Earnings Preview for Level 3 – Q2/2009

July 29th, 2009 by · 3 Comments

As regular readers of Telecom Ramblings know, I have long kept a detailed financial model of Level 3 Communications (NYSE:LVLT, news, filings), which reports earnings tomorrow morning.  The depth and power of this recession has rendered that model rather ineffective currently, since long term trends right now mean far less than short term disturbances.  So this quarter I am flying a bit more blindly than usual.  In the first quarter, Level 3 suffered substantial revenue pressure across nearly all lines of its business, and currency fluctuations managed to make the numbers look even worse.  Much of this was certainly due to the recession, and the market expected far worse at the time - the stock is up a bunch since then.   So then what to expect from the second quarter? 

Level 3 seems to have turned a corner over the past three months, with the sales funnel improving and they have had a nice run of contract related PRs.  There was even a filing regarding a rather substantial win with a multinational customer.  The new effort to decentralize the Business Markets group has also been encouraging.  However, we need to remember that even if all this is as good as shareholders hope, actual reported revenues and earnings will still lag behind such changes.  Therefore I feel it is prudent to expect the good and bad news to mostly offset for Q2 as the company gears up for its traditionally stronger second half.  Revenue growth, if any, will be muted, and EBITDA will hold steady as cost controls continue to hold the line.  Here is the current state of my model and its projections:

You can flip through the tabs at the bottom to see the details if you are interested.  The free cash flow projection is positive, but very close to break even.  Given the wild inaccuracies involved in making short term cash flow guesses, I think it's as likely to be negative as positive this quarter, then positive throughout the second half, and of course for the full year overall as the company has promised.

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Categories: Financials · Internet Backbones

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3 Comments So Far


  • Dave Rusin says:

    I’m bullish for tomorrows call.

    The story at Level 3 is Jeff Storey in my opinion. He is focusing on customers and local connectivity – where the margins and growth is happening.

    I am less concerned about churn as I would bet that Mr. Storey just might be churning unprofitable customers out in favor of margin growth and cash flow from loyal, profitable customers.

    I see a get back to basics approach going on at Level 3 more focused on sales excellence, value pricing and execution and less on “what’s the next application?”

    Just my opinion.

  • carlk says:

    Rob,

    Have you ever gotten your hands around the % splits between Euro and Pound Sterling for (3)’s European operations?

    The Company conducts a portion of its business in currencies other than the U.S. dollar, the currency in which the Company’s consolidated financial statements are reported. Correspondingly, the Company’s operating results could be adversely affected by foreign currency exchange rate volatility relative to the U.S. dollar. The Company’s European subsidiaries use the local currency as their functional currency, as the majority of their revenue and purchases are transacted in their local currencies.

    • Dave Rusin says:

      I just read an early Goldman Report – revs down, EBITDA flat … all signs of cleaning up non-performing, non-profitable customers.

      People need to stop being in love with the top line and look at sustainable margin growth — the top line will follow and will follow profitably and with low churn.

      As I said, the story is new COO Jeff Storey at Level 3 –the new Sheriff at Level 3. Back to fundamentals and execution.

      Level 3 under Storey has shifted focus to “think global, sell local” … he has realigned those efforts … it’ll take another quarter for the results of this effort to kick-in.

      As far as currency goes, if they don’t have someone or an outside firm managing currency hedges … shame on them.

      Goldman reports FCF neutral as the outlook. Expect Level 3 to get the M&A itch for accretive transactions to move forward with this alongside the “think global, sell local.”

      In my opinion, Level 3 needs to buy another long haul carrier as much as Obama needs or cares about advice from the Republicans.

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