Next generation internet backbone Level 3 Communications (NYSE:LVLT, news, filings) checked in with fourth quarter and full year earnings this morning, carrying through on its guidance of an improvement in core revenues and EBITDA - but only just barely. Free cash flow turned out positive for the year after a $97M number in the fourth quarter, beating my expectations. Here is a quick summary of the relevant numbers, followed by my own thoughts:
|Core Network Services||729||707||701||706|
|Other Comm. Revs||62||49||42||38|
|Total Comm. Revs||961||926||901||906|
|Comm Cost of Service||390||379||369||361|
|Comm Gross Margins||59.5%||59.1%||59.0%||60.2%|
|Comm SG&A (ex stock comp)||322||311||316||328|
|Comm. Adjusted EBITDA||249||230||215||216|
|Earnings per share||-0.07||-0.08||-0.10||-0.11|
|Free Cash Flow||-82||20||9||97|
Revenues - Wholesale Markets revenues saw another quarter of growth which is of course a good thing, but we didn't yet see a real acceleration. Business Markets, on the other hand, declined again - albeit more slowly. Content Markets saw an increase which was likely seasonal in origin, tempered by the CDN pricing pressure brought on by Akamai's move in the fall - basically inline with my expectations. European revenues fell slightly, which was a weaker number than I expected - probably that will involve continued pricing pressure in the east.
I'll be interested to hear comments in the CC about how the local markets initiative is doing and its overall impact on the struggling Business Markets group. Overall, core revenues were up as promised, but there is still a lot of work to do.
Costs & EBITDA - Well, communications adjusted EBITDA of $216M is a bit above $215M, but not by very much. Communications gross margins improved to over 60% which was a very good sign. But SG&A on the other hand rose to its highest level in a year despite all those cost cutting efforts - a story I will be interested to hear more about on the CC.
Free Cash Flow - $97M is a pretty good number. Looks like a bunch of it came in the form of IRU sales since the deferred revenue balance rose some $22M to $902M, which may bode well for the wholesale group as we enter 2010.
Outlook & Guidance - They didn't give much guidance, except to say they plan to increase capital expenditures as they look to increase investment in their network to take advantage of an improving economy. But of course, they used the word 'cautious' when describing the economy, as everyone has been doing. Translation: they're really, really, really hoping the economy picks up and they plan to be ready when it does, but they aren't ready to commit to actual numbers yet. I suppose that's understandable.
Overall, Level 3 managed not to seriously disappoint anyone here - the bleeding has stopped and the patient is recovering. But they didn't incite any spontaneous celebrations either. I suspect that they are just glad to put 2009 behind them without any further damage and start 2010 with a blank page.
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