Level 3 Reports Q2/2010, Sees CNS Growth Again

July 27th, 2010 by · 4 Comments

Before the bell today, we had Level 3 Communications (NYSE:LVLT, news, filings) issuing its Q2 2010 earnings report, which I offered a preview of yesterday.  The company did succeed in delivering on its promise of a return to core network services growth excluding the $7M asset sale last quarter.  EBITDA of $209M was roughly what I expected, and was achieved via pretty decent cost controls.  However, the market will surely be looking for a bit more than that in the second half.  Here is a quick summary of the company's relevant metrics alongside prior quarters:

$ in millions Q3/2009 Q4/2009

Q1/2010

Q2/2010

- Wholesale 347 353 336 342
- Large Enterprise & Federal 123 129 136 142
- Mid-Market 155 151 151 146
- Europe 75 73 71 69
Core Network Services Revenue 700 706 694 699
Wholesale Voice 159 162 165 163
Other 42 38 34 30
Asset Sale 7
Total Communications Revenue 901 906 900 892
Coal 15 18 10 16
Total Revenue 916 924

910

908
- Communications Cost of Revenue 369 361

371

358
- Communications Cash SG&A 316 328

327

324
Communications Adjusted EBITDA 215 216 200 209
Adjusted EPS (0.10) (0.11) (0.11) (0.10)
Capital Expenditures 75 80 82 104
Free Cash Flow 9 97 (90) (19)

Revenue: Particularly strong was the large enterprise and federal segment, and the wholesale number grew, though it didn't quite replace last quarter's asset sale.  The Mid-Market group, however, showed some weakness although the company suggests that the segment's core revenues grew strongly - implying they are still churning revenues they don't want as much.  Europe grew 3% in constant currency terms, however as I predicted (or moreso) the currency headwinds were strong.  Overall, not a strong revenue quarter, but a return to CNS growth.

Costs & EBITDA:  They did a pretty good job on costs, reducing both SG&A and COS and thereby achieving $209M in quarterly EBITDA - very close to my own guess.  However at higher capex levels they will need to get EBITDA back up toward the 250 range to keep cash flow near break even.

Capex:  At $104M this was rather higher than I expected, and although it burns some cash it is a positive development - suggesting that the company's promised second half revenue ramp may actually have teeth.

Free Cash Flow:  Again, I hit this one rather close to the mark - negative but not by much for the quarter.  I expect the second half's FCF will be positive, based on working capital flows, though for the full year the higher capex numbers will keep it negative.

Final Thoughts: Was this enough?  Seems to me that this earnings report maintained the status quo, with the company's growth potential still pushed to the second half.

Categories: Financials · Internet Backbones

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4 Comments So Far


  • Bill says:

    Rob,
    I follow your website daily and appreciate your commentary. Given J.C.’s comment on the strategic review of LVLT colo business, I was wondering what you thought this business might be worth? Who are the public colo companies? I’m guessing the two options would be to sell it or spin it out to shareholders with a nice chunk of their debt.

    • RE LVLT Colo says:

      Level 3 cannot sell off their Colo space for the following 2 reasons :1. Its not the most desirable, it would be fine for rack and stack but not a high end customer looking for a data center. 2. They utilyze a lot of space in all of their own Colo facilities. There is little to no market for their Colo space.

  • Parkite says:

    Well, coal led the way again with strong sequential growth:)

  • Anon says:

    I love the observation that L3 “growth potential” was pushed to the second half… Second half of what? This century? No EPS, no free cash flow.. EBITDA for this company isn’t a great metric due to their prodigious debt Leads to “i” and the “d&a” reminds of the current cost / time value of all that invested capital. The creditor’s own this one and seem willing to extend, pretend & raise spreads… Until they don’t

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