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||
|– Large Enterprise & Federal||123||129||136|
|Core Network Services Revenue||700||706||701|
|Total Communications Revenue||901||906||900|
|– Communications Cost of Revenue||369||361||
|– Communications Cash SG&A||316||328||
|Communications Adjusted EBITDA||215||216||200|
|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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