Hi everyone….what a week, huh! These last few days have really tested me. Our favorite son has taken it in the shorts and after being ahead of the benchmarks for the year the last few days saw that nice fact go bye-bye. In times like these I try hard to talk to other investors to gain perspective and then go back to the numbers to see actually where we are versus what I’m expecting.
To that end, here’s my model for 2008, with my estimates for both Q3 and Q4:
- Interactive model – requires Internet Explorer and the Office plugin
- Non-Interactive model – for everyone else
Essentially, for the year I’m expecting 1025 in ebitda, 100M increase in cash and 0, yes ZERO, in cash flow loss for the year. Now, that might seem aggressive but it’s surprisingly easy to get there…..the key is we need 2.675% (or 20M CNS) and 3.75% (or 30M) growth in CNS for Q3 and Q4 respectively. This would equate to around 6% growth in CNS for 2008.
Frankly, I don’t believe our growth in CNS (which is really the key to making our guidance) is that hard. I have 20M in Q3. I think we should see around 8 or 9 for Europe, perhaps 2 or 3 for CDN, and 8 or 9 for wholesale. I don’t think we will see anything in enterprise in Q3 as they continue to churn off low margin clients. As for Q4, I guess the big question is whether we will be able to continue to grow in a recessionary environment. Personally, I think bandwidth will continue to grow and pricing will stay firm in metro….I think we will get there.
Another interesting thing I have been doing is following gross margins quarter over quarter in order to see how we are trending. We exited Q2 with approp. 65.40% in CNS gross margins, assuming we pick up our 20M in CNS growth @ 80% gm, we should exit Q3 with 65.83% gm, or an increase of 0.43%. Using the same theory and calculations you get around 66.34% in Q4 with ebitda margin of 27.24% for Q4. That would be a very nice improvement compared to Q407!
BTW, all of this assumes we will NOT grow WVS past the 175…..on this point I would remind we are the margin leader by a mile and we can always make up for a few mil here or there just by dropping our pricing on a route or two.
From a valuation point, I think we end the year with about 6B in net debt, so with a value of 3.6B today, and assuming 1025 in ebitda, you get something a little north of 9x 2008 ebitda: pretty cheap compared to history. I think we do 1250 to 1300 in 2009, so assuming the same 9x valuation you would get around a double from here. All this assumes we can roll over our 10 debt of course (one the things that keeps me up at night)
Good luck out there. Oh yeah, a really good book I just read is The Medici Effect
PS: For those that have never seen this before all you need to do is put your estimates in the blocks in yellow to see how your estimates stack up against mine, and than how they total for the full year.
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the Juice – thanks for your usual good work on projecting the LVLT Model for 3Q2008 as you see it. appears clear that as soon as this sub-prime junk gets out of the way, it’s full speed ahead for this LVLT baby….
for those that care, you’ll note a new number called “boxed relationship,” this shows the difference between gross margin on CNS from when we started the quarter versus where we ended it. you’ll note that we are improving our CNS gm’s at a rate of approp. 0.5% per q.
the other benefit is that it allows us to track whether we are seeing improvements in gm not only from the effect of incremental growth in CNS, which impacts the existing gm base because it has a much higher marign (80% vs. 65%), but also from improvements associated with the ongoing integration efforts.
you’ll not that I don’t project any improvement for integration efforts as it relates to gm in Q3 or Q4, these would just be gravy. you can add your own improvement in the cells associated with “cns base improvement gp.”
what this all tells me is that we are frankly in a very strong spot relative to guidance. we only need low single digit growth in Q3 and Q4 in CNS @ 80% gm’s, no growth in WVS and need to maintain (not improve, just maintain) our gross margins to get to above 1000 in ebitdas for the year.
the key of course is for us to refi the 10’s so the sooner we do that the better. that’s really the only part of the story that makes me nervous.
First, thanks for tossing up the model. I wanted to point out that I think the other comm revenue & associated ebitda is quite high, especially in Q4. The other disagreement which is largely a product of the aforementioned other comm rev, is that if they toss up anywhere near that in ebitda in 2H #s, the Street will be blindsided. I am not sure they can myself but you never know.
thx for your note. i went back and looked at the numbers and thoughts behind my project for “other revs and ebitdas.” here’s where im coming from:
in Q208 we did 46M for other revs and 56M for sbc revs. the ebitdas contribution was 90% for other, or 41M, and 50% for sbc, or 27M. adding that up you get 102M in revs and 68M in ebitdas or 67%.
during the last q call i believe crowe/patel said a few things as it relates to sbc.
1. it would have a long tail similar to other revs
2. the margins on sbc would stay where they are
3. run off at same rates as other revs
consequently, i have added up both and run them off at 10% per quarter. which is why i show 90M for Q3. i am also taking the combined gm of 67% (90% +50%) which gets me to 61M in combined ebitdas for Q3. (rounding takes it up by 1M).
perhaps i have misunderstand mgt in terms of the characteristics of sbc going forward?
please note that in my previous post i meant gross margin where i said ebitdas. its early.
also i have updated my model to take out the rounding so my est. for q3 is now 266. thx.
Thanks Jeremy. My point of view is that you have the letter of the law right and I don’t disagree that you are correctly modeling the profit contribution. My opinion of the spirit of the law is a bit different though.
Crowe said SBC runoff would be similar to other revenue runoff. So 40% annual runoff is right. However, he also early in the year had refused to put anything in his model for SBC. So until that comment, the letter of the law would suggest a zero for SBC in 2H. Conservatively, I think a forecast somewhere in between might be more accurate especially in light of the economic environment where AT&T has even be having trouble with its commercial paper financing. If they are having funding problems and AT&T mgmt is worth their salt, I am making sure the checks that I write Level 3 move to zero as quickly as possible. As a result, I reduce my SBC revenue significantly.
I think the other areas of concern in the model is enterprise growth(macro) and Europe which finally has a currency headwind. On both of these, I hope I am wrong.