Level 3 Posts Solid Sequential Growth in the First Quarter

International fiber operator Level 3 Communications (NYSE:LVLT, news, filings) reported its Q1/2011 earnings this morning, fresh off its long-awaited announcement of the Global Crossing deal three weeks ago.  That deal has taken center stage since, however it won’t close until much later in the year, and Level 3 has unfinished business on the organic growth front to handle first.  The first quarter is traditionally lighter, however in their fourth quarter call Level 3 indicated they expected to manage a bit of sequential growth nonetheless, and in fact they posted solid revenues of $929, including $728M in core network services, which bested street estimates – and my own as well of course.  Communications adjusted EBITDA of $225 was also a sequential improvement.  

$ in millions	Q1/2010	Q2/2010	Q3/2010	Q4/2010	Q1/2011
– Wholesale	336	342	343	347	351
– Large Enterprise & Federal	136	142	144	144	144
– Mid-Market	151	146	147	151	155
– Europe	71	69	75	78	79
Core Network Services Revenue	694	699	707	720	729
– Wholesale Voice	165	163	161	161	164
– Other	34	30	27	23	21
– Asset Sale	7
Total Communications Revenue	900	892	895	904	914
– Coal	10	16	17	17	15
Total Revenue	910	908	912	921	929
– Communications Cost of Revenue	371	358	353	352	357
– Communications Cash SG&A	327	324	325	330	332
Communications Adjusted EBITDA	200	209	216	222	225
Adjusted EPS	(0.11)	(0.10)	(0.10)	(0.09)	(0.12)
Capital Expenditures	82	104	133	117	115
Free Cash Flow	(90)	(19)	(63)	73	(115)

Revenue: Wholesale revenues ticked upward for the quarter, which is very good news as this has always been the company’s main engine for growth.  But the fastest growth came in the Mid-market segment, which has languished for years but now appears to be waking up.  Federal and large enterprise was flat, and Europe was up just slightly.

Costs & EBITDA: Costs seem to have been mainly inline, with cost of revenue higher with revenue, and EBITDA was therefore up slightly with margins holding constant.  Earnings per share dipped as anticipated due to losses from the refinancing of debt.  Without that bit, loss per share was flat sequentially at ($0.09).

Cash & Capex: Capex was right where I thought it would be, which suggests to me that the company’s growth projections are probably still safe.  Free cash flow was very negative at ($115M), although this is to be expected due to working capital swings in the first quarter that we see every year. 

Final Thoughts: Overall, a pretty good quarter from Level 3 that will probably keep investors reasonably happy.  The stock has been up some this year in anticipation of some growth as well as in response to the Global Crossing deal.

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Categories: Financials · Internet Backbones