As expected, the largest of the next generation backbones, Level 3 Communications (NYSE:LVLT, news, filings), reported its fourth quarter 2010 earnings today. Total fourth quarter revenues of $921 and a loss per share of $0.09 (not including $0.06 in a one time tax benefit) will not surprise the street much. But with Level 3, one has to look deeper than the overall numbers to understand the company's trajectory. As regular Telecom Ramblings readers know, I offered my own detailed guesses on Monday, and just to toot my own horn for once, I pegged the CNS and EBITDA numbers right on, and was quite close across the board:
|$ in millions||Q4/2009||
Variance from my guess
|- Large Enterprise & Federal||129||136||142||144||144||-4|
|Core Network Services Revenue||706||694||699||707||720||0|
|- Wholesale Voice||162||165||163||161||161||0|
|- Asset Sale||7|
|Total Communications Revenue||906||900||892||895||904||-1|
|- Communications Cost of Revenue||361||
|- Communications Cash SG&A||328||
|Communications Adjusted EBITDA||216||200||209||216||222||0|
|Free Cash Flow||97||(90)||(19)||(63)||73||+36|
Revenue: Core network services grew 2% sequentially, which is right inline with what I was expecting. European and, surprisingly, mid-market revenues led the way, and wholesale did well. The large enterprise and federal segment which had been leading the way was flat this quarter. The company guided the first quarter to be up sequentially again, despite the slight seasonality from Vyvx that often sees them dip in Q1. For the full year, they were cautious (as expected), promising growth but no numbers yet. We'll see if they offer further color on the call.
Costs: SG&A was up slightly, and COS down slightly, but both within normal parameters.
EBITDA and EPS: EBITDA of $222 won't set the world on fire, but it probably slightly beats analyst expectations - as my own guess was slightly higher than most. Not including a one time tax benefit, loss per share was $0.09, a penny better than the street was expecting.
Cash Flow & Capex: Free cash flow was higher than my pessimistic expectation, but working capital is hard to predict. The company predicts as usual that Q1's number will again flow in the other direction. Full year 2011 cash flow is expected to be negative, which I also predicted - they are (and must) spend for growth, but the FCF breakeven point won't come until the end of the year if they succeed. Capex fell sequentially to $117M, still up from those recessionary numbers, and they guided to capex levels of about 12% of revenues, which suggests that $110-120 will be the norm.
Conclusions: All in all, Level 3 had a very steady quarter. I did not expect them to shoot the moon, just put themselves in a position to do well in 2011. They did that, but there is much work ahead.
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