TheJuice on Level 3’s Q1

April 29th, 2009 by · 2 Comments

[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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2 Comments So Far

  • Rob Powell says:

    I disagree somewhat that margins were the real story. When revenue dips this quickly, I don’t think it is reasonable to expect COGS and SG&A to follow in lock step. Sure they will try, but that they kept margins as steady as they did surprised me.

    • jeremy drane says:

      first off, good looking guys like us are allowed to agree to disagree.

      re your comment: the way i look at it is as follows….in Q408 we generated 525m of margin on 785m in revs or 66.9%. if we were to sustain that same margin profile on the 729m in revs we got in Q109 we should have been able to generate 488m vs. the 482m we got. so were talking about just a 6m shortfall. now that shortfall could be for a few reasons….1) the margin on CNS actually stayed the same and the ended up taking less than 30% on WVS….2) we had some one-time costs in leases what-not that occur in the beginning of the year…3) we lowered margin in CNS to kick-start some growth, like accept off-net in BMG.

      In not sure which it was but I don’t like digging into this big a hole at the beginning of the year because we need to do that much better towards the back-end just to get back to where we started.

      I have us around 67% at YE09 so we need to ramp back up from 66% to 68% and that is going to prove hard. Last years full year improvement was .06% and we were told that cogs sorts of improvements would be LESS this year than last. Now I believe that we are going to see something like 30M in leases run off this year so I thought my number was pretty conservative at 67% now I’m not so sure.

      Perhaps some think I squabble to much for a few million in gross but that drives ebitdas which is then leveraged by our valuation multiple.

      Margin comments aside….the low revenue number REALLY did surprise me to the down side while the sga custs surprised to the upside. I’m sure laying iff another 150 is going to do wonder for Crowe and crews standing with the line employees. I read somewhere that their is a site where you can vote on your co’s execs and Crowe had 15% positive standing, one of the lowest surveyed. I’m getting that second hand so it might be false.

      I’ll read the transcript, but it sure sounded like they were back selling the dream on the concall. Net Net these results didn’t do anyone any favors in terms of boosting valuations for next gen networks.

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