[TheJuice blogs about his financial models and projections for telecom companies, most frequently about Level 3 Communications. Do you want a turn at the microphone? Contact the webmaster]
Hi all. Below are my comments on Q109.
Revs: Pretty bad in all areas. Looking over the last few years we have not had this bad a hit since AOL, this recession is hurting us. Furthermore, our deferred revenues keep trending down another not-so-good sign. I suspect Alltel had much to do with it, but the butt-kicking we are taking in Business Markets it leads me to believe that losses are broad based. Much like in previous years we are talking up growth in the forward quarters something that the street has always significantly discounted.
Margins: This is the real story imho. In Q408 we had 66.9% CNS margins; in Q109 we had 66.1%. Furthermore, our EBITDAS margin fell from 26.3% to 25.9%. Now on an absolute level these are very small percentage changes but when you couple falling revs with falling margins with falling capital expenditures you get an unsustainable model.
Other: The rest of the report is pretty straight forward. Working Capital was a bit more than I projected while Capital Expenditures were a bit less. All these items netted to a bigger cash loss than I projected (-46 million) with a vast majority of that miss being tied back to the -36 million miss on CNS.
Overall: Frankly, I'm surprised the stock performed as well as it has as much of the short case has been reinforced by these results while management is asking investors to focus on the future. The entire argument of cutting costs to match operational short comings has sure become a recurring theme. If the stock or bonds fall I will buy back in but I think we could be dead money until the next quarter. I hope people can see that the company won't need to raise capital to pay down debt, at least for a couple years, but I still wonder how long people are willing to pay a valuation premium relative to our competitors when our operational results and balance sheet are significantly less appealing. I haven't listened to the call yet so perhaps something was said that's not in the press release that folks are focusing on…at this point I'm focusing on the numbers and less on management dialog. Good luck out there!
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