TheJuice's Level 3 Communications 2008 Wrapup

February 15th, 2009 by · Leave a Comment

It's annual report card time for me, so here are a few thoughts re Q408 as well a look at full year numbers versus my expectations. Q109 and FY09 model update will come later (although I did say that I thought 1050 to 1150 was a good conservative ebitdas range for FY09 prior to the Q408 con-call, so I think I'm starting off in relatively the right place).

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First Impressions: hmmm. Well looking at the stock I would say all is normal. After an initial pop, the short-trade (who made a fortune as they have been very right) came in and pounded down the stock after headline number euphoria subsided. We are trading around 7 times adjusted EV/Ebitdas (market value on the debt) which is on the higher side of some of our "peers" so us coming down 10% seems logical. A 20% or 30% drop would have been irrational so if that comes in the near future I will buy equity…say 80 cents or below [update: I missed it on 2/17 due to work, damn!]. As to our debt…well look at that the bonds are up with my 17's making post crash new highs. That IS good news. [update: they've since come back down, argh!].


Model Update: I went back through and scrubbed and reconfigured parts of the model to simplify the numbers. It was getting way to difficult classifying all the data from the CF statement. I think what I will use this format from here on out as it's much easier to calculate and easier for others to understand.

Q408: Not much to say that hasn't already been discussed by others: revenues were weak while cogs, sga and capex were much better than expected. I guess after seeing TWTC kick it with rev growth I thought we would come thru, no such luck. We have a LOT of work to do in Enterprise. Thinking back to when we had quarter after quarter of "long sales cycles" and "clients are pushing their networks harder" I think we are going to see weak revenues for most, if not all, of 2009. I missed the working cap swing again although looking back across the entire year I got the number pretty close in aggregate but the quarterly timing was way off. Finally, the metric I follow (which I made up) called "boxed relationship," which simply measures our ability to maintain GP in CNS, was back up again which I think tells me that we needed to discount in Q3 to make the numbers whereas in Q4 we decided to hold pricing steady and take the rev hit. Frankly, outside of revs, this was a pretty good q.

FY09: Thinking back to the beginning of the year I recall when we said we would not be FCF positive the stock tanked. But where did we end up, we ONLY spent 36 million, whereas many, if not ALL of the i-banks, had us spending around 150-300M...and after significantly outperforming their numbers what does the co get - downgrades. Is there no justice in this world! As to my ability to see around corners, well I missed the com ebitdas number by only $1M - hell yea. I was also pretty close on FCF and missed that by only 46M. Finally, I only missed the ending cash number by 30M. I guess, as a bondholder, I'm very focused on cash-flow and feel like my ability to tap my network of friends and distill that into a number on a q basis is just as good as Goldman et al. If I were to grade my performance as an oracle I would say A-/B+, with much room to do in working capital.

Looking into FY09, I will post a separate schedule with my Q109 and full year forecast and hope that once again LVLT mgt. is able to do better than I expect. Good luck folks

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