Tomorrow before the bell Level 3 Communications (NYSE:LVLT, news, filings) will report earnings, which means it is time for a quick earnings preview. Analysts expect total revenues of $910M, flat with the prior quarter and a loss of $0.11 per share. As is often the case, I am slightly more optimistic. But when it comes to Level 3, the details are more important than those overall numbers. The key right now for Level 3 is to demonstrate tangible growth in their core network services. They know it, the street knows it, everyone knows it. Here is a quick table of my own projections in the context of the prior few quarters:
|$ in millions||Q3/2009||Q4/2009||
|- Large Enterprise & Federal||123||129||136||140|
|Core Network Services Revenue||700||706||701||710|
|Total Communications Revenue||901||906||900||903|
|- Communications Cost of Revenue||369||361||
|- Communications Cash SG&A||316||328||
|Communications Adjusted EBITDA||215||216||200||210|
|Free Cash Flow||9||97||(90)||(50)-0|
Core Revenues: Wholesale revenues will grow from the prior quarter's $336 (not including the $7M asset sale), on improving market conditions, however, I'm not expecting fireworks on this number during Q2. The best growth should come from the Large Enterprise and Federal, which has been strong for several quarters. Mid-Market revenues should grow, finally reversing the downward slide they have been on for so long as the local markets initiative takes hold. European revenues will probably increase more on a constant currency basis, but I suspect currency fluctuations will again hide much of that improvement. If the prior reporting method were in place, I'd be looking for a nice Content Markets number as this seems to have been quite strong during the quarter.
Comm. Adj. EBITDA: Last quarter's $200M will likely be replaced with a restoration to the $210 level again. However, key will be what the outlook for this number is. If capex rises to support a growth trend, EBITDA numbers will surely need to move higher to keep free cash flow near break even. I don't expect any major shifts in the cost structure.
Free Cash Flow: Level 3 expects that rising capex levels to support second half growth will keep free cash flow slightly negative for the year, and I have no reason to doubt them. A higher capex number would in my opinion be a positive sign, suggesting that the hoped-for growth trend is materializing. When it comes to working capital though, the second quarter is less seasonally negative than the first quarter, and therefore the free cash flow number should be better - though it is as always lumpy.
Earnings Per Share: Analysts peg this at a loss of $0.11, but I'm going to be a bit more optimistic and chop off a penny. Actually, this number matters far less than the core revenue number at this point.
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