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||
|- Large Enterprise & Federal||123||129||136||142||145|
|Core Network Services Revenue||700||706||694||699||710|
|Total Communications Revenue||901||906||900||892||899|
|- Communications Cost of Revenue||369||361||
|- Communications Cash SG&A||316||328||
|Communications Adjusted EBITDA||215||216||200||209||211|
|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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