Level 3 Finds Growth, Increases EBITDA

October 28th, 2010 by · 8 Comments

Level 3 Communications (NYSE:LVLT, news, filings) reported its Q3/2010 earnings this morning, managing to find sequential growth across all of its core segments as well as in total revenue for once, while holding costs down quite well also.  The result was that they actually managed to beat composite analyst estimates for revenue, adjusted EBITDA, and earnings per share.  But with Level 3 the devil is always in the details, so here's a quick look in greater detail alongside the past 4 quarters:

$ in millions Q3/2009 Q4/2009

Q1/2010

Q2/2010

Q3/2010

- Wholesale 347 353 336 342 343
- Large Enterprise & Federal 123 129 136 142 144
- Mid-Market 155 151 151 146 147
- Europe 75 73 71 69 75
Core Network Services Revenue 700 706 694 699 707
- Wholesale Voice 159 162 165 163 161
- Other 42 38 34 30 27
- Asset Sale 7
Total Communications Revenue 901 906 900 892 895
- Coal 15 18 10 16 17
Total Revenue 916 924 910 908 912
- Communications Cost of Revenue 369 361

371

358 353
- Communications Cash SG&A 316 328

327

324 325
Communications Adjusted EBITDA 215 216 200 209 216
Adjusted EPS (0.10) (0.11) (0.11) (0.10) (0.10)
Capital Expenditures 75 80 82 104 133
Free Cash Flow 9 97 (90) (19) (63)


Revenue: The strongest performer was obviously Europe, while both wholesale and large enterprise/federal grew but only just.  Mid-market revenues actually turned in some growth as well.  So core revenues were up 1%, which is good but not spectacular.  They really need to accelerate a bit before anyone will believe in a ramp.  Can they do it in Q4?  Depends on what all that capex is for, more on that below.

Costs & EBITDA: While revenue growth was acceptable, cost controls were quite impressive.  Cost of revenue declined even as revenues grew, and SG&A didn't see a measurable bump due to utility costs.  Hence communications adjusted EBITDA of $216M was above my own projections and adjusted EBITDA margins expanded to 24.1%. EBITDA is expected to grow from here as well, which is good.  They need to find a way back toward $250M in quarterly EBITDA, which can support their debt and enough capex to grow.

Capex & Cash Flows: The big standout number in this release though was capex, which surged mightily to $133M - even higher than I had thought.  That *could* forecast a big Q4 coming up, but we should wait to hear on the conference call just what went into that number.  Of course, with capex so high, free cash flow was even more negative than I had projected although not by much.  If it's for the cause of growth to come, I'm all for it.  The company projected positive cash flow in the fourth quarter as working capital swings back the other way - but not enough to erase the cash burn of the first three quarters of course.

Conclusion: Level 3 had a good quarter, and is spending for better ones down the line.  What the markets will think of it I don't know, but IMHO this certainly didn't fall in line with the bear case that has been holding the stock price below $1. I will listen to the CC for further info and update here.

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Categories: Financials · Internet Backbones

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8 Comments So Far


  • Anon says:

    Although a good quarter, it was not what I expected after Crowe&crew talked this quarter up. However, with EBITDA growth and margins like this, we should get back over $1.

  • carlk says:

    What’s the right annual production # for the average producing telecom salesperson in (3)’s space while excluding churn? (3) keeps hiring like gang busters.

  • fluids_only says:

    Toes – good job on the estimates. You were close on the numbers but exactly tracked the trends for all key line items. Shows your sources are reliable and your analysis excellent. Keep it up.

  • carlk says:

    O.K. None of you “telecom experts” seem to have a clue or want to share, so I’m waiting to hear back from the King of CLEC’s, Dave Rusin, for my answer.

    I sure do hope that it is at least 5MM per capita, otherwise, I think “selling cotton candy” is a better career path.

  • Clark when do you think says:

    Clark since you are so smart when do you see Level 3 going through Bankruptcy?

  • carlk says:

    You must be Clark Kent, aka, Superman, so it’s your opportunity to answer because…..”click whirr”, you don’t know WTH you’re talking about.

  • How low can you go says:

    The market sure seems to like Level 3’s performance. Shares should see the .70’s next week and BK to soon follow. You just can’t continue to push your massive debt issues into the future. It’s amazing they have been able to kick the can down the street for this long.

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