The Economy Takes a Big Bite Out of Level 3

April 28th, 2009 by · 8 Comments

Internet backbone provider Level 3 Communications (NYSE:LVLT, news, filings) reported earnings this morning, checking in with a loss of $0.08 per share, largely in-line with expectations on that front.  Revenues of $980, however, were were down substantially from Q4, well below most estimates and also the projections my own model which is obviously not handling the recession well at all.  Thejuice’s predictions were far closer to the mark, but even he was too high.

Revenue pressure was the heaviest in the core network services of the Wholesale Markets and Business Markets groups, which fell 7% and 6% respectively.  The Content Markets group also saw a large sequential drop of 14%, but much of that came from Vyvx seasonality.  European revenue was off only 1% sequentially, the best performer.  On the revenue front, this was just dismal.  The revenue ‘pressure’ turned out to be quite brutal to say the least.  Will this translate into similar troubles elsewhere in the sector, or will it be local to Level 3?

On the positive side, Level 3 managed to demonstrate excellent cost controls.  While gross margins didn’t vary much, communications SG&A came down a bundle yet again to $338M.  That enabled them to managed EBITDA of $250M, which was down slightly sequentially but was actually pretty good given the revenue they were working with.  Free Cash Flow was also quite reasonable at -$85M with a large negative working capital swing as expected.  Powered by low capital expenditures of $78M, if working capital had been flat, FCF would have been somewhere in the +$40M range despite the economy.

On the revenue front, Level 3 is clearly staggering.  My own idea that wholesale might see some benefit in a recession due to less self-building did not pan out at all.  For Q2 they see some stability returning, but will probably first see more revenue pressure.  They’re getting better at operating what they have, but they very much need to return to growth as they have not yet grown into their debt load.

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Categories: Financials · Internet Backbones

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8 Comments So Far

  • skibare says:

    I cannot WAIT to hear Crowe blow smoke up his own skirt on the Conf Call
    When and IF those big holders ever give up and just bail, this one goes BK when and IF they do that……..the resounding THUD of losses after losses after missed promises after missed promises…….shareholders hosed again

  • Wayne Crimi says:

    I suspected that the loss of a key customer and other churn related to the economy was going to impact revenue more than was generally expected, but I didn’t expect this much of a miss across the board. If the company bottoms out from here, it won’t be too bad because of the cost cuts, but if the trend continues (even if not as steep), the rest of the projections are in big trouble. This is now probably a 2011 story. LOL

  • Wayne Crimi says:


    At this point, anyone that listens to Crowe or takes him seriously at all is demonstrating a large flaw in their thinking and a strong emotional involvement with the stock.

    He’s a not a CEO whose words you can take seriously. He’s a pure 100% pumper. If it wasn’t for the fact that he seems so bright, after 10 years of his nonsense, I would think he was delusional and in need of help.

  • The_highwayman says:


    Let’s face it, LVLT has consistently always had to rely on SG&A cuts and financial moves to stay alive.

    This is getting very old, they could not grow when they completed due to the macro environment of 2001, so they bought software distribution companies to keep from violating a bank covenant, then they came out in 2004 with some VoIP growth, churned DSL and D/U by the millions…they still could not grow, so they went to their funders got a wad of cash and wentt on a shopping spree, and became exactly what they stated they never needed to be to survive.

    those acquisitions have not beared any kind of success at 2007 the bottom dropped out and then the macro environment is now impacting them big time.

    some of us know perfectly well, why these guys fail.

    nothing ever changes with these guys and Crowe still is out there talking about the future. He should pull out his coveralls and start harvesting what he has.

    In this environment, which personally I think is going to get worse, you cannot keep playing the same song.

    It’s time LVLT actually delivers and starts growing.

    I know churn in the BMG is killing them right now.

    oh well there is always another QTR, but we have been saying that for years now.

    • Wayne Crimi says:

      The right thing to do is sell the company. That has been the right thing to do for quite awhile. But at first it would have been difficult because of the debt load and now it’s pretty much too late to get an attractive price (in other words find a bigger fool).

  • Eric S says:

    Core revenue growth down inline with GDP isn’t good but given the control on the margin side, how quickly they took capex out of this business(Storey has experience with company’s in a debt coma) and what seems like a plan on the enterprise with someone who has experience – this stock may actually see some upgrades from the sell side and more interest from generalist analysts who are:
    (1) seeing orders canceled not deferred across this economy.
    (2) See many business who have eliminated few costs and cannot reduce capex.
    (3) A secular opportunity in an economy which is forecasted to have di minimus growth potential over the next half decade with government hands everywhere.

    Why ?:
    (1) the unknowns of the debt equation are resolved.
    (2) Oppty in enterprise – Level 3 has its first leigitimate shot on goal in this segment in years/ever.
    (2a.) Oppty being created by someone outside the MFS heritage.
    (3) Potential for the wholesale orders which are being deferred to be filled.
    (4) Costs eliminated during this downturn were fixed cost which will make any resulting revenue growth bringing powerful operating leverage.

    • jeremy drane says:

      Eric – the co trades at a premium to it’s peers but has worse results. in the current enviorment i don’t see how we get upgraded. i think we trade in a range of .60 to 1.00 with a LOT more risk to the downside, and that doesn’t include the fact – the very likely fact – that we will need to do a reverse. i like the co but will only buy at much cheaper prices.

  • Eric S says:

    jeremy – the stock is one of the most hated sell side stocks there thus making it vulnerable to good news but lets jsut focus on valuation.

    Granted, it does trade at a small premium(minimal though if you mark its debt to mkt) but that could change.

    How: ?
    1.) We get minimal growth(2%) and the sector valuation stays at these recession multiples.
    A.) They resume growing into their leverage with core communications ebitda moving up modestly and the company pays down debt as it is now a “debt paydown story”. So EV stays at 7-8B but the operating and financial leverage multiplier moves the equity 3-4x revenue growth of 2%. Much better than a 3% govt bond.
    2.) Revenue growth is again minimal but average multiples return to normal.
    A.) Think of it this way if equity valuations normalize and multiples could expand 1 or 2 points. If Level 3 goes from trading at 7x up with the sector back to a historic norm of 9x, the equity is a double/triple.

    3.) We get debt paydown, equity valuations normalize AND growth. The upside potential is parabolic.

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