Telecommunications carrier Level 3 Communications (NYSE:LVLT, news, filings) reported earnings this morning, with mixed results. They reported a profit of $0.03, something that doesn't happen every day, but of course this was mostly due to one time benefits. The fingerprint of the recession was clear however, the company's revenues were hit by unfavorable foreign currency exchange by $14M over the third quarter. That's enough to raise some eyebrows, currency fluctuations are something my models do not handle yet so this did catch me off guard, although in hindsight the troubles in the UK were clear enough. EBITDA, when adjusted for all the one time items, was $271M. My projection of $260 included a $12M charge for severance, it would have been $272 otherwise and was actually very close. The positive free cash flow of $124M was a big plus, and the company reiterated that it will be FCF positive in 2009.
How could they take a revenue hit and still meet EBITDA expectations? Well the good news came in communications SG&A and COS, which saw substantial reductions, beyond my expectations. SG&A, adjusted for one time items and not including stock compensation, was $348M as compared to $370M in the prior quarter. I expected a drop, but to reach 33.8% of revenue was surprisingly good. Likewise, COS fell to $414M with gross margins improving to 60% despite an increase in wholesale voice revenues.
Looking quickly at each group's performance:
- Wholesale Markets: Core network services grew but only slightly to $966M, up $2M sequentially. Wholesale voice revenues jumped to $181M, up $8M sequentially, which is a good thing, but it's the high margin stuff that we want to see grow.
- Business Markets: Revenues of $237M represented a 2% decline sequentially, not quite holding the line but still in the ballpark.
- Content Markets: Revenues of $100M were up $2M sequentially, but I had hoped for a slightly better bump given that Q4 is usually big for Vyvx.
- European Markest: Revenues fell to $80M, down $6M sequentially, the first drop in two years. This is where the currency woes really hurt - sales seem to have been fine.
- Other Revenues: These fell by more than I expected, although they always decline. I'm curious whether it was SBC or managed modem that fell the most.
Free cash flow of $124M was a big number because it boosted the company's unrestricted cash position to $768M. That is enough to pay off their debt maturities through 2010 assuming they deliver on their positive cashflow promise for 2009. Of course, it includes a working capital swing. A quick estimate of their real run-rate using EBITDA of $272, capex of $107, and net interest expense of $132 says that without working capital, cashflow would have been positive $33M in the fourth quarter.
The final word? Revenues were ugly, perhaps inline on a constant currency basis, but still ugly. Yet cost savings were wonderful, and thus EBITDA was inline. I think that overall the market will like these results, simply because there is no evidence of an increasing threat from coming maturities. The company didn't offer much in the way of projections for 2009, which I'm sure the street won't like although it isn't too surprising. They also didn't say much about Unity and their progress on backoffice integration. Perhaps they will say more on their CC later this morning.
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