Level 3’s Bleeding Slows

October 28th, 2009 by · 7 Comments

Next generation internet backbone Level 3 Communications (NYSE:LVLT, news, filings) checked in with third quarter earnings this morning.   The company has had a rough year as the economic crisis and other factors have compounded to pressure revenue.  I don't think anyone was expecting much this quarter, but while the revenue pressure didn't go away it did at least ebb somewhat as promised.  Here is a quick summary of the relevant numbers, followed by my own thoughts:

Q1/09 Q2/09 Q3/09 Q4/09 guidance
Wholesale Markets 358 340 342
Business Markets 216 212 203
Content Markets 85 82 81
European Markets 70 73 75
Core Network Services 729 707 701 up from Q3
Wholesale Voice 170 170 158
Other Comm. Revs 62 49 42
Total Comm. Revs 961 926 901
Comm Cost of Service 390 379 369
Comm Gross Margins 59.5% 59.1% 59.0%
Comm SG&A (ex stock comp) 322 311 316
Comm. Adjusted EBITDA 249 230 215 206-256
Earnings per share -0.07 -0.08 -0.10
Capital Expenditures 78 80 75
Free Cash Flow -82M 20M 9M ~53M (Neutral for FY)

Revenues - while core network services declined again, $701M was just about what I expected to see. Wholesale markets revenue actually ticked upward slightly - a good sign since this is the company's growth engine.  Business markets revenue on the other hand was quite weak. The overall revenue number declined more substantially due to a lower wholesale voice number, but it is the core network services revenues that are the key.

EBITDA - $215 was a bit disappointing, largely due to higher SG&A than I had hoped to see.  That number does tend to jump around a bit, so I will be listening to the company's comments regarding it.

Free Cash Flow - Ever so slightly positive at $9M, the second quarter in a row.  Seasonality probably guarantees that the fourth quarter will be similar, and that they will not breach their FCF neutral guidance for the full year.

Guidance - They maintained guidance for EBITDA and again indicated that this should be the bottom for CNS revenues, so not much has changed yet.


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Categories: Financials · Internet Backbones

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7 Comments So Far


  • Dan110355 says:

    Capex is interesting.

    Q3’08: $123 mil.
    Q2’09: 80 mil.
    Q3’09: 75 mil.

    Despite the significant reductions in capex, they had some creative announcements — Philly, Chicago, & rural towers. I wonder if network maintenance is suffering.

    Dan

    • Rob Powell says:

      Dan, I think it is mainly due to the small amount of new sales they have needed to provision. Success-based capex, or in the case lack thereof. Network maintenance is likely doing fine.

  • ben50son says:

    The quarter’s main weakness was the BMG. I am waiting to be able to read the Seeking Alpha transcript of the conference call. Mr. Storey made some statements which, if I heard correctly, claimed great increases in sales in the cities where LVLT has rolled out its local initiative. I want to read what he said as opposed to relying upon my recollection of his comments.

    Along with all shareholders, I wait for the top line to stop shrinking – and then to grow. BMG has to be part of that.

    • ben50son says:

      Here is what Mr. Storey said about BMG. While one is left with the question of whether the base of sales was so low that a 75% sales increase from 1 Q to 3Q, or 50% from 2Q to 3Q, is not all that much in dollars. However, if this local initiative medicine takes in Chicago, Philly, NY, etc., well that could be a good thing.

      3Q Conference Call.

    • Rob Powell says:

      Cut & paste of rich text into comments doesn’t work well. Here is the quote & link:

      looking at the initial markets I have listed, we have experienced a 50% improvement in sales Q3 to Q2, and more than 75% improvement Q3 to Q1. As a result, we are accelerating our local market approach into additional markets by hiring general managers, staffing additional sales people, aligning operations in each of those locations as quickly as possible.
      http://seekingalpha.com/article/169626-level-3-communications-inc-q3-2009-earnings-call-transcript?page=-1

  • Investore says:

    I didn’t mind the report or the call, I really am happy that they had positive cash flow. I don’t think any one doubts the validity or income earning potential for LVLT, it is the concern that they wont be able to service their debt. This is the second quarter in a row of positive cash flow, there are lots of good things in the works to improve top line revenues and the debt has been pushed out even farther with the $275 note. I like what I see for Q4 and into 2010.

  • Dave Rusin says:

    I imagine they are focusing capex on customer driven on-net buildings — not building backbone. This levers nicely as long as you decide not to start a price war.

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