While the quarter's big announcement was obviously the Level 3 deal which will close later this year, the main priority in the meantime the number one priority of Level 3 Communications (NYSE:LVLT, news, filings) was proving their organic growth trend has legs, and improving legs at that. Their second quarter results show exactly that, slightly exceeding both analyst estimates and my own for core network services growth. Here are their numbers in context:
|$ in millions||Q2/10||Q3/10||Q4/10||Q1/11||Q2/11|
|- Large Enterprise & Federal||142||144||144||144||148|
|Core Network Services Revenue||699||707||720||729||744|
|- Wholesale Voice||163||161||161||164||151|
|Total Communications Revenue||892||895||904||914||913|
|- Communications Cost of Revenue||358||353||352||357||347|
|- Communications Cash SG&A||324||325||330||332||340|
|Communications Adjusted EBITDA||209||216||222||225||226|
|Free Cash Flow||(19)||(63)||73||
Revenue Growth: All CNS segments of the company advanced in the first quarter, the Large Enterprise and Federal segment posting the largest percentage gain and Europe the smallest. In aggregate, core network services grew by $15M sequentially, or 1.7% on a constant currency basis. That's still not a big number, but it is a sequential improvement exactly as promised. A decline in the company's wholesale voice revenues, which are managed for margin contribution, led to a sequential decline in total communications revenues of $1M, but the key is growth in CNS.
Costs & EBITDA: Communications gross margins were up again, rising to 62.0%. SG&A rose, but $8M of it was related to costs for the GLBC purchase. After backing that out, SG&A was flat over the first quarter. Likewise, Communications Adjusted EBITDA of $226M included those costs, and without them would have been $234M which seems to mesh well with qualitative guidance. The $250M quarterly EBITDA mark is always key for them in terms of having the scale necessary to spend for accelerating growth, and they took another step toward it.
Capex and Cash Flow: Capex levels of $125M were up sequentially, but that fits well with a second half ramp - the sales of which need to be in the pipeline already. Free cash flow of $6M was a bit better than I expected, but it fluctuates enough that the pendulum will probably swing back next quarter.
Final Thoughts: Level 3 needed growth and it came through, now we need more growth. The company left existing (minimal) guidance in place, which perhaps they will add more color to on the CC later this morning.
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