it is actually probably better than the street expected.

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Categories: Financials · Internet Backbones

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6 Comments So Far

  • carlk says:

    That’s funny! The market’s omnipotence with respect to LVLT is uncanny sometimes, isn’t it?

    At $3.50 with this report, LVLT would be in terrible trouble today; however, thanks to “Mr. Market’s” adjustments during the interim to $1.20, things may be just fine.

    Don’t buy that though, because knowing the scoundrels at the helm, a break under 1.00 is still possible with the day being so young.

    I’ve said this before too, and I’ll say it again. LVLT is probably one of the rare public corporations whose STOCK PRICE is perfectly efficient almost all of the time, diametrically opposite WEB theories to the contrary.

    It must be that WEB controlling influence on or over the psychology of this corporation.

    How is that this company’s news, inner inefficiencies, failures or successes, always translate to the perfect stock price with few suprises?

    Who is this little birdie(s) who tells all to those who count in advance?

  • Parkite says:

    Taken to the woodshed today. Seems that the market’s tolerance is getting shorter for LVLT. Down to a $1B market cap. Wonder when Jim Crowe will spend some of his own money buying stock?

  • Tortelliniboy says:

    Dear Rob:

    Just a few questions I would like your feedback/opinion on please.

    What do you think the underlying reason for the huge price drop today?

    > Lower revenue guidance?
    > Hint at possible more equity dilution to reduce the high yield bond debt (mentioned at 20-40% in call)?
    > Profit taking from huge short position on LVLT?

    If it is short seller profit taking, do you think the short sell opportunity is now minimized at this price level? I don’t see this can go much lower as bankruptcy is not a possibility until 2010. However, further dilution due to debt refinancing may cause more downward pressure.

    Your thoughts appreciated…

  • Rob Powell says:


    I think the underlying reason is the potential equity dilution and a general despair that LVLT will ever find a path to the organic growth that their assets should support easily. And frankly, the market panics these days for basically any reason, so today really wasn’t that surprising.

    As you say, it is not until 2010 that the company would be truly forced to make a move, and a year and a half is a long time in telecom. But right now, the market thinks the sky is falling and doesn’t really do math anymore, so one just has to deal with that.


  • Only one explanation. The market thinks bondholders will eventually own this company. It is decoupled from any meaningful metrics at this point.

  • carlk says:

    Hi Andrew,

    Once BMG kicks in, the world is going to know organic growth as it never imagined could come from OUR(3).

    I just hope if R. Abdel, a remnant tie to KOH days gone by, has continued to be a negative factor in the turnaround process for the past 12 months, that he is removed pronto. That department needs a dynamic leader who can sell cost effective, state of the art solutions like “cotton candy” to kids at the state fair.

    Got a lot at my target price. It’s time for this company to rock!

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