Level 3 Earnings Primer Q3/2010

October 26th, 2010 by · 13 Comments

On Thursday morning, Level 3 Communications (NYSE:LVLT, news, filings) will become the first of the competitive fiber operators to report their Q3/2010 results.  There is some sense amongst watchers of this company that this quarter is a critical one, and I agree.  They have been forecasting solid growth in the second half, and they really need it because their current scale is not sufficient in the long term to manage their debt load and everyone knows it.  Few analysts seem to be expect them to demonstrate much in Q3, but I have been seeing some positive signs out there and I suspect they will put up a decent quarter.  With Level 3, the key numbers are their core network services revenue, EBITDA, and capex, while total revenue and earnings per share are less informative.  Here’s a quick table of my own detailed projections in the context of the prior 4 quarters:

$ in millions Q3/2009 Q4/2009




(my estimate)

– Wholesale 347 353 336 342 347
– Large Enterprise & Federal 123 129 136 142 145
– Mid-Market 155 151 151 146 146
– Europe 75 73 71 69 72
Core Network Services Revenue 700 706 694 699 710
Wholesale Voice 159 162 165 163 163
Other 42 38 34 30 26
Asset Sale 7
Total Communications Revenue 901 906 900 892 899
Coal 15 18 10 16 15
Total Revenue 916 924 910 908 914
– Communications Cost of Revenue 369 361


358 360
– Communications Cash SG&A 316 328


324 328
Communications Adjusted EBITDA 215 216 200 209 211
Adjusted EPS (0.10) (0.11) (0.11) (0.10) (0.10)
Capital Expenditures 75 80 82 104 120
Free Cash Flow 9 97 (90) (19) (50)-0

Revenues: From what I hear, both wholesale and large enterprise & federal have been pulling their share of growth recently, and Europe has seen pretty good CDN revenues though I don’t know what effect foreign exchange movements might have.  The weakest spot until it proves otherwise will be the Mid-Market segment, where the company’s Go Local effort has been balanced by churn.  This is also where further economic pressures might surface.

Costs & EBITDA: Q3 has seasonally higher utility costs, which ought to show up in the company’s SG&A.  Everything else ought to be normal. My EBITDA number comes in higher than the street, which is expecting something lower, though several sources seem to disagree on just what that is.

Capital Expenditures & Cash Flow – It may sound paradoxical, but I’m looking for some cash burn this quarter – an acceleration of spending that would foreshadow steadier growth in the fourth quarter and onward.  Working capital will probably be slightly positive, but free cash flow will probably remain negative, only turning positive for Q4.  I would actually be disappointed if capex fell and as a result they managed positive free cash flow.

Growth is paramount here, they cannot conserve their way out of the hole they’ve dug over the past three years.

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Categories: Financials · Internet Backbones · Metro fiber

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13 Comments So Far

  • carlk says:

    It always strikes me as uncanny, as to who controls/dictates the stock price in this name. Beginning with the mostly strange, damn expensive convert in the midst of pump articles describing a large, nearly declared additional SSA contract “potential” win disappearing in the night as quickly as it came, followed up by Crowe’s remarks indicating fraud during the pricing of said convert, even after dumping a large swath at $1.05 to his peers, only to then have a news release about “foul play” in the market making pits as if to condone or validate his explanation notwithstanding his implied warranty of the stock price recovering shortly, is quite disgusting to say the least.

    Many times, I must agree, the enemy resides within the belly of this wild boar, even beyond the external forces calling it a “bum,” most of the time. Swing bum, swing!

    This market beast has strangely become quite content in not encouraging this “bum” to swing at any new MNA’s, it appears, even as much as that would help its struggling balance sheet at this snap shot in time.

    At the same time, with the Delisting count down and imminent R/S confronting (3) common owners, it seems obvious that they won’t be letting this pig from Omaha close above one PPS, at least before Thursday, or will they?

    Of course, these similar chants were being hummed in more opaque places according to certain underlying players for months now.

    Extending the uncanny nature of this security further, I don’t believe I have ever witnessed a stock whose naysayers talking anonymously about how badly things will play out, always seem to be right. Indeed, there is always something supernatural-counter intuition be damned- that seems to be going on, and never a glimpse of light to appear from (3)’s darkness.

  • ES says:

    Thanks for the preview Rob.

    I think the major point of contention on the stock is the forward rev growth. Should they see your ebitda number and get a normal seasonal lift in Q4 – this stock would be run rating at ebitda levels ~930M for next year assuming no growth. If they can grow revs 5% and hold their ebitda margins that is over 1040 for 2011 which is vastly different for debt & equity holder than the 880M that Bloomberg is projecting.

    There are a few assumptions in there but I am not sure how aggressive 5% comm revenue growth is given the capital being deployed but it is surely above the 2% annual revenue growth they were run rating at last quarter – forget the 2% sequential they target. Either way, I think the mkt’s level of skepticism is high even for these guys.

  • carlk says:

    Tisk, tisk, you want a Mandarin lesson and translation? Don’t bother, the language is a very tough haul as with foresight I attempted such an out of culture experience for my children about twelve years ago, even while they were very young. For now, I’ve advised them to marry the race, or hire a translator when necessary!

    Here’s a free translation, however. The game is rigged in spite of Buffett banter. The criminals reside together in partnership as “insiders” along with the “Wall Street” scum, of which you may be one. The suckers are dumb money investors through the “mutual fund mechanisms” enhancing the wealth on each side.

    It was funny to hear Sunit tell his masters that he had stopped the Indian outsourcing and Visas at one point in (3)’s recent cycle, though. Americans continue to be antagonized according to the labor exploitation plans of these nation building scoundrels who are the private central banks, as well as the corporations they embolden along with the politicians inside the governments that they own.

    That little act by Crowe during his Sept. presentation immediately after the convert, as though he didn’t know what was happening at the exchanges, and what the response would be-negative-was BS right before the article-post implementation excuse-about “market makers” complaining to the SEC about “manipulation” for “rebates,” with LVLT specifically identified.

    Again, Crowe did suggest that the stock would recover from its under one PPS where the convert strike was valued from. How’s his stock been doing since his comments on Sept. 15th, and the manipulation article that he didn’t know about?

    They rushed the convert in anticipation of the “manipulation” they knew was heading straight at them because they’re not confident about the short term reaction to their “numbers” coming out on Thursday.

    The company is a disgrace as their management team consistently appears MIA, especially without an MNA, something their debt owners are refusing to enable, it seems.

    Do you think it will close above ONE tomorrow in order to trigger a new 30 day Nasdaq counting rule tied to delisting?

    Wait till Thursday, as more than likely, Crowe has put it to his commoners again.

    Even though BK is your handle inclusive of implied wish, apparently, you can say, Shi, Shi, later! imo

  • Anonymous says:

    I would have to agree with Carl. I cannot believe Crowe has not been replaced. He has created no shareholder value over his tenure just destroyed plenty of it.

    Crowe’s colors really showed when he fired Sunit and then hired him back. What kind of leader does this?

    He was able to stave off bankruptcy through acquiring cash flow. For the life of me, I cannot understand why the market gave them an over inflated currency (his stock) to go out and do these acquisitions in the first place.

    As an active investor in the telecom space, I have stayed away from this company.

  • Homer says:

    Careful what you wish for.. getting rid of Crowe at this point in time would signal the internal implosion of this company and an imminent financial restructuring…. probably not what common shareholders want

  • carlk says:

    Unless you agree with this, you are not in agreement with me.

    “The game is rigged in spite of Buffett banter. The criminals reside together in partnership as “insiders” along with the “Wall Street” scum. The suckers are the dumb money investors through the “mutual fund mechanisms” enhancing the wealth on each side.”

    As for Sunit, when he let the Sun Rocket AR’s runaway like he did, I would have fired him too.

    Regarding this enterprise, until Sunit’s usury friends get off the interest rate pedal during a period of the lowest yields in corporate bond history, it remains being held for ransom. imo

  • conCERNd says:

    why can’t they refi at a lower rate, while rates are at an all time low?? even shaving off 1% would help

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