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.