Level 3 Still Treading Water

May 6th, 2010 by · 7 Comments

Network operator Level 3 Communications (NYSE:LVLT, news, filings) reported earnings this morning, and their first quarter was a pretty challenging one.  The company is coming off a rough 2009 in which it saw some stabilization in the fourth quarter.  However, the first quarter is seasonally weaker and they were unable to maintain that overall.  Earnings per share of $0.11 were in-line, however EBITDA fell sequentially to $200M, which frankly is not a happy number.  There were some bright spots, especially in the Large Enterprise and Federal grouping and signs of life in the Mid-Market segment.  Here is a quick table summarizing their numbers:

$ in millions Q3/2009 Q4/2009

Q1/2010

- Wholesale 347 353 343
- Large Enterprise & Federal 123 129 136
- Mid-Market 155 151 151
- Europe 75 73 71
Core Network Services Revenue 700 706 701
Wholesale Voice 159 162 165
Other 42 38 34
Total Communications Revenue 901 906 900
Coal 15 18 10
Total Revenue 916 924

910

- Communications Cost of Revenue 369 361

371

- Communications Cash SG&A 316 328

327

Communications Adjusted EBITDA 215 216 200
Adjusted EPS (0.10) (0.11) (0.11)
Capital Expenditures 75 80 82
Free Cash Flow 9 97 (90)

Revenue: The main weakness came in the Wholesale group, which saw revenues fall by $10M due to lower intercarrier compensation and seasonally lower Vyvx revenues.  That was partially offset by a $7M asset sale, else it would have been even lower.  The biggest surprise came in the Large Enterprise and Federal grouping, which saw very solid sequential growth.  And in the Mid-Market grouping they did achieve stability at last - perhaps this division is now finally turning the corner?  Europe saw growth in constant currency terms, but currency fluctuations wiped that out for now - hopefully it will swing back eventually.

Costs & EBITDA:
Cost of Revenue was up sequentially due to revenue mix and the lack of favorable settlements that helped the Q4 number.  SG&A excluding stock compensation was $327.  Both numbers weren't far from where I thought they would be, but with the lower revenue number EBITDA had to fall and it did, and EBITDA margins fell to 22.4%.

Cash Flows & Capex: As anticipated, working capital drained cash during Q1, which was a negative $90M.  Capital expenditures went up slightly to $82M, but not enough to suggest an incoming surge in revenue growth just yet.   However, coming capex increases mean that the company will likely be FCF negative for the full year.

Overall, Level 3 is doing better than last year but continues to have its work cut out for it in 2010 in its quest to return to revenue growth.  Looking forward, orders were up 15% in the first quarter, which suggests that perhaps the trend will move upward steadily from here.

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Categories: Financials · Internet Backbones

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7 Comments So Far


  • Anonymous says:

    LVLT must have significant operation problems. They replaced the COO and one would think as the economy has begun to breathe….they would should some growth.
    Yet, they lose ground or as you say …tread water…
    With all the HD, 3D and CDN activity growing, it would seem demand for lvlt services should show some growth. What am I missing? Is oversupply so great that consolidation is still necessary to get pricing power and organic growth??

  • Anonymous says:

    If you were expecting growth, these are the 2 things I think you were missing:
    1.) The sellside hadn’t expected any growth b/c of the seasonal pattern of the business. Ice cream cone sales don’t do well in January and neither does telco as the contracts undergo annual price consumption to offset much of the unit growth which is now ~50% depending on who you believe.
    2.) From the time an order is signed until implemented in telco land varies widely but maybe it averages 45-60 days. If there is an economic upturn as you say, Buffet said things got better for him in March & April, then we should expect sales to come in beginning in Q2.

    One of the big things you are missing is seasonlity. There

    The other is I think you are just missing the seasonality of the business. Q1 this year was better than Q1 last.

    • HiYield says:

      I’m not sure what telco land you live in but the one i live in all contracts are neither all signed nor renewed in january. Contracts are executed all year long. And generally are renewed on an anniversary date of the contract’s execution which is not necessarily in January.

      Furthermore, telecommunications is one of the least seasonal industries I can think of.

      If revenue or margins are down, it has more to do with writing down revenue, customer churn and failure to replace with new revenue the revenue that was churned or written down.

  • fluids_only says:

    OK, a disappointing result but not quite as disastrous as initially feared. The enterprise results are good, what is needed now is a good kicker. One can only hope that Crowe lasts until executing the next good acquisition, then is kicked upstairs in favor of Storey, who seems to know how to get things done. That could be an investible proposition.

  • ES says:

    Looking through telco results, most carriers see annual rerating of contracts early in the year which compounds the slow down from the post holiday period.

    Take another look HY.

  • HiYield says:

    ES, I have looked. Below are L3’s Q1 ’07 & ’06 earnings announcements and results. In both cases Q1 grew significantly over Q4 results.

    http://www.sec.gov/Archives/edgar/data/794323/000079432307000108/f8k991_04262007.txt

    http://www.sec.gov/Archives/edgar/data/794323/000079432306000059/f8k991_04252006.txt

    I believe what you’re seeing today is
    (1) revenue writedowns
    (2) tighter margins on new biz
    (3) slower pace of replenishment of churned business.

    All 3 of the above are a function of the challenging economic environment.

    Telecom is not a highly cyclical business. I believe the improvement you may see in out quarters is a function of economic (business cycle) recovery, not seasonality.

    CEOs and executives that talk about a poor Q1 due to seasonality should have to explain why 2007, 2006, etc. didn’t reflect that so-called “seasonality”.

  • ES says:

    In 2007 January they completed the acquisition of both Broadwing and the CDN assets. In 2006 there were was Looking Glass Telcove and ICG which were acquired throughout the year which as those companies came on I am sure skewed the results though I am not going to vouch for the exact effects the same way as I didn’t know the company then.

    As per above, telco contracts get rerated on a normal cycle(many times aligning with the budgetary cycle) and there is also less business ordered in Q4 which makes Q1 sales and installs light.

    Read through the transcripts of their peers if you want to verify it from someone else.

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