On Thursday morning it will be Level 3's turn to reveal its Q1 earnings report. The company has changed the way it will break down its revenues, and we therefore will not be getting information on the four customer facing market groups this time, but rather by customer grouping: Wholesale, Large Enterprise and Federal, Mid-Market, and Europe. That will make things read a bit differently, but it doesn't change the basic dynamic of what Level 3 Communications (NYSE:LVLT, news, filings) needs to do this year: return to revenue growth. Here is a quick tabular rundown of what I am expecting in the context of the prior two quarters in the new reporting format:
|$ in millions||Q3/2009||Q4/2009||
|- Large Enterprise & Federal||123||129||131|
|Core Network Services Revenue||700||706||711|
|Total Communications Revenue||901||906||905|
|- Communications Cost of Revenue||369||361||365|
|- Communications Cash SG&A||316||328||325|
|Communications Adjusted EBITDA||215||216||215|
|Free Cash Flow||9||97||(50) - (100)
Revenue: The first quarter is rarely a big one for sequential revenue growth in this sector, and I see no reason for things to be different this time. Amongst the wholesale and large-enterprise/federal groupings, the goal is to see another quarter of sequential growth to start the year on the right foot. In the mid-market grouping the goal remains merely to stabilize - the company's local market initiative should become extensive enough to swing this number sometime this year but perhaps not yet. Over in Europe, there are probably foreign exchange headwinds but in constant currency terms I hope to see a return to steady growth.
Adjusted EBITDA & margins: Unless there is a revenue surprise, I don't expect EBITDA to change very much this quarter nor should EBITDA margins change all that much. Improvement would be very welcome though.
Capex and Cash Flows: In this sector, working capital tends to flow out in Q1 and Q2, and back in during Q3 and Q4. That means free cash flow will likely swing back to the negative side regardless of other metrics - although the magnitude is never particularly predictable. Key to watch will be the capex number, which was small throughout 2009 as the company conserved cash and fought churn. A return to growth by necessity will require an increase in success-based capex, and in fact may be preceded by it. Level 3 has been making expansive noises since winter, and that leads me to expect that spending will have risen in Q1 - but we shall see.
M&A: Unless there is a big announcement before earnings (you never know), the company will surely tow the same line as always and express its willingness and interest if the right opportunity arises and that consolidation is inevitable - but no comment on any particular scenarios.
Balance Sheet: Last week Level 3 announced it would call its 10% senior debt due 2011 a year early, and what management says about the reasons will probably be closely watched. IMHO this move doesn't really affect the likelihood of a big M&A move this year, simply because the money they are using was earmarked long ago to buy back this debt - it wasn't cash they could have used in an acquisition anyway. By calling it early, they save a few million bucks in interest - plus this was expensive money and they've been trying to get rid of it for years including by swapping it for equity a few years ago.
If you haven't already, please take our Reader Survey! Just 3 questions to help us better understand who is reading Telecom Ramblings so we can serve you better!Categories: Financials · Internet Backbones · Metro fiber