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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