Thejuice's LVLT Post-Q3 Model Update

October 30th, 2008 by · 14 Comments

Ok, here's the model with Q3 results and Q4/YE estimates.  As I indicated on the IV board, generally speaking the numbers were real, no gimmicks, but they were a bit light in terms new growth in CSR's as well as improvement in working capital.  Neither of these should be a surprise considering the current environment; I just was a wee bit too hopeful.

We need to pickup the speed in BMG sales and keep executing on Unity.  I remember when I thought Unity would be finished in Q4 now we are shooting for 2/3rds.  We need to get this done so we can keep consolidating the industry.  I think one more big round and we will probably reach a point of longer term stability.

[Rob: Juice, thank you for sharing your model and thoughts on LVLT's prospects each quarter!  If anyone else has work they would like to share on companies or technologies in the internet infrastructure space, but not the energy for a blog - let me know and we'll work something out.]

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Categories: Financials · Guest Posts · Internet Backbones

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14 Comments So Far


  • ProfessorPlum says:

    Thanks for the model — as usual, LVLT misses most where it counts most… the FCF line.

    This is an overlevered monstrosity that may make some money for its debt holders. Now that Bill Miller and his friends at Mason Hawkins are facing massive redemptions, there is no one left to line up and plow money into Jim Crowe’s construction folly.

  • rick barich says:

    Toes,

    Not much was said or made of this press release/8K by TWTC. Do you think this is standard day to day operations or a prelude to TWTC merging or being purchased. Lots of verbage on his contract buyout if TWTC has a change of control. In fact it appears to be teh main reason for the new contract http://biz.yahoo.com/e/081031/twtc8-k.html

  • Rob Powell says:

    I think it is fairly standard nowadays, and I have seen many similar agreements come and go in the industry without a deal to follow. But obviously they wouldn’t have such clauses if there weren’t a possibility.

  • Eric S says:

    Jeremy,
    I am not quite as bullish on CF from ops as you are but otherwise your model seems sound and you were right about SBC revenues in 3Q.

    The crucial question for the company is more than just the debt in my mind, it is revenue growth. If they are going to add even 100M(below your $122 est) in cash in 4Q the debt situation looks manageable.

    On the debt, with 100M of cash generation in 4Q and just the muted Street consensus fcf generation for 2009 & 2010 the company would generate $254M in cash. Adding $254 to the $587 they have now would get them $841M. Despite the bonds rallying, yes, rallying, they could still take them out all of the debt thru the end of the decade today for $779M based on market prices.

    Likely, they would not takeout all that debt but roll it over, at least the 2010 portion. There would also be large interest expense saves on that debt which comes due over the next three years which would be addl to my fcf estimate of $254M through 2010.

    Back to the revenue growth. With the sales people they on-boarded this year of ~125 or 60 net. The sales adds should be able to fight some of the economic tide especially if pricing holds in.

    With fairfax and longleaf, you could not have 2 better partners that own 50% of the company. As a result, the short squeeze could be violent especially in a market that isn’t as bloody as the telco bubble despite Wall Street fears.

    With LVLT trading under 8x ebitda or call it 5x a marked to market ebitda(when valuing the debt at mkt), it is trading inline with its peers despite having an asset in the ground which I estimate to be worth $20B of present day worth(far short of the $27B of 1999 dollars it took to install the network). The price of the asset is rising while the enterprise is on sale for ~$6B depending on the price the debt.

    This will take patience but fiber is getting burned up and asset values are rising here while fcf, debt levels and industry dynamics have never been better.

  • Professor Plum says:

    C’mon guys… $20B asset in the ground? On what basis? Replacement cost? Who cares? LVLT is actively selling IRUs at cut rate prices so they can almost meet revenue expectations and they are giving the asset away. How much does Cogent pay per year for assets that allow them to carry roughly the same amount of traffic as LVLT? About $20MM. So you are placing a 1,000x revenue multiple on the asset — that’s inane.

    Marked to market EBITDA is useless unless you file for bankruptcy — which is where LVLT is headed and we all know it.

    5x EBITDA is far from cheap in this market — particularly for a company with normalized Capex (not the underinvestment that LVLT admits they have been doing in the past 2 Qs) roughly equal to depreciation.

    Look at the executive insiders… they continue to sell millions of $ of stock… why?

  • Anonymous says:

    A few points:
    -Replacement cost is over $27B in dollars spent earlier this decade. In real terms obviously it is quite a bit more and I am not sure in our lifetime you will ever again get politicians agree to tear up their streets given the problems they had the first time though money obviously talks. A $10B haircut to this value would be one way to back into $20B it or if you want more detail please see the telgeography data(subscription only).
    -IRUs are actually moving up in price so in fact they are not cut rate. You can contact any dark fiber vendor for this info. Please also look at CMCSK or Cox’s decision to run their own network over level 3 fiber for their thoughts on scarcity value.
    -Mark to market matters when they are paying down debt below par value. Please see Warren Buffet’s bond purchases(Bloomberg filings) for an indication on how that investor is valuing the opportunity in the debt in the same way the company is.
    -5x ebitda for a toll keeper business model with double digits ebitda growth, real asset value in miserable mkt isn’t something to sneeze at.
    -Capex off an underutilized asset and state of the art network is something that you might expect in the early years after a major pipe build.
    -On the insiders, I am not sure what you are basing your comment on. Over the past year, most executives and the majority of the B.O.D. have made large buys and have increased their overall ownership. There are two exception that I am aware of: 1.) one board member who looks like they recently received a margin call as he was the most active net adder of stock earlier this year. 2.)The second exception is that when company compensation has been given out in ownership of LVLT, executives have sold part of it in order to moderate their increased ownership. The insider score service had been very + on it last I checked.

  • Professor Plum says:

    Sorry for the delayed response.

    1) Replacement cost is rising only if you don’t believe there is near infinite ability to expand wavelengths and data rates. History is on the side of the believers. A random $10B haircut on the assets doesn’t work for me… I’m far more interested in what the NPV of those assets is given IRU/data pricing and current finance costs. On that basis, the assets are massively overvalued or IRU/data pricing is massively undervalued. If you believe the latter, LVLT is not your best play.

    2) IRUs are not moving up in price according to my dark fiber contacts. There is increased bidding activity, but it is being met by desperate sellers like LVLT and pricing is flat at best.

    3) Mark to market only matters if you have cash to repurchase the debt. CCOI had cash and executed. LVLT only has cash because they are skimping on Capex. They cannot repurchase meaningful amounts of debt. They have $500MM due in 4 months and they have $400MM due in 9 months. Maybe… maybe the capital markets open for them, but I doubt it.

    4) 5x EBITDA is assuming that pricing holds in their traditional businesses. I think that is a very bad assumption. We are closing in on the crashing of the VOIP wave and the divergence between data at $4/MB and voice at $100/MB is unlikely to persist through this cycle.

    5) Capex is below their needed levels by their own admission. Look at the earnings releases. They have been underspending in the hopes of showing positive FCF to attract further suckers to the capital pool. It will come crashing down next year in a wave of much higher than 2008 CapEx — you are already seeing the impact in delays to key projects

    6) On the insiders — every insider that has put CASH into the company has sold. Toilet paper option grants don’t count. Insider score services are roughly worth the toilet paper that the options are printed on. When I see cash going in from multiple executives, I care. I have seen the opposite.

  • carlk says:

    With the first serious debt maturity being $305 million due in September, 2009, I’m calling Professor Plum a damn liar or an ignorant fool, and suggesting he be banned to the Yahoo board where more sordid characters bask in their own darkness.

  • Eric S says:

    1.) Taking a monster haircut to nominal install costs of a decade ago was one way to make you feel comfortable with the telogeography data. Since we pay a great deal for it I will not give you the data I mentioned but you can look at a summary of it in a 2006 JPM initiation report on their estimate of asset value which back then was ~$4 share.

    2.) So you see increased bidding activity but you aren’t seeing the price of dark fiber go up. I have seen low single digits prices up on deals. I don’t have access to your sample set but it would depend if you are talking metro or long haul.

    3.) As I am sure you saw, level 3 bought debt in 3Q. As Carl points out, your debt numbers are way off and buying it all isn’t what you would want from a utility.

    4.) VoIP isn’t driving this business.

    5.) Capex is a function of new orders. While the factory was down last winter, less orders were signed, less capex is needed once those installs happened which is what you saw in Q2. As you can see, capex has increased.

    6.) On the insiders. Undoubtedly, Level 3 like all companies compensates their execs with shares. Using insider score is one way for you to quickly look at it but feel free to do your own research on it. I could go into great detail about each trade but suffice it to say, the majority of board members bought stock with their own money over the past year. Chairman, Walter Scott, who is on Berkshire’s board bought large slugs of the convert on multiple occasions over the past year and just this fall the COO & CFO added to their holdings.

  • Tortelliniboy says:

    Re: Insiders

    Looks like the additions to holdings this fall was through acquisitions (stock options). I don’t see any direct purchases where an insider used their own cash to purchase shares.

    What the heck is the value of the coal mine ownership share they have? They should have sold this a few months ago when coal was a hot commodity.

  • carlk says:

    Tortelliniboy, are you sharing any recipes? I love Italian food courtesy of my mother’s side.

    The last time I heard a Level 3 executive place a value on coal mines was by Mr. Choski, as acting CFO circa 2001-2002.

    At that time, the number was $120M.

  • Tortelliniboy says:

    Coal was in an incredible bull market along with all of the other commodity materials earlier this year. They could have probably got a lot more than 120M for their share. Too bad they didn’t sell.

    Recipe: The best is Tortellini en brodo (in capon broth). This is how Tortellini is traditionally served in the Emilia-Romanga region of Italy.

  • carlk says:

    Grazia!

    You may be right about coal, at the same time we seem to be losing money in the quarter due to higher energy costs.

    Between that silly Merrill Hedge and the potential missed opportunity in coal, one has to wonder what the hell Crowe is thinking about up there!

  • BrooklynBS says:

    The insider activity at LVLT is basically neutral this year.

    The sales this year by Director Douglas Eby look like they are related to margin calls, so I wouldn’t say it’s suggestive of any sentiment. If levered up to buy the stock last year and earlier this year and paid the price.

    All of the other insider sales this year at LVLT came after the vesting of restricted stock awards and proceeds from the sales were used to pay the withholding taxes associated with the rewards (this, by the way, is footnoted on all of the Form 4s). These type of sales are common practice and the most tax efficient method for an individual to account for a restricted stock award, which is considered income once it vests. The sales also only represent a fraction of the award, so the end result has been a net increase in ownership by LVLT executives.

    There was a little cluster of buys in the spring, but Eby was responsible for most of the inflows, so his buys are washed out by what’s believed to be the margin call sales.

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