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||
|- Large Enterprise & Federal||123||129||136||142|
|Core Network Services Revenue||700||706||694||699|
|Total Communications Revenue||901||906||900||892|
|- Communications Cost of Revenue||369||361||
|- Communications Cash SG&A||316||328||
|Communications Adjusted EBITDA||215||216||200||209|
|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.