Level 3 Communications (LVLT) reports earnings Thursday morning, the first US nextgen carrier to do so. And when they do, the first thing everyone is going to look for is evidence of economic deterioration. LVLT's business has many units and their earnings reports can be rather complex in comparison to a pure colocation provider like Equinix or an equipment provider like Infinera. So it's important to review where they have been and just what to expect beforehand.
Thejuice posted his model's predictions earlier this month, and what follows are my own. Here is my quick summary of the Q3 numbers and a quick discussion of what to look for. All numbers are in millions unless otherwise specified, and I don't care about coal so it isn't in the table except for its contribution to EPS and EBITDA:
LVLT's growth this quarter, should there be any, should come from the wholesale network and European businesses. The business markets group is known to be churning off lower margin customers and hence will probably be flat, and while content markets is growing organically the Q2 number had perhaps $6M or so in revenue from the Vyvx Ad business that was sold in June. Other revenue includes both the SBC contract and managed modem amongst other things, and will probably decline as per normal.
LVLT has given annual guidance of 8-13% core revenue growth, where 'core' means the 4 major business units. At this point, hitting the top of that range would seem to require some sort of divine intervention, even thought the company has forecast the usual seasonality in its growth rate. Indeed, Q1 and Q2 growth was light, and hence Q3 and Q4 will need to show solid progress to come near its core revenue guidance. The company has struggled for the last few quarters first with provisioning issues and then with recovering their growth profile, but indications are strong that they are no longer limited by internal problems. Of course, now we have external economic issues to deal with - it's always something, but let's see what LVLT has to say on growth now.
LVLT's 2008 EBITDA guidance of $950-1100 is a wide range that they seem certain to hit, even zero EBITDA growth in Q3 and Q4 will get them there. The Q2 number had some one time items, including some extra deferred revenue. Also, further improvements in SG&A are expected in Q4, but not so much in Q3. Hence, the Q3 EBITDA number is not likely to increase much over Q2. The company may narrow EBITDA guidance, given that a $150M error bar will render current guidance rather useless.
But what effect will the crisis in the financial markets have on Level 3? Well, it could show up in several places. European revenues could show the effects of currency fluctuations. Business markets may show more churn than expected. Or the wholesale markets might see growth evaporate. It certainly will come up regarding the bonds that mature in 2009 and 2010. But there's always the possibility it might not show up in Q3, and we will hear something akin to 'so far things are ok, but we will be watching carefully for macro trends to impact our results'. In 24 hours we will see.