Level 3 Gets Growth Footing Back

February 10th, 2010 by · 19 Comments

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:

Q1/09 Q2/09 Q3/09 Q4/09
Wholesale Markets 358 340 342 348
Business Markets 216 212 203 199
Content Markets 85 82 81 86
European Markets 70 73 75 73
Core Network Services 729 707 701 706
Wholesale Voice 170 170 158 162
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
Capital Expenditures 78 80 75 80
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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Categories: Financials · Internet Backbones

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19 Comments So Far


  • carlk says:

    Cautious but at the same time making investments to grow while generalizing revenue buckets?

    Beginning with the first quarter 2010, the company will no longer use the Wholesale Markets Group, Business Markets Group, Content Markets Group and European Markets Group designations in reporting revenue.

    • Rob Powell says:

      Yeah, I don’t yet know what to make of the switch in revenue buckets. Instead of the type of the customer determining the product, we’re moving to the size of the customer. I’ll be curious to see what they’re trying to bring out in the numbers with the change.

  • carlk says:

    Slide 10, however, offers the KEY to driving the numbers which will fall into the BUCKETS which Slide 5 is now organized.

  • The_highwayman says:

    The attitude on the call and the capex remarks reminded me of leaving 03 and 04 entering 04 and 05….

    when LVLT starts talking about spending capex you should start looking in the places they don’t talk about on the calls and run….

    we see the same curt and overbearing attitude on the calls at the end of 03 and then again at the end of 04….both times the over spent on capex to try to “capture the demand when the economy turned and nothing changed….

    Storey is known for his brutual cost cutting initiatives, they seemed absent this QTR…..

    It is one thing to re-iterate you are not going to give guidance, which is fine, I would rather have wallstreet doe their own homework, BUT it’s another to become almost combative and overbearing about it all, espeically when you are trying to regain some street cred in light of a disaster almost 3 years ago, that ruined all your credibility to begin with….

    They seemed down right rude today

  • carlk says:

    You seem seem to gain clarity, comfort and vision from past events. Mr. Taleb puts it quite eloquently here:

    “We’re all blind to rare events and routinely fool ourselves into believing we can predict risks and rewards.”

    Additionally, you seem INDIFFERENT to “CONVERGENCE” and “PHYSICAL PRESENCE” on top of brand recognition in the MEDIA SPACE where everything is becoming “DATA” while playing into (3)’s hands.

  • The_highwayman says:

    I am far too busy to be so emotionally involved in ANY stock as you seem to be with LVLT…

    there is a 12 step program for LVLT equity holders, I suggest you take part in it….

  • carlk says:

    I think you’re something a great deal more than a “busy” body, but I’ll refrain from telling you what that is until I see you in person. And, if you think you want to say something smart to me then, we’ll have WAR!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  • ES says:

    They have been telegraphing less guidance and the new reporting segment for months so that isn’t news to people paying attention.

    To Level 3’s credit they have sought out opinions on those two subjects as well as capex and it was our opinion as well as other important parties that they follow through with all 3 pieces for the benefit of its long term stakeholders which they obviously did today.

    I think what is hurting the stock is misconceptions around the Google news which Rob will no doubt address.

  • richardj says:

    I appreciate everyone’s analysis of the these figures. However, could anyone enlighten me of the long run implications. Will lvlt’s ownership of the “pipes” give it pricing power and leverage over customers in the long run? How much further out is the long run? Richardj

  • carlk says:

    Since you seem to be one of those opinions that was sought out, would you mind identifying the $20M settlement charge and which “discontinued business operation” is coming in Q1? tia

  • carlk says:

    It always gets DARK and QUIET when direct questions are asked amongst (3) holders, even the favored sons who describe themselves as “important parties” on this board. Those parties are less important than me or other individual “stake holders,” in my mind because, they typically are smart asses using someone else’s money rather than their own. See Highwayman, I’ll go after more than just the opposing views inside this TAINTED NAME, a name that continues to live in INFAMY according to The Street!!!!!!!!!!!!!!!!!! IMO

  • carlk says:

    Robert,

    Do you want to take on this $20M WASTE of owners’ capital which didn’t prevent these executives from paying themselves a BONUS on top of it?????? Tia

    • Rob Powell says:

      I’ll look into it…

      • carlk says:

        Hi Rob,

        Has the CIA blocked you from this answer in advance of the 10K notwithstanding the public disclosure already made by Sunit Patel? tia

        • carlk says:

          Rob,

          Please abandon my request! Just heard back from (3). This is a confidential, non disclosed “subject” item.

          When I think about the importance of this entity preserving its capital, or utilizing it for more important cash generating endeavors, this remains a disappointment. 🙁

          I presume whether or not it had been reserved for adequately, is also confidential.

  • fluids_only says:

    Level 3 is being punished for refusing to give guidance. The metrics look pretty good – not stellar, but no nasty surprises and finally an end to provisioning issues – so this can be the only reason for the slight tanking (and a legitimate reason to sell, as it remains a speculative stock and the risk has just increased).

    Why this sudden petulance on Crowe’s part. Either bad news or good news is to follow. Bad news, in the context of the quarterly report, could probably only mean loss of a major customer. If good news, it would probably have to be a major acquisition or deal (even a JV with Sprint) – and given that the company have raised its middle finger to the analysts, it probably means it would be funded out of straight debt :).

    Who knows with this company. I believe the long-term trend is very positive for this company, but of course in 1999 I thought the long term would have been realised by now.

  • ES says:

    Carl – I say this without intending to incite but I feel like this is the wrong board for you. Whatever passing thought I gave to explaining it to you has evaporated.

    I did not mean to imply I was an important party, as my comment should have read other more important parties – though they were pretty upfront with the guidance telegraph and soliciting feedback broadly.

    In regard to fluids posting – he is still probably right though that the lack of guidance hurt the stock but I was hearing all sorts of noise this morning on the higher IRU sales and Level 3 disintermediation re: Google.

  • carlk says:

    ES, you’re a gentleman, for addressing me so nicely. I thank you for that.

    My problem with this principle of “important” shareholders is tied to the debt albatross that continues unabated from certain institutions gleefully charging usury rates. Where are we now, up another $25M in net interest expense to $525M post yesterday’s news?

    I believe the definition of “important” shareholders should be those who DRIVE SALES to this ENTERPRISE rather than SUCKING INTEREST out of its INTESTINES further jeopardizing its short, medium and long term viability.

    We need a new class of important shareholder investors the likes of technology companies not to exclude MSFT, CSCO, or name others as you see fit!

    You might be right about me not fitting on this board. I think I belong on the Island of misfit toys along with T REX. 🙂

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