Level 3 Earnings Primer: Q4/2010

January 31st, 2011 by · 2 Comments

Level 3 Communications (NYSE:LVLT, news, filings) reports earnings on Wednesday morning, and therefore it is time for Ramblings’ quarterly earnings primer.  Level 3 spent 2010 recovering from a 2009 that saw churn eat away their revenue and set them back again from positive cash flow.  Since the first quarter of 2010, the company has been growing core revenues steadily, albeit slowly.  Their fortunes in 2010 depend on one thing: solid revenue growth.  They know it, too – you can hear it in every investor presentation they give.  And investors and analysts know it too.  The debt mountain in front of them cannot be scaled any other way.  With that in mind, here are my own detailed estimates of the numbers we might see on Wednesday:

$ in millions Q4/2009





my estimate

– Wholesale 353 336 342 343 348
– Large Enterprise & Federal 129 136 142 144 148
– Mid-Market 151 151 146 147 148
– Europe 73 71 69 75 76
Core Network Services Revenue 706 694 699 707 720
– Wholesale Voice 162 165 163 161 161
– Other 38 34 30 27 24
– Asset Sale 7
Total Communications Revenue 906 900 892 895 905
– Coal 18 10 16 17 17
Total Revenue 924 910 908 912 922
– Communications Cost of Revenue 361


358 353 355
– Communications Cash SG&A 328


324 325 328
Communications Adjusted EBITDA 216 200 209 216 222
Adjusted EPS (0.11) (0.11) (0.10) (0.10) (0.10)
Capital Expenditures 80 82 104 133 125
Free Cash Flow 97 (90) (19) (63) 25-5

Q4 thoughts: Company guidance is for revenues and EBITDA to improve sequentially, and I see no reason to doubt that they will meet that limited goal.  The question is by how much?  While Q4 is traditionally a stronger quarter for them, I think it would be a mistake to expect too much too fast.  From what I hear, no one segment is leading the charge at this point, although large enterprise and federal will probably tack on the fastest rate.

2011 and the path forward: The company keeps saying that it wants to first get back to the 8-10% growth in core network services in 2011.  To put that in context, they would need to add $60-70M in quarterly revenues during the year, or $15-18M each quarter on average – a rate they have not managed in some time and probably won’t in Q4 either.  If they maintain that footing during the CC, it will definitely forecast a better year ahead.  With Level 3’s assets and the faster growth their peers have demonstrated, this is just a matter of execution, but then isn’t it always?

8-10% growth is not a random goal: The path to sustainable free cash flow generation at LVLT runs directly through the $250M quarterly EBITDA barrier they bounced off of in 2007/2008.  Once beyond that threshold, they reach a virtuous circle in which they have the cash flow to invest in faster growth and can then grow into their debt.  Tacking on $60-70M in quarterly revenue at 65% incremental EBITDA margins gets them there, and 2-4% growth does not.  That’s really the bottom line and why their goal is what it is.

Capex: Higher capex levels need to continue.  If you see them dropping back below $100M, that would improve FCF but would spell trouble nonetheless.

Free Cash Flow: It’s probably safe to say that Q4 free cash flow will be positive on the back of working capital swings, and that Q1 free cash flow will be the opposite.  That happens every year.  Free cash flow guidance for the full year 2011 will be closely watched, but IMHO it won’t be positive even with the revenue growth they will probably project  given their capex spending plans.  It’ll be closer to breakeven though.

Conclusion: Is Level 3 ready to rumble at last?  It’s too early to say, but whatever qualitative guidance the company gives will be very cautious.  The worst thing they could do now is to over-promise, as nobody would believe them anyway but would punish them for it later regardless.  So we will see Q4 improvement, cautious optimism for 2011, and then we’ll wait to see if their accelerator still works.

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Categories: Financials · Internet Backbones · Metro fiber

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2 Comments So Far

  • Anon says:

    Whatever happened to TheJuice? He used to have some good models as well.

  • carlk says:

    Cody David Klein has done an even better job “predicting” the stock price for many years now. His model must have been adopted by the masters of the universe including our long favored institutions.

    Without a doubt, if there was ever a quarter for “models” to broken while starting anew, this is the one(inflexion point).

    CNS at 3 percent qoq tomorrow? Nah, but FOOLS can still dream, right? LOL! From speculative points of view, I always liked companies who report their earnings smack in the middle of the week. OMG, did I say earnings or did I mean their “LOSS REPORT”?

    Nice win by Morche’s Federal Markets Group crew in D.C. today! It was a non typical win too(web pages), representative of some “change.”


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