On Tuesday before the market opens we will hear from the internet backbone duo of Level 3 and Global Crossing, who of course announced their intentions to get hitched a few weeks ago. Since that deal seems rather unlikely to fall through, it seems appropriate to preview earnings for both companies at the same time. The two share some common features when it comes first quarter results, namely a) slower sequential growth due to a seasonally strong Q4, and b) higher cash usage due to seasonal expense trends. This year, both companies are also projecting a stronger overall growth trend. But of course they are not yet joined at the hip, so let's look at each in turn:
Level 3 Communications Q1/11 Preview: Despite the seasonality in their Vyvx business, Level 3 has said that it should see core network services grow sequentially although just barely. I'm taking them at their word on this, and I see no reason for their fortunes to vary much across their four reporting segments. Higher expenses will probably drag communications EBITDA down slightly sequentially, and a loss from refinancing debt will cut into EPS. Other than that, I'm not expecting fireworks of any sort. Level 3 will continue the drumbeat on organic revenue growth with a ramp that is as always weighted toward the second half. Here's a quick but detailed rundown of my projections for Level 3's numbers:
|$ in millions||Q1/2010||Q2/2010||Q3/2010||Q4/2010||Q1/2011
|- Large Enterprise & Federal||136||142||144||144||145|
|Core Network Services Revenue||694||699||707||720||721|
|- Wholesale Voice||165||163||161||161||161|
|- Asset Sale||7|
|Total Communications Revenue||900||892||895||904||902|
|- Communications Cost of Revenue||371||358||353||352||350|
|- Communications Cash SG&A||327||324||325||330||333|
|Communications Adjusted EBITDA||200||209||216||222||219|
|Free Cash Flow||(90)||(19)||(63)||73||(75)-(100)|
My estimates a bit more conservative than the street as my revenue number comes in a little lighter - your mileage may vary. Over the years, I have found that Q1 is just not the time to expect to be impressed -- so therefore I just don't anymore. Nevertheless 2011 promises to be a much better year for Level 3 organically, while 2012 will be about integration progress and little else.
Global Crossing Q1/11 Preview: Global Crossing had a big Q4, but before projecting Q1 one has to keep in mind a few caveats. First, GCUK revenues had $13M in one time events, and therefore we must shift sequential expectations accordingly. Second, they suggested higher opex in the neighborhood of $15M, which will cut into OIBDA. Global Crossing will continue to place much emphasis on their large enterprise business and on investments in managed/cloud services.
|$ in millions||Q1/10||Q2/10||Q3/10||Q4/10||Q1/11
|- GC Impsat||129||134||145||151||152|
|- Intersegment Eliminations||(6)||(6)||(6)||(12)||(8)|
|Total Invest & Grow||554||555||568||602
|- Wholesale Voice||94||74||79||81||80|
|- Cost of Revenue||455||431||440||452||460|
|Free Cash Flow||(72)||(13)
|Capex & Capital Leases||55||63||43||64||55|
Again, my revenue projections are a bit lower than composite analyst estimates - for the same aversion to Q1 optimism as I expressed for Level 3.
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