Q2/11 Earnings Preview: Level 3 and Global Crossing

July 26th, 2011 by · 1 Comment

Level 3 and Global Crossing both report earnings on Wednesday morning, which of course is not a coincidence given their pending combination later this year.  Here's a quick preview of what to expect, or at least what I expect.

Level 3's Key: Show Us the Organic Growth

For Level 3 Communications (NYSE:LVLT, news, filings), the market's interest in the company's Q2 numbers and any Q3 guidance has very little to do with the merger and everything to do with a more immediate item on their agenda:  their current growth trend, its sustainability, and its potential acceleration.  Level 3's qualitative guidance is simply that Q2's growth in core network services will improve on what we saw in Q1.  Due to high incremental EBITDA margins, adjusted EBITDA ought to grow faster.  Meanwhile, free cash flow is forecast to be positive for Q2-Q4 in the aggregate but of those quarters Q2 is usually the weakest on cash flow.  All indications are that none of these are high hurdles this quarter.  However, the street isn't expecting them to do any better than eek past.  Despite my increasingly positive view of the company's strategic position and their ability to capitalize on it, I think the market is right to be cautious about the rate of acceleration in the short term.  Things always take longer than our internal clock eternally hopes, and hence my guess for the company's Q2 numbers is a minimal satisfaction of guidance:

$ in millions Q2/10 Q3/10 Q4/10 Q1/11 Q2/11

(my estimate)

- Wholesale 342 343 347 351 356
- Large Enterprise & Federal 142 144 144 144 145
- Mid-Market 146 147 151 155 158
- Europe 69 75 78 79 80
Core Network Services Revenue 699 707 720 729 739
- Wholesale Voice 163 161 161 164 164
- Other 30 27 23 21 19
Total Communications Revenue 892 895 904 914 922
- Coal 16 17 17 15 15
Total Revenue 908 912 921 929 937
- Communications Cost of Revenue 358 353 352 357 360
- Communications Cash SG&A 324 325 330 332 334
Communications Adjusted EBITDA 209 216 222 225 230
Adjusted EPS (0.10) (0.10) (0.09) (0.12) (0.10)
Capital Expenditures 104 133 117 115 115
Free Cash Flow (19) (63) 73

(115)

(25)-0

Of course, I hope to see more acceleration than that, but I must make them show me first.  But of course any news we do get about the merger will be important, especially any additional information about the timing of the close.  I just do not expect them to get specific just yet though, given the DOJ's second request and the many other items outside their control.

Global Crossing's Key:  Hold the Line

While the merger probably doesn't rank high in Level 3's perceived performance Wednesday, it's probably the only thing on the mind of the market when it comes to glbc.  When the quarter began, the company's stock price was at 14.  Currently it's just shy of 38, and surprise can only damage it.  So how not to surprise?  Stability or perhaps a little growth in the UK, the same or better in the US, and strength in Latin America - adding up to something that keeps them on track for guidance of 6-9% organic growth and EBITDA in the neighborhood of $425M+ for the year.

$ in millions Q2/10 Q3/10 Q4/10 Q1/11 Q2/11

(my estimate)

- GCUK 113 112 128 113 114
- GC Impsat 134 145 151 148 152
- ROW 314 317 335 326 330
- Intersegment Eliminations (6) (6) (12) (8) (8)
Total Invest & Grow 555 568 602 587 598
- Wholesale Voice 74 79 81 74 75
Total Revenue 630 648 683 661 673
- Cost of Revenue 431 440 452 456 461
- SG&A 106 99 110 121 112
OIBDA 93 109 121 84 100
Free Cash Flow (13) (1) 102 (93) (25)-25
Capex & Capital Leases 63 43 64 52  55

 

Categories: Financials · Internet Backbones

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  • Carlk says:

    Is the fortune teller, sorcerer depicted in your picture you, or could it be the LVLT management team? 🙂

    Without a doubt, your projected quarterly numbers for (3) have been pretty damn good for a long time now.

    Hopefully, mid-market will be the catalyst for something more robust in returning to 2 percent qoq growth.

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